Magazine article Government Finance Review

State Government Debt: An Alternative Perspective

Magazine article Government Finance Review

State Government Debt: An Alternative Perspective

Article excerpt

The October 1992 Forum article "The Mushrooming of State Debt: A Beast about to Attack?," introduced important questions about state government debt levels. As the authors pointed out, the public sector generally has been increasing its debt in recent years to levels that put many governments at risk. However, is the outlook for the state government sector as potentially damaging as for the federal and local government sectors? Using recent and time series data, we provide a different perspective on the issue, one which suggests that states might be doing a better job of managing their debt than is indicated by the aggregate numbers.

Relative Shares of Public-sector Debt

Considering their important fiscal role in the federal system, state governments have maintained a relatively modest level of long-term indebtedness. In current dollars, long-term debt of all governments at the end of fiscal year 1991 was $4.6 trillion. The federal government accounted for $3.7 trillion, or 80.5 percent. State long-term debt at $342 billion represented 7.5 percent of the total. Long-term debt of the local government sector (counties, municipalities, schools, etc.) was $551 billion, or 12.1 percent of the total.

This is not a recent phenomenon. Exhibit 1 shows the relative shares of public sector debt for selected years from 1961 to 1991. The state share peaked at 9.8 percent in 1981 and has declined since. What might be surprising to many is the fact that state long-term debt is smaller than that of the local government sector, and has been throughout the post-World War II period.

The relatively smaller share of state debt is attributable to several factors over and above differences in spending magnitudes among the three levels of government.(1) Most important are state balanced budget requirements, state use of capital budgets and debt limits (often constitutional) that usually require voter approval for bond issues. All three of these conditions are absent from the federal sector.

In the local government sector, larger relative debt shares can be viewed as the consequence of a mismatch between the demand for services and the supply of resources available to finance them. Local government is where many of the traditional government services(schools, utilities, police, fire, etc.) are rendered. Demand for these services continually increases, even during recessions, and occasionally is set by federal or state mandates. As the immediate providers, however, local governments bear any debt burden associated with supplying these services.

Categories of Debt

The relatively controlled nature of state-sector long-term debt is very pronounced if we examine the components. Long-term debt can be separated into three categories: full faith and credit (FFC), nonguaranteed (NG) and public debt for private purposes, such as industrial development bonds (IDB). The latter category is not new but has become significant in the past decade and is now compiled separately in Census Bureau statistics. FFC is tax-supported debt. NG is essentially revenue bonds, such as for toll highways and the like, repayable from pledged government sources. IDB is nonguaranteed debt also, but distinct in that it supports private business growth or expansion and is repayable from pledged private proceeds.

All federal long-term debt is FFC; however, FFC is now only one-fourth of the state sector long-term debt, as shown in Exhibit 2. The bulk of state sector debt is NG and IDB, which imposes no direct burden of taxation upon the public.(2) Even more striking is the fact that a majority of state debt is issued for private benefit. At the close of fiscal year 1991, 48.5 percent of all state sector long-term debt was for private purposes (IDB). This was up from 44.5 percent in fiscal year 1988, when the Census Bureau began compiling such statistics separately.

When government long-term debt levels are adjusted by excluding IDBs from the state and local sectors, the resulting shares of public debt show the following distribution:

Fiscal                 Percent share
year         Federal       State        Local
1991           86. … 
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