Strategies for Managing State Debt

Affordability studies can help states decide how much to borrow

Strategies for Managing State Debt
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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 the recession. 

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.
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