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This report was updated in April 2018 to reflect a revised methodology for calculating total state debt. For a more complete explanation of the revised methodology, please see "Calculating state debt" on page 38.
When a state government faces a large expense, such as adding lanes to a highway or restoring an aging bridge,
officials often borrow the money, allowing these projects to move forward while spreading the costs out over time
and to generations of taxpayers.
Gauging whether a state can afford to take on new debt, though—and how much—can be difficult. When
lawmakers face decisions over whether to issue bonds or how to manage existing debt, they need the right
data to inform their choices. In 27 states, officials produce debt affordability studies that evaluate the impact
of potential issuances on the state’s self-imposed debt caps. These data-driven analyses give states the
power to manage debt in a way that aligns with their resources and spending priorities.
As state budgets recover from the effects of the Great Recession of 2007-09, lawmakers are looking for
ways to prepare for the next downturn. At the same time, states are increasingly interested in taking advantage
of low interest rates to borrow money for key infrastructure projects that may have been put on hold during
To help lawmakers and state finance officials better understand and manage their state’s debt obligations, The
Pew Charitable Trusts conducted a 50-state research study. Pew evaluated state financial documents published
from January 2010 to October 2015, reviewed pertinent literature and websites, and interviewed officials,
academic experts, and credit rating analysts. The result was the development of a set of criteria to define the
characteristics of, and assess the quality of, a debt affordability study.
These key findings emerged from the research:
- Twenty-seven states conduct debt affordability studies. Of these, nine—Florida, Georgia, Maryland,
Massachusetts, New Hampshire, North Carolina, Oregon, Texas, and Virginia—lead the way by producing
studies that give policymakers a clear understanding of their states’ debt levels through, among other things,
careful projections, smart benchmarking comparisons, multiple descriptive metrics, and analysis.
- Eighteen other states publish debt affordability studies that could be improved by adding elements such as
a legal mandate to produce the study and an expanded scope of analysis. These states are Alaska, California,
Connecticut, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Nevada, New Mexico, New York, North
Dakota, Pennsylvania, Rhode Island, South Dakota, Vermont, Washington, and West Virginia.
- Highly leveraged states are not alone in publishing debt affordability studies. North Carolina, Georgia, Nevada,
and New Hampshire are among the states with the 10 lowest measures of debt per capita, according to Pew’s
analysis of comprehensive annual financial report (CAFR) data, but all produce a study.
- The states that produce debt affordability studies also vary in how they structure their debt. Some have highly
centralized debt structures, while others delegate a higher share of total borrowing to independent agencies
and authorities. Twenty-three states, including high-debt states such as Illinois, Michigan, and New Jersey, do
not produce a debt affordability study. The amount of total debt held by states in this group differs greatly.
The findings show that the quality and depth of debt affordability studies vary. Unlike a CAFR, which documents
the financial condition of a state using standardized accounting data, debt affordability studies do not conform
to any generally accepted templates and their content varies from one state to another. Indeed, they are meant
to have the flexibility necessary to help policymakers understand their state’s debt in the context of the state’s
particular legal structure, fiscal culture, and needs.
In June 2015, Hawaii lawmakers passed legislation directing the Department of Budget and
Finance to publish an annual debt affordability study. The department released the first one in
December 2016, after the deadline for inclusion in this report’s analysis. But an initial review
of the study shows that it aligns with many of Pew’s recommendations: It has a statutory
requirement for publication and uses multiple metrics and extended projections. Like all
affordability studies, it also has room for improvement. The benchmarking comparison group,
for example, could be more narrowly tailored.
Based on an analysis of the data, Pew developed criteria for a high-quality debt affordability study, which could be
used either by officials looking to strengthen an existing study or by officials conducting one for the first time:
- Create a requirement—either by statute or other mechanism—mandating that the state produce a debt
affordability study, making clear its purpose and use, who will prepare it, the timetable for ensuring regular
publication, and requiring the study to include a statement of how much more the state could afford to borrow.
The study’s release should coincide with the state capital planning and budgeting process. Doing so helps
ensure that it is used in policy analysis, not merely financial analysis.
- Use metrics to put into context what the state has borrowed and its capacity to issue additional debt. These
metrics should compare the state’s debt load to that of peer states.
- Project the outstanding debt and the cost to service it, and include estimated bond issuances and the state’s
debt capacity over multiple years. These projections allow debt affordability studies to be forward-looking,
something other state financial reports with information on debt are not.
- Include written analysis to explain the data—putting them into context and detailing their implications—and
offer clear recommendations for future borrowing and debt management. This analysis equips policymakers
with information on the trade-offs between funding infrastructure and capital projects and using the funds
on other needs.
- Consider the breadth of publicly supported debt and which obligations to model against state resources.
Develop a process for measuring debt issued by component units (entities that are legally separate but
perform state functions), independent authorities, state agencies, and local governments. States should
consider how much debt these entities issue and how closely the state backs the obligations and distinguish
between those modeled in debt capacity calculations and those simply reported.
- Include a discussion of other long-term liabilities, such as public pensions and retiree health care. Although
these obligations differ from long-term, bonded debt, they represent competing claims on state funds and
should be considered along with debt.
- Ensure that the study originate from an office or body with a commitment to objective analysis and close
to the decision-making process to ensure that it is used by policymakers. Among states that produce debt
affordability studies, the agency or department that creates them includes state treasurers, executive branch
budget staff, comptrollers and controllers, and independent committees and commissions, some of which
include elected officials.