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State government debt: an alternative perspective.

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 86.2 4.1 9.7
1990 85.7 4.2 10.1
1989 84.9 4.5 10.5
1988 84.1 4.9 10.9


The state sector share of all government debt drops to 4.1 percent when adjustments are made. It declines even further if only FFC debt is examined, as seen below.
Fiscal Percent share
year Federal State Local
1991 93.2 2.1 4.7
1990 93.0 2.1 4.8
1989 92.8 2.3 4.9
1988 92.5 2.4 5.1
1981 86.9 4.5 8.6
1971 83.0 4.4 12.7
1961 86.6 2.9 10.5


The federal sector minimum share was 81.4 percent in 1974, which corresponds to the maximum share year for the state sector (5.2 percent) and local sector (13.4 percent).

When state debt is viewed in this way, it demonstrates the relatively small burden that it imposes on the tax base. The federal debt load is a large and immediate competitor for other tax dollars. For state governments, this is considerably muted.

Affordability

Examining relative shares of public-sector long-term debt gives a different perspective. We assume here that the issuance of debt is a legitimate financial recourse for governments. Whether the debt is issued by the federal, state or local sector is decided by political and economic forces beyond the scope of this discussion. Debt still must be repaid, however, and to be fair we need to look at it from the perspective of dollar magnitudes.

The components of state-sector long-term debt amounted to $84.7 billion for FFC, $91.5 billion for NG and $165.9 billion for IDB at the close of fiscal year 1991. How do these compare to amounts of previous years, and do they represent a dangerously increasing level?

If one looks at FFC only, per capita state sector debt was $337 in fiscal year 1991, when state per capita expenditure for general government operations (excluding insurance trust expenditure(3)) was $2,204. Exhibit 3 shows that from 1961 to 1991 per capita state-sector debt grew by 545 percent in current dollar terms, compared to an increase of more than 1,200 percent for general expenditure. Over the same time period, FFC debt as a percentage of state general expenditure declined from 32.7 percent to 15.3 percent. The same type of decline is seen in comparing "adjusted debt" (FFC and NG, without IDB) to general expenditure over the past 30 years.

Thus, state governments are financing less of their general expenditure than ever before with funds borrowed on the pledge of tax revenue. This is in contrast to what has occurred in the federal sector over the past 30 years, where FFC long-term debt is about 330 percent of general expenditure. Thirty years ago it was about 300 percent, so there has been a gradual increase.

Further Study

The purpose of this brief was to provide a different perspective of state debt. There are many important issues associated with the topic, including some that might directly affect the data we present. We acknowledge that additional study is needed to look at individual state differences, especially given the magnitude of debt in some states compared to others. We also have not adjusted data for price level changes over time, although in examining relative shares this might not be a factor.

From the perspective presented here, we conclude that management of debt in state governments appears reasonable in both historical perspective and in relation to current financial commitments. This is not to say that the balance is not precarious. At the moment, however, state governments are suffering through significant financial problems generally unrelated to their debt burdens.

NOTES

1 Expenditure shares are not evenly distributed among the three levels of government. In comparison to long-term debt shares, however, they are significantly different. In fiscal year 1991, direct expenditure shares were: federal--56 percent, state--18 percent, and local--26 percent. Moreover, the substantial state-to-local intergovernmental transfers (amounting to $186 billion in fiscal 1991) are excluded from the state shares and included with the local shares in these data.

2 The treatment of IDB as government debt is not universally accepted, despite its tax-exempt status. There also is disagreement about whether governments are obligated for repayment in the event of defaults on such debt. These are important issues but not directly pertinent to this article where we recast the data by excluding such debt from state totals.

3 Insurance trust expenditure covers employee retirement, unemployment compensation, and other insurance operations (including federal Social Security) that are theoretically financed on an actuarily sound basis without affecting current government activities.
Exhibit 1
SHARES OF TOTAL PUBLIC LONG-TERM DEBT BY LEVEL OF GOVERNMENT
1961-1991
Year Federal State Local
1991 80.5% 7.5% 12.0%
1986 76.9 8.9 14.2
1981 74.2 9.8 16.0
1976 74.0 9.2 16.8
1971 74.0 8.0 18.0
1966 76.0 6.8 17.2
1961 80.2 5.4 14.4
Exhibit 2
PERCENT SHARES OF STATE LONG-TERM DEBT OUTSTANDING BY TYPE:
1961-1991
Total FFC NG IDB
 and only
 IDB
1991 24.8% 75.2% 48.5%
1986 26.3 73.7 0.0
1981 39.7 60.3 0.0
1976 49.3 50.7 0.0
1971 48.5 51.5 0.0
1966 44.6 55.4 0.0
1961 48.8 51.3 0.0
Exhibit 3
STATE FFC DEBT AS PERCENT OF STATE GENERAL EXPENDITURE
1961-1991
Year Percent Per capita Per capita
 FFC general
 expenditure
1991 15.3% $336.87 $2,204.29
1986 17.2 268.79 1,565.43
1981 20.7 229.61 1,107.64
1976 25.3 179.10 708.67
1971 24.1 104.34 432.45
1966 27.6 65.27 236.71
1961 32.7 52.26 159.82


HENRY WULF and DAVID KELLERMAN are statisticians in the Governments Division, Bureau of the Census.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Forum
Author:Wulf, Henry; Kellerman, David
Publication:Government Finance Review
Date:Feb 1, 1993
Words:1662
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