The Georgia General Assembly reconvened June 15 to resume the 2020 session halted in March by the novel coronavirus pandemic. The decline in tax revenues as a result of the pandemic will require spending cuts across all state agencies, given the constitutional mandate to create a balanced budget.
One step lawmakers could take to stimulate the private sector – and yield a one-time influx of $250 million to help fill the state’s current budget shortfall – is to return the Georgia Environmental Finance Authority (GEFA) to its core mission.
GEFA was created by the Legislature as the Georgia Environmental Facilities Authority in 1985 to assist local governments in “constructing, extending, rehabilitating, repairing and renewing environmental facilities.” Most importantly, it was also created to aid in the “financing of such needs by providing grants, loans, bonds and other assistance to local governments.” Originally, GEFA was only authorized to make loans for water supply or wastewater treatment and related facilities. In 1989 it was also authorized to make loans to fund solid waste management facilities.
GEFA started as a small agency with a small pool of capital and a relatively low loan limit. The original goal was for GEFA to be the lender of last resort for local governments with less than perfect credit ratings and lack of access to the private financial markets. Since its inception, however, GEFA rapidly surpassed its original mission.
As of June 30, 2019, the primary operating fund available to GEFA to offer loans (i.e. GEFA’s Georgia Fund) was $488.1 million. Its net assets (net position) were $2.4 billion. This would put GEFA among the 10 largest financial institutions headquartered in the state of Georgia. Moreover, GEFA cannot be considered a lender of last resort anymore, as it now offers loans to local governments like Atlanta, Savannah, Gwinnett County and others with high credit ratings. No longer confined to financing projects in poorer jurisdictions with low credit ratings, the agency is now lending money towards items like solar projects in large municipalities.
The rapidly expanding operations of GEFA raise concerns not only about mission creep but about the use of taxpayer dollars. First, GEFA’s General Fund is funded mainly through general tax revenues. Those funds are then used to offer loans to local governments, which repay them using local taxes and debt. This kind of “tax recycling” effectively means some citizens are being taxed double to support these projects. Limiting the pool of funds available for allocation would also reduce the overall exposure for state taxpayers.
Second, this government service should belong primarily in the private sector. By offering loans at a below-market interest rate, thanks to the taxpayer subsidy, GEFA crowds out private-sector solutions for developing public facilities in markets with AA and AAA bond ratings. GEFA typically offers loans with an additional 1% discount off the rate of the state’s general obligation bonds. Not only does this subsidy reduce the creation of value in the financial sector, but it prevents the private sector from competitively offering sewer or water services in Georgia.
The pandemic has brought tremendous challenges. Before COVID-19, Georgia was already projecting a debt burden. The current recession will further debilitate its finances. Tax revenues are decreasing: More than 2 million Georgians lost their jobs and thousands of companies were forced to suspend operations. The state faces a critical moment in which it is important to reduce overall budget liabilities.
Certain debt obligations cannot be monetized, such as the State Revolving Funds (SRF), which are distributed by the federal government and cannot be packaged as securities. There is, however, $488.1 million available in the “Georgia Fund” portion derived from state taxes. Using conservative estimations, we can project that approximately $250 million would be available for immediate monetization to the state after accounting for normal securitization procedures (such as the variance in interest rates among loans, insuring and stress-testing the portfolio, and discounting the cash flows to adjust for current market rates).
While projects like water supply, wastewater treatment and solid waste management are typically provided by the public sector (mainly local governments), there are increasing pressures to consider the privatization of such services to reduce government spending and inefficiencies. A serious discussion about transitioning to private market solutions is difficult, however, if local governments are receiving subsidized capital through GEFA to provide the services.
Reducing the size and reach of GEFA will accomplish two different goals: to save millions of dollars for Georgia that can help reduce the budget shortfall, and to recalibrate the discussion about privatization of municipal services. This crucial move would allow Georgia to address the short-term financial difficulties imposed by the COVID-19 crisis, as well as allow for long-term gains in terms of investment as our metropolitan areas continue to grow.
