On the Hook, One Way or Another

Local journalist Ted Nesi has moved from the Providence Business News to WPRI.com and is maintaining a column there (although they're calling it a "blog"). One sample from a couple of weeks ago has been nagging at me:

The Daily Beast is out this week with one of its link-drawing listicles — "The Most Screwed States" — and guess who they say is the most screwed of all? You guessed it — good ol' Rhode Island. ...

But those numbers are also very misleading — and more than a little bit alarmist.

Nesi's first step is to update the numbers cited in the article, which adjusts our debt-to-GDP ratio in a little bit healthier a direction. But his next point, which relates to Andrew's commentary about state bonds, seems like it must be ignoring something:

Rhode Island taxpayers are not on the hook for the state's entire $8.9 billion in debt. In fact, we're on the hook for less than half of it. The reason is because a big chunk of that borrowing is what's known as "conduit debt."

Conduit debt is basically when the state goes out and borrows money on behalf of someone else — nonprofits like Brown University or Rhode Island Hospital, or individuals via state agencies like RISLA and Rhode Island Housing. Going through the state makes it easier and cheaper for those entities to borrow money.

Reading the article, one gets the impression that the state's involvement in conduit debt is less than superficial. If that were the case, however, then why would it be true that lenders make the borrowing process "easier and cheaper" when the state is involved? Nesi should be a little more careful with his language: The taxpayer is "on the hook" but is trusting the recipients of the borrowed money to pay it back — sort of like the federal government trusted mortgagees through Fannie Mae and Freddie Mac to pay for their houses.

Just as significant is the incentive system that conduit loans set up. Particularly when it comes to organizations — perhaps, although I lack the time to confirm, including the City of Central Falls — the state's interest in the health of its sub-borrowers could lead to special arrangements with tax dollars to enable them to pay back the debt before it officially defaults to the state.

In other words, conduit debt essentially makes the borrowers quasi state agencies paying the debt through their own revenue sources — no different than fees and other revenue that state departments take in — for the term of the loan. Perhaps they shouldn't be incorporated into lists tallying annual state debt payments, for example, but it surely shouldn't be written out of consideration.

And whatever the case, for all of the adjustments that Nesi makes, he still only manages to improve Rhode Island's debt problem from worst in the country to seventh or tenth worse (depending whether one looks at income or population). Not a comfort, especially considering that we tie with the collapsing state of California.