WASHINGTON—When faced with large expenses, such as building or repairing roads, bridges, and other infrastructure, state governments often borrow money, allowing the projects to move forward while spreading the costs over time. But gauging whether a state can afford to take on new debt can be difficult. A debt affordability study is a tool that officials use to evaluate the impact of these liabilities on the state’s finances and give lawmakers the power to manage their debt effectively over the long term. While 27 states conduct debt affordability studies, only nine produce studies with all the necessary elements to give policymakers a clear understanding of their state’s debt levels, according to a report released today by The Pew Charitable Trusts.
The report, “Strategies for Managing State Debt: Affordability Studies Can Help States Decide How Much to Borrow,” examines data from all 50 states and sets criteria for a strong debt affordability study. The research found that:
- 27 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.
- 18 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, 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.
“Used carefully and methodically, debt can be a powerful instrument that state and local governments can use to repair vital infrastructure, improve quality of life, and drive economic growth,” said Mary Murphy, director of Pew’s state and local fiscal health project. “These affordability studies provide crucial data that help officials better understand and manage their state’s debt.”
Based on an analysis of data from each state, Pew developed criteria for a high-quality debt affordability study. Generally, the leading states:
- Evaluate their debt affordability using metrics, benchmarks, and multiyear projections under several scenarios.
- Define a purpose for the affordability study and include all relevant debt. The purpose should reflect the state’s debt issuance structure.
- Require that debt affordability studies be conducted and make clear their purpose, use, and who will prepare them. Spell out a timetable so the report is released as the governor is putting together capital and operating budget proposals to submit to the legislature.
These guidelines are designed to help state officials who want to strengthen an existing study or are conducting one for the first time.
“As state officials face competing pressures to save or spend, grasping the nuances of debt management is becoming ever more important,” said Murphy. “This report is intended to be a helpful tool for policymakers to manage debt and make informed choices about state finances over the long term.”
The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at pewtrusts.org.