Low tax-supported debt gets Nebraska a No. 1 ranking

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Posted: Saturday, October 19, 2013 12:00 am

Most people probably don't imagine the vicinity of South Sioux City, Neb., as the national leader in responsible government finance, but it is, according to financial publication Barron's.

This week, Barron's named Nebraska the best state in the country when it comes to managing government budgets. Iowa was second and South Dakota third — making the tri-state corner near South Sioux City the nation's garden spot when it comes to savvy government finance.

“Nebraska has virtually no tax-supported debt and the country's lowest unfunded pension obligation,” Barron's wrote. “It is notable for having a 'cash-balance plan,' a cross between a traditional pension and a 401(k) plan that has been adopted by companies including IBM. This cuts financial obligations relative to regular pensions. Other states are looking at the idea.”

A lot of it comes down to the fact that you can't lose at a game you refuse to play: Low state debt is the law in Nebraska. The Nebraska constitution prohibits the state from having more than $100,000 of bond debt.

“I am thrilled we are ranked No. 1,” Gov. Dave Heineman said in an interview. “We don't spend money we don't have.”

Nebraska Treasurer Don Stenberg said it would take an amendment to the state constitution to change the law that bars all but nominal bond debt.

“Don't see that happening anytime soon,” Stenberg said. “Most Nebraskans don't want their government to be able to borrow a lot of money. They see the mess going on in Washington.”

The rankings were compiled by Boston-based investment management firm Eaton Vance for Barron's. The rankings took into account state debt, pension and health-care obligations. Isolated municipal problems such as Omaha's underfunded police and fire department pension plans were not part of the analysis.

Neither were unfunded health-care obligations, with Barron's citing insufficient information about them to arrive at a precise conclusion.

Stenberg, a director of the Nebraska Investment Council agency that invests an $18.8 billion portfolio to generate returns for state pensions, said there are some small problems to face. He said the retirement plan for state teachers is underfunded by about 25 percent.

The pension plans for judges and state troopers are also lagging a bit, Stenberg said, but both are more than 90 percent funded.

And borrowing at the state level is not 100 percent prohibited, regardless of the constitution, Stenberg said.

State agencies, such as college boards of regents, are free to sell revenue bonds. But those bonds repay investors from a single revenue stream, such as college tuitions, and are not the obligation of the state and its taxpayers. There are also some small exceptions, such as for building dams, he said.

But for the most part, it is pay as you go, Heineman said. Highways are paid for with cash, generated from gasoline and state sales tax proceeds. Nebraska doesn't even have a Cabinet post that most states do, that of finance director. In other states, that person's job is to troop to Wall Street every so often to wheel and deal with investment banks.

Those are the Wall Street intermediaries that earn billions a year from arranging bond sales on behalf of governments desiring to borrow from investors who front the money in return for periodic interest payments and eventual full repayment of their principal from government coffers.

“We don't have anyone doing that job,” Heineman said. “That's how things get out of hand, and if you are not careful, you borrow your way into deep trouble.”

The Barron's report said Nebraska's debt was zero percent of gross product, with Iowa and South Dakota at less than 1 percent.

“It's the Heartland,” Stenberg said. “Nebraska, Iowa, South Dakota, I think most people would agree, have a history of being fiscally conservative.”

The worst states had far higher ratios of debt to state product. Hawaii and Connecticut are at about 8 percent, Illinois at about 5 percent, Barron's said.

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