State and Local Government Debt: An
Analysis
Steven Maguire
Specialist in Public Finance
March 31, 2011
Congressional Research Service
7-5700
www.crs.gov
R41735
CRS Report for Congress
P
repared for Members and Committees of Congress
State and Local Government Debt
Summary
The financial consequences of the recession that spanned from December 2007 through June of
2009 has increased congressional interest in the financial health of state and local governments.
State and local tax revenues declined, expenditures climbed, and debt increased. Even though tax
revenue has begun to rebound, expenditures for unemployment benefits and other social
programs remain elevated. Also, federal aid to states, which had increased as part of the American
Recovery and Reinvestment Act, has begun to recede. Federal outlays for grants in aid to state
and local governments rose from $538 billion in FY2009 to $608.4 billion in FY2010 and are
estimated to be $625.2 billion in FY2011. The FY2012 budget provides $584.3 billion in outlays
for aid to state and local governments in 2012.
In response to these state and local government fiscal headwinds, several hearings have been held
early in the 112th Congress to examine the health of state and local government finances and the
potential effects on the economic recovery. The hearings focused on a range of issues important
to state and local governments as well as federal policy makers. The role of state and local
government debt was one of these issues. The federal government has a significant stake in this
debt market as the tax expenditure for the issuers of tax-exempt state and local governments was
recently estimated to be $161.6 billion over the 2010 to 2014 budget window.
This report first provides a broad overview of state and local government finances and how these
governments incorporate borrowing into their budget. The second section reports data on state
and local government debt and how that debt has changed over time. This section includes a
comparative analysis of these debt parameters for each state. The third section discusses different
economic perspectives on the use of debt by governments and if governments are intrinsically
biased toward borrowing more than is considered economically optimal. The discussion provides
background for Congress as it deliberates potential changes in the oversight of the primary and
secondary markets for state and local government debt.
Issues related to state and local government finances, such as government pensions and health
benefits, are also addressed. This report will be updated as legislative events warrant.
Congressional Research Service
State and Local Government Debt
Contents
State and Local Government Finances ......................................................................................... 1
State and Local Government Debt ......................................................................................... 1
Operating Budget and Capital Budget ............................................................................. 2
The Unemployment Trust Fund and Pension Debt ........................................................... 3
Holders of State and Local Government Debt ........................................................................ 3
Measuring State and Local Government Debt.............................................................................. 5
Relative Measures of State and Local Government Debt........................................................ 5
How Has State Debt Changed Over Time? ............................................................................ 7
State Government Debt ............................................................................................................... 8
Fiscal Illusion and Debt Versus Taxes.................................................................................... 9
Ricardian Equivalence and Debt Capitalization ................................................................... 10
Change in State Debt from FY2002 to FY2009 ................................................................... 10
Change in State Debt from FY2002 to FY2009, by State ..................................................... 11
Other State Fiscal Strains: Pensions and Declining Federal Aid ................................................. 13
Pension Obligation Bonds ................................................................................................... 13
Federal Aid ......................................................................................................................... 14
State Obligations: Debt and Unfunded Pension Liabilities ................................................... 14
Economics of State and Local Government Debt ....................................................................... 15
Crowding Out of Domestic Investment and Net Exports...................................................... 15
Economic Efficiency of Tax-Exempt Debt........................................................................... 16
Congressional Action ................................................................................................................ 17
Figures
Figure 1. Holders of State and Local Government Debt Outstanding ........................................... 4
Figure 2. State and Local Debt Outstanding as Percent of Own-Source Revenue ......................... 6
Figure 3. Level of State Debt and General Revenue..................................................................... 8
Figure 4. General Revenue Change from Previous Fiscal Year................................................... 11
Figure 5. State Debt as Percentage of State Personal Income ..................................................... 12
Figure 6. State Debt and Unfunded Pension Liabilities as Percent of State GDP ........................ 15
Tables
Table A-1. Relative Measure of State and Local Government Debt Outstanding ........................ 19
Table A-2. Change in State Debt and Interest Expense from FY2002 to FY2009........................ 21
Table A-3. State Debt and Unfunded Pension Obligations.......................................................... 23
Congressional Research Service
State and Local Government Debt
Appendixes
Appendix. ................................................................................................................................. 19
Contacts
Author Contact Information ...................................................................................................... 24
Congressional Research Service
State and Local Government Debt
State and Local Government Finances
The fiscal health of many states has been severely strained by the prolonged economic slowdown
following the recent recession, even after the official end of the recession in June 2009. State and
local tax revenues have declined, expenditures for social insurance programs have increased, and
federal assistance has begun to recede as federal aid related to the American Recovery and
Reinvestment Act (ARRA) expires. Further, state and local governments are required to balance
current operating budgets either annually or biannually. State and local governments have used a
combination of rainy day fund withdrawals, tax increases, spending reductions, and in some
instances, borrowing to meet these balanced budget requirements.1
Congress has become increasingly concerned that state financial difficulties may lead states to
take actions that could have an adverse impact on the economic recovery and that they may need
additional federal government assistance. Part of this concern has focused on debt issued by state
and local governments. This report will describe state and local government debt and analyze
how debt is incorporated into state and local budgets. The report will also analyze the role the
federal government has in state and local government debt structure.
Other issues of interest to Congress include bond default risk (or more generally, state
bankruptcy) and public pension underfunding. Bond default risk and underfunding public
pensions are both integral parts of state and local finance, though somewhat beyond the scope of
this report. Clearly, during economic downturns, the risk of bond default rises. In particular, those
bonds secured by specific revenue streams and not the general obligation of the issuing
jurisdiction are at greatest risk. Even so, municipal default has been relatively rare, only 54
defaults from 1970 to 2009, and has yet to become a significant issue in municipal finance.2 As
for public pensions, debt is rarely used to finance future obligations and is generally discouraged
by public finance professionals. Nonetheless, some states have used debt to fund pensions.3
State and Local Government Debt
As noted earlier, the level of state and local government debt and purported growth of this debt
during the recession has generated significant congressional interest.4 Some observers have
suggested that the pressure to provide additional federal assistance has increased as states are
purportedly relying more on debt to finance operations. For example, H.R. 344, the Fiscal
Responsibility Effective Enforcement Act, would prohibit the Federal Reserve Board (the Fed)
from buying short-term municipal securities, thus reducing the probability that the Fed would be
1 An overview of some techniques used to “manage” state budget constraints can be found in the following: Eileen
Norcross, Fiscal Evasion in State Budgeting, Mercatus Center, George Mason University, Working Paper no. 10-39,
July 2010.
2 For more on the history, see Moody’s Investor Service, “U.S. Municipal Bond defaults and Recoveries, 1970-2009,”
February 2010. As for future defaults, though difficult to predict, the Bond Dealers of America reports that “in the last
four years and during the height of the recession, only seven municipal governments filed for bankruptcy.” See Mike
Nicholas, Chief Executive Officer, Bond Dealers of America, as reported in the The Bond Buyer, February 28, 2011.
3 James B. Burnham, “Risky Business?: Evaluating the Use of Pension Obligations Bonds,” Government Finance
Review, June 2003, p. 12-17.
4 For more on state and local government debt, see CRS Report RL30638, Tax-Exempt Bonds: A Description of State
and Local Government Debt, by Steven Maguire.
Congressional Research Service
1
State and Local Government Debt
asked to “bail-out” state and local governments. Congress has also held several hearings on
policies addressing the fiscal health of state and local governments.5 This section will describe the
type of state and local government debt analyzed here and who holds this debt.
Operating Budget and Capital Budget
In contrast to the federal government, most state and local governments maintain two budgets, an
operating budget and a capital budget. The operating budget funds current expenditures such as
employee salaries, payment for services, and interest payments on debt. Current revenues, such as
taxes, fees, user charges, and intergovernmental aid, finance these expenditures. When observers
refer to state and local government budget deficits, they are almost always refer to the operating
budget.
The timing of state and local revenue, however, typically does not match spending. Thus, most
governments issue short-term debt to finance current spending then use future revenue to repay
this debt. These notes are called revenue anticipation notes or tax anticipation notes. It is
important to note that almost every state and local government is required to maintain a balanced
operating budget from fiscal year to fiscal year, so only in rare circumstances short-term debt is
carried over into the next fiscal year.6
The capital budget is typically used to finance infrastructure (or public capital) investment. The
capital budget looks forward as far as 10 years for some states.7 The role of debt also differs in the
operating and capital budgets. Long-term debt is almost always intended for capital projects and
as such is included in the capital budget. However, the interest expense on debt issued for the
capital budget is included in the operating budget.
No uniform definition of a “capital” expenditure exists, though most lean toward a common
principal. The National Association of State Budget Officers (NASBO) provides the following
brief explanation of how states identify spending for inclusion in the capital budget:
States define the types of expenditures allowed in capital budgets to include such items as
construction, improvements, land acquisition, site improvements, major renovations, and
equipment. Definitions may also specify the anticipated useful life of a project and a
minimum level of expenditure, with $25,000 being the most frequent minimum for capital
budget expenditures.8
The ambiguity in some facets of this explanation is readily apparent. For example, the difference
between a “major renovation” and a “minor renovation” may be arbitrary.
5 U.S. Congress, Senate Committee on the Budget, Challenges for the U.S. Economy, 112th Cong., 1st sess., February 3,
2011; U.S. Congress, House Committee on Oversight and Government Reform, Subcommittee on TARP, Financial
Services and Bailouts of Public and Private Programs, State and Municipal Debt: The Coming Crisis?, 112th Cong., 1st
sess., February 9, 2011; and U.S. Congress, House Committee on Oversight and Government Reform, Subcommittee
on TARP, Financial Services and Bailouts of Public and Private Programs, State and Municipal Debt: The Coming
Crisis? Part II, 112th Cong., 1st sess., March 15, 2011.
6 National Association of State Budget Officers (NASBO), “Budget Processes in the States,” Washington, DC, Summer
2008, available at http://www.nasbo.org/LinkClick.aspx?fileticket=AaAKTnjgucg%3d&tabid=38.
7 NASBO, “Capital Budgeting in the States,” Washington, DC, November 1999, available at http://www.nasbo.org/
LinkClick.aspx?fileticket=yfDocTSXHU4=&tabid=84.
8 NASBO, “Capital Budgeting in the States,” 1999, p. 8.
Congressional Research Service
2
State and Local Government Debt
Nevertheless, the use of capital budgets and balanced budget rules makes it relatively difficult for
state and local governments to issue debt to fund current operating expenses. Some states,
however, do have some flexibility to shift spending between the operating and capital budgets,
from fiscal year to fiscal year, and from account to account. This flexibility diminishes the
seemingly disciplined treatment of debt. In addition, many states create and use special purpose
authorities for debt issuance. These special authorities, though part of state government, are
typically not constrained by the budget discipline tools described above.9
The Unemployment Trust Fund and Pension Debt
State and local governments also incur future liabilities that are not bonds. For example, many
states borrow directly from the federal government to finance current expenditures for
unemployment compensation (UC).10 During recessions, the balance of these funds often falls to
a point where states borrow to pay benefits. States can borrow from outside sources or from the
federal government. As of February 18, 2011, 31 states and the U.S. Virgin Islands had borrowed
a combined $43 billion through trust fund loans from the federal government.11 These debts will
be repaid through higher taxes on employers in most cases. A thorough examination of this type
of debt and accompanying interest costs, though significant in some states, is beyond the scope of
this report (for example, California owes over $10 billion to the federal government or 23% of the
total outstanding).
Pension funds—in particular, defined benefit retirement funds—are also a significant liability or
debt incurred by states and local governments. Recent studies have estimated that many state
pensions are underfunded; one set the underfunding at $1 trillion.12 As with UC programs, a
thorough examination of this type of debt is beyond the scope of this report.
Holders of State and Local Government Debt
In addition to the discipline of budgetary rules, state and local government debt issuance is also
constrained by the financial markets. As with any borrower, state and local governments need
willing creditors to incur debt. The relative safety of state and local government debt and the
federal income tax exclusion on interest payments on state and local bonds has created a strong
demand for state and local government debt. What is also important to note is that entities that are
otherwise non-taxable (or untaxable foreign entities) have little interest in tax-exempt state and
local debt.
9 An overview of some techniques used to “manage” state budget constraints can be found in the following: Eileen
Norcross, Fiscal Evasion in State Budgeting, Mercatus Center, George Mason University, Working Paper no. 10-39,
July 2010.
10 CRS Report RS22954, The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States, by Julie
M. Whittaker.
11 United States Department of Labor, Employment and Training Administration, “Trust Fund Loans,” Washington,
DC, available at http://www.workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans, visited February 23, 2011.
12 Pew Center for the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to
Reform,” Washington, DC, February 2010, available at http://downloads.pewcenteronthestates.org/
The_Trillion_Dollar_Gap_final.pdf.
Congressional Research Service
3
State and Local Government Debt
Individuals are the primary holders of state and local government debt. Figure 1 shows the
holders of all outstanding municipal debt as of the third quarter of 2010.13 Households, mutual
funds, and money market funds represent holdings of individuals and compose approximately
two-thirds of all debt outstanding. Individual holdings are represented in shades of blue. In past
years, the individual share was larger as commercial banks and the rest of the world (ROW) held
considerably less municipal debt. The recent increase in tax-exempt bond holdings by
corporations and ROW can be attributed to the change in the more favorable tax treatment of
corporate-held tax-exempt debt and Build America Bonds (BABs).14 BABs are taxable and offer
higher interest rates than tax-exempt bonds thus making them more attractive to non-taxable
entities such as pension funds and international investors.
Figure 1. Holders of State and Local Government Debt Outstanding
As of the Third Quarter of 2010 in Billions of Dollars
Source: CRS presentation of data from Federal Reserve Board, Flow of Funds Accounts, Flows and
Outstandings, Third Quarter 2010.
Notes: The parts labeled “individuals” are chiefly owed by individuals directly or indirectly through the specified
type of investment vehicle.
The next section provides more detail on the level of state and local government debt. The
discussion relies on data provided publicly by the Federal Reserve Board and U.S. Bureau of the
Census and attempts to establish the current debt position of state and local governments and how
it has changed over time.
13 This total includes the debt issued by nonprofit organizations and nonfinancial businesses.
14 For further analysis of Build America Bonds, see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by
Steven Maguire.
Congressional Research Service
4
State and Local Government Debt
Measuring State and Local Government Debt
The Fed and the United States Census Bureau (Census) publish information on state and local
government debt outstanding. Both sources exhibit the relative importance of long-term debt. The
Fed data are more current whereas the Census reports detailed data for both state and local
government debt, albeit less current.
The Fed reports that, as of the third quarter of 2010, $2.39 trillion of state and local government
debt was outstanding. Of this total, long-term debt composed 94.6%.15 The Census reports that
for FY2008, the latest year available, total state and local government outstanding debt was $2.55
trillion ($1 trillion in state debt and $1.55 trillion in local debt).16 The Census further reports that
in FY2008 state long-term debt was 98.6% of state total outstanding debt and local long-term
debt was 98.0% of local total outstanding debt.
The amount of state and local government debt outstanding provides an indication of the relative
magnitude of government borrowing. The government issuer, however, is not obligated to repay
all of this debt; much of this debt is issued through debt vehicles called revenue bonds. Revenue
bonds commit (or are secured by) a specified revenue stream, not the full faith and credit of the
issuer. From 1996 through 2010, roughly one-third of state and local government debt issued was
general obligation debt and two-thirds was specific revenue-secured debt.17
By comparison, total corporate and foreign bonds held by U.S. residents was $11.4 trillion at the
close of the third quarter of 2010, and U.S. Treasury debt just recently reached $14.1 trillion.18
Most corporate debt and all federal debt is backed by the full faith and credit of the issuer.
Relative Measures of State and Local Government Debt
The level of debt outstanding is best understood in the context of capacity to service that debt.
One common measure of capacity to service debt is a jurisdiction’s own-source revenue,
excluding transfers from the federal government. This metric includes revenue from taxes (e.g.,
sales, income, and property) and revenue from fees and charges (e.g., public college tuition and
recreation fees). It could be argued that own-source revenue may be the best metric to gauge
capacity to service debt because state and local governments have a great deal of control over
these revenue sources.
A narrower measure of capacity to service debt is using current tax revenue alone. Capacity
would seem smaller using this measure and would make the local government situation look
15 Federal Reserve Board, “Flow of Funds Accounts, Flows and Outstandings, Third Quarter 2010,” available at
http://www.federalreserve.gov/releases/z1/. This total does not include the amounts issued by nonprofit organizations
and nonfinancial corporate businesses.
16 United States Census Bureau, State and Local Government Finances FY2008, released July 7, 2010. The Fed reports
$2.68 trillion outstanding for 2008
17 Thomson-Reuters as provided by the Securities Industry and Financial Markets Association (SIFMA). Data available
at http://www.sifma.org/research/statistics.aspx.
18 For more on Treasury debt outstanding, see CRS Report RL31967, The Debt Limit: History and Recent Increases, by
D. Andrew Austin and Mindy R. Levit.
Congressional Research Service
5
State and Local Government Debt
relatively more precarious as they rely less on current taxes and more on user charges and fees
than state governments.
Table A-1 presents ratios measuring (1) debt to own-source revenue (presented in Figure 2) and
(2) debt to current tax revenue for (a) state and local governments combined, (b) state
governments alone, and (c) local governments alone for FY2008 (the latest available).19 In states
where local governments have less responsibility for government service provision, state level
revenue and spending is a larger share of the total state and local government combined budget.
In such states, the debt burden would lean more heavily on the state. With this in mind, the
combined state and local government debt burden may be the best comparative measure across
states.
Figure 2. State and Local Debt Outstanding as Percent of Own-Source Revenue
FY2008
Source: United States Census Bureau, State and Local Government Finances FY2008, released July 2010.
Notes: See Table A-1 in the Appendix.
The total state and local debt to taxes percentages should be viewed with caution as they may
mask fundamental differences among states in how debt finance is shared between the state
government and local governments. For example, total state and local government debt to taxes in
19 The FY2008 data, though somewhat dated, are still informative for comparative analysis. Debt outstanding does not
fluctuate drastically from year to year as most of the underlying debt is long term. The drop in revenues corresponding
with the 2007 to 2009 recession, however, is not reflected in the percentages.
Congressional Research Service
6
State and Local Government Debt
New Hampshire and Tennessee are 212.1% and 188.3%, respectively. From this, one might
conclude that, from a risk perspective, Tennessee’s debt policies are relatively more sound than
New Hampshire’s. The state of New Hampshire does have the highest debt burden of all states
(debt was 351% of taxes collected in FY2008) yet local governments in New Hampshire have the
second lowest debt burden (debt was 97% of taxes collected). Whereas in Tennessee, the state had
the lowest debt to taxes percentage of just 37.8%, but local governments in Tennessee had a debt
to taxes percentage of 421.0%. Only five states had local governments with a higher debt-to-taxes
percentage than Tennessee.
The difference between New Hampshire and Tennessee highlights how examining measures of
state debt alone may understate potential debt strain at the sub-state government level. And, to the
extent states may be indirectly responsible for the finances of sub-state governments, risk could
be transferred from the local governments to state governments.
How Has State Debt Changed Over Time?
The recession that began in December 2007 and ended June 2009 created significant fiscal strain
on state and local governments.20 The economy was in recession for over half of FY2008 and all
of FY2009. Over this period, revenues declined and elevated spending intended to counter the
effects of a slowed economy created what the National Association of State Budget Officers
called “one of the worst periods in State fiscal conditions since the great depression.”21 In
addition, federal assistance provided by the American Recovery and Reinvestment Act of 2009 is
scheduled to expire and future pension obligations, for both retirement and health benefits, have
created unease among many financial analysts and policymakers.
This section examines how state finances have changed over the FY2002 to FY2009 period.
These years were selected for comparison because they are fairly representative of recent
changing economic conditions. Both the beginning and end are considered economic troughs
corresponding with the two most recent recessions. The recession of 2001 spanned from March
2001 to November 2001, which includes the beginning of FY2002 (for most states that would
have been July 1, 2001). The data endpoint, FY2009, corresponds with the end of the most recent
recession in June 2009.
Figure 3 shows the level of state general revenue, intergovernmental aid from the federal
government, total state debt outstanding, and interest expense. The average annual growth rate for
state debt outstanding over the period was 7.4% and total revenue, including intergovernmental
aid, grew at an annual average rate of 2.2%. If intergovernmental aid were excluded, the average
annual growth rate of state own-source revenue was 1.1% from 2002 to 2009.
20 National Bureau of Economic Research, “U.S. Business Cycle Expansions and Contractions,” available at
http://www.nber.org/cycles/cyclesmain.html, visited January 31, 2011.
21 NASBO, “The Fiscal Survey of States: Fall 2010,” Washington, DC, p. vii., available at http://www.nasbo.org/
LinkClick.aspx?fileticket=EQnlICsAJD8%3d&tabid=38.
Congressional Research Service
7
State and Local Government Debt
Figure 3. Level of State Debt and General Revenue
FY2002 to FY2009 in Current Dollars
Source: CRS calculations based on United States Census Bureau, State Government Finances: 2009, available at
http://www.census.gov/govs/state/.
The relatively continuous rise and slight drop in state general revenues in FY2009 is likely a key
contributor to the current stress on state and local government operating budgets. State operating
budgets, which as a general rule must be balanced from fiscal year to fiscal year, do not include
levels of debt outstanding. The operating budget, however, does include interest payments on
level of debt outstanding. These state interest payments outpaced state GDP growth over the same
period, yet, as a portion of debt outstanding, declined from 5.2% to 4.5% from FY2002 to
FY2009.
The lower (relative to state GDP) interest payments likely reflect falling interest rates over the
last 20 years. In 1992, the average municipal bond rate was 6.41%, falling to 5.05% in 2002, and
then to 4.64% in 2009.22 As interest rates drop, states replace (or current refund) outstanding high
interest rate bonds with lower interest rate bonds.23 Also, any “new money” debt issuances carry a
lower interest cost.
State Government Debt
Some policymakers have suggested that the level of state debt may grow, given the need to close
current operating budget gaps, possibly with increased reliance on debt.24 The budget gaps are
relatively large from a historical perspective though state definitions of “deficit” vary
22 Office of Management and Budget, “Economic Report of the President,” Table B-73, February 2011. The interest
rate dropped further in 2010 to 4.16%.
23 Municipal bonds typically include a 10-year call provision where the issuer can buy back outstanding debt.
24 For a discussion, see U.S. Congress, House Committee on Oversight and Government Reform, Subcommittee on
TARP, Financial Services and Bailouts of Public and Private Programs, State and Municipal Debt: The Coming Crisis,
112th Cong., 1st sess., February 19, 2011.
Congressional Research Service
8
State and Local Government Debt
considerably. The National Conference of State Legislatures (NCSL) estimates a FY2011 budget
gap of $26.7 billion and a FY2012 budget gap of $82.1 billion.25 States are generally reluctant to
address gaps in the operating budget by reducing general fund spending that could be included in
state capital budgets, which are financed primarily with debt. There is some evidence, however, to
suggest that some states may have used this budget for financial flexibility. For example, despite
the economic slowdown, capital spending increased 4.7% in FY2009, and was estimated to have
grown 5.5% in FY2010. 26 This additional spending was financed with additional debt and federal
funds.
In addition, the NASBO reports that 32.5% of spending on capital projects in FY2009 was
financed with bonds. Other non-general fund sources, such as dedicated fees and fund surpluses,
composed another 35.1% of capital spending. General fund financing of capital projects
represented 5.9% and federal funds the remaining 26.5%. These levels reflect a change in the mix
of funding sources. General fund financing of capital projects decreased by 35.9% whereas
federal fund financing increased 15.3% and bond-financed spending increased 10.6%. The
implication is that in recent years states may have relied more on debt financing of capital
projects that in the past were paid with general fund revenues.
Many states, some researchers contend, may suffer from a so-called “fiscal illusion” that makes
debt (or federal grants) appear to be “cheaper” than using general fund revenues. As a result, they
argue, states spend more than they otherwise would if the spending were financed exclusively
with general fund revenues. In times of budget stress, the incentives for using debt are even
greater. Following is a brief discussion of research that has examined the tradeoff between
financing spending with debt, federal aid, or current general fund revenues.
Fiscal Illusion and Debt Versus Taxes
The fundamental question of how to finance expenditures settles on the choice between selling
bonds or using current tax revenues. Fiscal illusion, as it applies to state and local government
debt, refers to the perception of current taxpayers that public goods financed with debt are
cheaper than using current taxes because payment is shifted to the future.27 In theory, this illusion
encourages more public spending than would otherwise be the case. This choice is principally a
tradeoff between using taxes collected today versus taxes collected in the future.
Nevertheless, debt finance accomplishes two principal objectives of public finance. First, for debt
issued for capital projects, the users of public infrastructure are repaying the debt through tax
payments. This is typically called “pay-as-you-use” (payuse) financing and is considered more
equitable as the taxpayers receiving the benefit are paying the taxes needed to repay the bond.
Second, the use of debt smoothens spending on (often) large and expensive infrastructure
projects. Without a bond issue, the jurisdiction would be required to make periodic lump sum
payments for infrastructure. Accordingly, taxes would fluctuate as the payments are made.
25 National Conference of State Legislatures, “NCSL Fiscal Brief: Top Fiscal Issues for 2011 Legislative Sessions,”
January 3, 2011, p. 1.
26 All expenditure data are from the National Association of State Budget Officers, “Fiscal Year 2009 State
Expenditure Report,” Fall 2010. The report is available at http://www.nasbo.org/.
27 A singular definition of “fiscal illusion” does not exist. J. Buchanan, Public Finance in Democratic Process,
University of North Carolina Press, 1967.
Congressional Research Service
9
State and Local Government Debt
Some jurisdictions, however, use a pay-as-you-go (paygo) system and “save” tax revenue and
plan spending to match the saving and revenue structure. This requires a disciplined system of
maintaining taxes and accurately anticipating future spending needs. One study concluded that
ideally, a mix of the two financing mechanisms, depending on economic conditions, could
maximize efficiency.28 According to the study, during times of economic growth and budget
surpluses, jurisdictions should use paygo and during economic downturns, payuse would be
preferred.
Ricardian Equivalence and Debt Capitalization
One response to the fiscal illusion theory that suggests governments will borrow and spend “too
much,” is that the current generation will save more today in anticipation of the future taxes
needed to repay the debt.29 The theory presumes the current generation is interested in
maintaining the consumption patterns of the next generation. To achieve this, the current
generation saves and then transfers at death to the next generation an amount needed to retire debt
incurred by the current generation. The net amount of debt would be unchanged. The list of
restrictive assumptions needed to achieve the balance of planned saving to match debt repayment
has led some to question the robustness of the so-called Ricardian Equivalence Model (REM).
A second response to the “over borrowing” critique relies on a model similar in principle to the
REM. The debt capitalization model posits that future debt payments are “capitalized” into the
value of property at the state and local government level.30 In this theory, higher debt translates
into lower property values as the market “capitalizes” or incorporates the requirement to repay
future debt into the value of property today. As a result, the current generation “pays” for debt
through lower property values today.
Change in State Debt from FY2002 to FY2009
As noted earlier, the last two recessions mark the beginning and end of the era examined. The
level of state debt has increased from 59.9% of general revenue in FY2002 to 69.9% of general
revenue in FY2009, and may increase further as the pace of the economic recovery and lagging
housing market may continue to depress state (and local) revenue for FY2010, FY2011, and
possibly FY2012. Figure 4 shows that general revenue growth actually declined in FY2009. The
recession ended just before the beginning of FY2010 and the lag between economic decline and
corresponding drop in revenues suggests that FY2010 may also exhibit a decline as well. State tax
revenue, however, has shown recent improvement and may help alleviate some fiscal strain in
FY2012.31 Nevertheless, the growth in debt outstanding did slow, though it still exceeded general
revenue growth the last three fiscal years.
28 Wen Wang and Yilin Hou, “Pay-as-You-Go Financing and Capital Outlay Volatility: Evidence from the States over
Two Recent Economic Cycles,” Public Budgeting and Finance, vol. 29, no. 4, 2009, pp. 90-107.
29 Barro, R.J., “Are Government Bonds Net Wealth?,” Journal of Political Economy, vol. 82, no. 6, 1974, pp. 1095-
1117.
30 These applications are relevant for state and local governments more so than federal level governments. For more,
see Eichenberger, Reiner, and David Stadelman, “How Federalism Protects Future Generations from Today’s Public
Debts,” Review of Law and Economics, vol. 6, no. 3, 2010; and Banzahaf, H.S., and W.E. Oates, “On Ricardian
Equivalence in Local Public Finance,” June 2008, available at http://ssrn.com/abstract=1248002.
31 Tax revenue is obviously the most important component of general revenue, yet composed just 48% of the total.
(continued...)
Congressional Research Service
10
State and Local Government Debt
Figure 4. General Revenue Change from Previous Fiscal Year
All States
Source: CRS calculations based on United States Census Bureau, State Government Finances: 2009.
Notes: The data point for the year listed represents the change from the preceding fiscal year.
Change in State Debt from FY2002 to FY2009, by State
The composite data for all states does not reflect significant differences among states. The
variation in debt position across states can be measured as it relates to a common measure, such
as personal income or general fund revenue or expenditures. For this report, both personal income
and general fund expenditures are used to represent the “budget” capacity of the state. Even
though a state may have the capacity as measured by personal income, the tax (and budget)
structure is the mechanism through which the capacity is accessed. The interest expenditures of a
state as a share of total expenditures provides a measure of a state’s capacity to service debt out of
the current operating budget.
Table A-2 exhibits two relative measures for FY2002 and FY2009 for each state. Figure 5 shows
the FY2009 debt to personal income percentage for each state. The first is total debt outstanding
as a share of personal income. In FY2009, total state debt as a share of personal income was
8.6%, up from 7.0% in FY2002. The increase likely reflects more debt as well as a decline in
personal income in FY2009 given the severity of the recession. State debt as a share of personal
income was over 21% in three states: Massachusetts, Alaska, and Rhode Island. In contrast, state
debt in Nebraska, Texas, and Tennessee was below 4% of personal income. In addition, 12 states
(...continued)
Dadayan, Lucy and Donald Boyd, “State Tax Revenues Rebound Further, Growing For Third Straight Quarter,” The
Nelson A. Rockefeller Institute of Government, State Revenue Flash Report, November 30, 2010. Available at
http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-11-30-State_Revenue_Flash.pdf.
Congressional Research Service
11
State and Local Government Debt
reduced debt as a share of personal income from FY2002 to FY2009. Overall, state debt
outstanding has increased, though the overall debt position has been relatively stable for most
states through FY2009.
Figure 5. State Debt as Percentage of State Personal Income
FY2009
Source: CRS calculations based on U.S. Census Bureau Data, available at http://www.census.gov/govs/state/.
Notes: See Table A-2 in the Appendix.
The second set of data shows the relative importance of interest expense in state expenditures
(excluding intergovernmental expenditures).32 These data could be used as an indicator of the
“affordability” of the debt load discussed above. As mentioned previously, debt is typically
incurred for large capital projects and most (48) states use a separate capital budget to account for
this debt. The state operating budget incorporates the capital budget through the interest expense,
which appears as an expenditure in the operating budget. Total state interest expense in FY2002
and FY2009 was 4.5% of general fund expenditures.
32 These expenditures are sometimes referred to as “general fund” expenditures.
Congressional Research Service
12
State and Local Government Debt
Other State Fiscal Strains: Pensions and Declining
Federal Aid
Some have suggested that post-employment pensions for government workers are underfunded
and compelling states to devote more revenue to shoring up pension funds. Recent reports have
suggested that the amount needed to fully fund promised benefits could be as high as $1 trillion.
For example, an analysis by the Pew Center on the States found that “at the end of fiscal year
2008, there was a $1 trillion gap between the $2.35 trillion states and participating localities had
set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those
promises.”33
Future pension obligations, however, impact current operating deficits only to the extent that
annual contributions will need to rise to fully fund pensions. Data for state and local governments
for FY2008 show that government pension expenditures account for just under 3% of total
expenditures or $82 billion for all state and local government pensions. These contributions are
for future retirees. Payments for already retired or separated workers is a significantly larger
expense ($180 billion in FY2008). These payments are funded through employee retirement trust
funds, not from general fund revenue.
Pension Obligation Bonds
Some governments have issued bonds to finance annual pension payments as a means to alleviate
some fiscal strain. These bonds, called “pension obligation bonds” (POBs), are taxable and the
issuing governments invest the proceeds of the POBs in the pension fund. The intent is for the
return of the invested proceeds to exceed the interest cost on the bonds. The portion of pension
assets funded with POBs is very small.34 A recent study found that the “amount of POBs issued
any one year has never been more than 1% of total assets in public pensions.”35 The same
researchers concluded that
Nevertheless, it appears that POBs have the potential to be useful tools in the hands of the
right governments at the right time. Issuing a POB may allow well-heeled governments to
gamble on the spread between interest rate costs and asset returns or to avoid raising taxes
during a recession. Unfortunately, most often POB issuers are fiscally stressed and in a poor
position to shoulder the investment risk. As such, most POBs appear to be issued by the
wrong governments at the wrong time.36
33 The Pew Center on the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to
Reform,” February 2010, available at http://downloads.pewcenteronthestates.org/The_Trillion_Dollar_Gap_final.pdf.
34 Illinois, however, offered $3.7 billion of pension obligation bonds on March 10, 2011.
35 Munnell, Alicia, Thad Calabrese, Ashby Monk, and Jean-Peirre Aubry, “Pension Obligation Bonds: Financial Crisis
Exposes Risks,” Center for State and Local Government Excellence, January 2010, p. 7. Available at
http://www.slge.org/vertical/Sites/%7BA260E1DF-5AEE-459D-84C4-876EFE1E4032%7D/uploads/%7BD84F0CBF-
78F0-41C1-93ED-84CACA92DE48%7D.PDF.
36 Ibid.
Congressional Research Service
13
State and Local Government Debt
Federal Aid
According to the United State Census Bureau, the federal government provided the states $497.8
billion in FY2009, or one-third of state general revenue.37 NASBO reports that federal funds
financed 29.5% of expenditures ($457.0 billion) in FY2009, rising to 34.7% ($563.7 billion) in
FY2010.38 As federal assistance contained in the American Recovery and Reinvestment Act
(ARRA) gradually expires, the FY2011 federal share will likely decline somewhat. Currently,
states are preparing the FY2012 budgets and are anticipating the need to increase revenue and
reduce expenditures to replace the lost federal aid.
State Obligations: Debt and Unfunded Pension Liabilities
The amount of debt outstanding varies across states. The Census data presented in Table A-3 and
Figure 6 do not differentiate among the types of debt that states issue. As noted above, some
states include liabilities for future pension obligations while others do not.39 As of the end of
FY2009, states had issued over $1.04 trillion of debt compared to $1.5 trillion in state general
revenue.40 As shown in Figure 6 (and Table A-3), state debt ranged from $1.3 billion in
Wyoming to $134.5 billion in California. The national average was $20.9 billion.
According to the Pew Center on the States, at the end of FY2008, total unfunded pension
liabilities were $449 billion and unfunded health benefits amounted to $555 billion. Summing the
two post-employment liabilities of government with debt provides a more complete picture of
each state’s future obligations. Hawaii and New Jersey, with debt and unfunded pension
obligations of 34.4% and 33.2% of state GDP respectively, significantly exceed the national
average of 14.5%. In contrast, Tennessee and Wyoming had debt and unfunded obligations of
3.4% and 4.4% of GDP, respectively. Recall, however, (see Table A-1) that local governments in
Tennessee carry a relatively large share of the debt burden in that state.
37 U.S. Census Bureau, “State Government Finances: 2009,” January 5, 2011.
38 National Association of State Budget Officers, “Fiscal Year 2009 State Expenditure Report,” Fall 2010. The report is
available at http://www.nasbo.org/.
39 The Government Finance Officers Association (GFOA) recommends that issuers only include the following types of
debt in a debt management policy: direct debt which is payable from general revenues, including capital leases; revenue
debt which is payable from a specific pledged revenue source; conduit debt, which is payable by third parties for which
the government does not provide credit or security, state revolving loan funds and pools; other types of hybrid debt,
which is payable from special revenues or containing other unique security pledges; and interfund borrowing, which
are loans for short-term cash flow needs.
40 General revenue does not include state pension net revenue, state owned utility company revenue, and state owned
liquor store revenue.
Congressional Research Service
14
State and Local Government Debt
Figure 6. State Debt and Unfunded Pension Liabilities as Percent of State GDP
Amount in Billions of Dollars
Source: CRS Calculations based on U.S. Census Bureau, State Government Finances 2009; and Pew Center on
the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform,”
February 2010.
Notes: The bond debt is at the end of FY2009. The unfunded pension data are for FY2008. See Table A-3 in
the Appendix.
Economics of State and Local Government Debt
The use of public debt has important economic consequences that extend beyond the comparative
metrics presented in this report. Economists examine broader issues surrounding government debt
and its impact on the financial markets and the economy. These issues, which are not mutually
exclusive, include (1) the degree to which government debt crowds out domestic investment and
net exports and (2) the economic efficiency of using tax-exempt debt to subsidize public capital
formation. The two chiefly negative consequences may seem to justify greater oversight of state
and local government debt and the implicit federal subsidy. Designing a federal oversight role,
however, would need to address the underlying constitutional issues governing the federal-state
relationship.
Crowding Out of Domestic Investment and Net Exports
In a typical economic model, the level of savings in the economy is equal to investment and is
fixed over time. Under this model, when governments borrow, those savings are not available for
Congressional Research Service
15
State and Local Government Debt
private domestic investment, raising interest rates and making private borrowing more expensive.
The higher interest rate also leads to net inflows of foreign capital as investors look to invest in
the United States. The dollar would strengthen resulting in a drop in net exports as dollar-
denominated goods become more expensive.
State and local government debt, thus, is often seen as having a significant impact on the
macroeconomy, and some economists argue that if state government borrowing becomes
“excessive” that borrowing could have a negative impact on private domestic investment and net
exports.41 As such, the economic impact of state and local government debt issuance is generally
perceived as of congressional interest as is the role of the federal government in either promoting
or impeding the issuance of state debt.42
Economic Efficiency of Tax-Exempt Debt
The federal government currently provides a tax preference for state and local government debt.43
The latest estimate of the federal tax expenditure for tax-exempt state and local government debt
is $161.6 billion over the 2010 to 2014 forecast window.44 This tax expenditure is the direct cost
to the federal government of the exclusion of interest paid on state and local government debt
from individual and corporate income taxes.
The tax preference provided through tax-exempt bonds, however, has been criticized as “not a
cost-effective means of transferring resources from the federal government to state and local
governments.”45 Congress may act to more fully explore alternatives to tax-exempt financing
considering the volume of tax-exempt financing and the economic inefficiency. Following is a
brief discussion of why tax-exempt bonds are seen as an economically inefficient means of
federal assistance to state and local governments.
Consider a 35% marginal tax rate investor who purchases a 5% tax-exempt bond with principal
amount of $1,000,000 to be repaid over 20 years. Each year for 20 years this taxpayer receives
$50,000 in tax-exempt interest income. Each year the federal government forgoes collecting
$24,500 (investor tax rate multiplied by what the taxable interest would have been) of revenue
because the revenue loss is based upon the yield the taxpayer forgoes (the taxable yield) and the
taxes that would have been collected on that interest income. For example, if the investor had
purchased a taxable bond carrying a 7% interest rate, he would have received $70,000 in interest
income and paid $24,500 in income taxes on that income (35% times $70,000).46
41 This holds for all government debt, not just state and local government debt.
42 Aizenman, Joshua, and Gurnail Kaur Pasricha, “Net Fiscal Stimulus During the Great Recession,” National Bureau
of Economic Research, no. 16779, February 2011.
43 CRS Report RL30638, Tax-Exempt Bonds: A Description of State and Local Government Debt, by Steven Maguire.
44 U.S. Congress, Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2010 to
2014,” JCS-3-10, December 10, 2010.
45 Donald B. Marron, Acting Director of the U.S. Congressional Budget Office, Economic Issues in the Use of Tax-
Preferred Financing, Testimony before the Committee on Ways and Means, Subcommittee on Select Revenue
Measures, March 16, 2006.
46 The decision about preferred alternatives is critical to estimates of the revenue loss from tax-exempt bonds. An entire
range of financial and real assets exists with different yields, risk, and degree of preferential taxation. It is not true that
the municipal bond purchaser’s preferred alternative is always a taxable bond though it is a sound approximation.
Congressional Research Service
16
State and Local Government Debt
The previous example presents the fundamental economic inefficiency of tax-exempt bonds. The
after-tax rate of return for the tax-exempt bond is the full 5% ($50,000 divided by $1 million).
The after-tax rate of return for the taxable bond is 4.55% ($45,500 divided by $1 million).
Theoretically, the federal government is providing an additional $4,500 to this investor for
purchasing the tax-exempt bond.
Also, consider that the issuer is receiving a subsidy through lower interest costs. In this example,
the issuer receives a two-percentage-point (the difference between a taxable rate of 7% and a tax-
exempt rate of 5%) discount on debt or $20,000 which is less than the $24,500 tax expenditure. In
theory, the federal government could provide the issuer with a direct subsidy of up to $24,500 to
the issuer yielding a smaller revenue loss.
Over time, the size of the federal subsidy for state and local government debt issuance has varied
along with macroeconomic factors and more directly with the marginal income tax rates. The
historical average interest rate on high-grade corporate bonds from 1939 to 2010 was 6.26% and
for high-grade municipal debt, 4.89%. In 2010, the average was 4.94% for corporate debt and
4.16% for municipal debt.47 The relatively high municipal bond rate in 2010, 0.84 of the taxable
rate, confers a significant tax preference to higher tax rate investors.
Congressional Action
This report examines the complexities of state and local government finance and how the
magnitude of state fiscal stress varies considerably from state to state. Congress has recently held
hearings examining the fiscal health of state and local governments and has offered legislation in
two areas related to state and local fiscal health analyzed in this report: government debt and
government pensions.
State and local debt, although growing, has not reached the point where widespread default seems
likely. To date, few defaults have occurred and interest costs for debt outstanding represented a
relatively modest 3.5% of total state and local government expenditures (4.5% of state
expenditures in FY2009). More recent government budget data may show that for selected local
government issuers, such as governmental authorities that rely on specialized revenue streams,
interest costs have risen and default—and possible state government intervention—may be more
likely than in the past. Prolonged weakness in the economy would certainly raise this probability.
Some policymakers are concerned that state and local governments are issuing too much debt,
increasing the risk of potential default. In response, Congress may seek to increase oversight of
the municipal bond market. Historically, the federal government has not actively engaged in
regulating how state and local governments finance activities.48 Congress has limited authority as
the Tower Amendment to the Securities and Exchange Act of 1934 explicitly prohibits the federal
government from requiring
any issuer of municipal securities, directly or indirectly through a purchaser or prospective
purchaser of securities from the issuer, to file with the [Securities and Exchange]
47 Office of Management and Budget, Economic Report of the President 2011, Washington, D.C., February 2011.
48 For example, S. 251 in the 112th Congress would explicitly prohibit the Fed from assisting state and local
governments and authorities through purchasing their debt or offering guarantees.
Congressional Research Service
17
State and Local Government Debt
Commission or the [Municipal Securities Rulemaking] Board prior to the sale of such
securities by the issuer any application, report, or document in connection with the issuance,
sale, or distribution of such securities.49
Congress does confer a tax preference to state and local government bond issuers and could
modify this tax preference to induce changes in bond disclosure requirements. Also, the Internal
Revenue Service (IRS) currently audits selected outstanding tax-exempt bond issues to determine
if the bonds comply with tax law. Expanding these audits may help ensure that the tax-exemption
and associated federal revenue loss is merited.
Congress may also examine alternatives to tax-exempt bonds for subsidizing state and local
government capital investment. In the 112th Congress, several bills have been introduced to
extend and expand a modified version of Build America Bonds (BABs) including H.R. 11, H.R.
736, H.R. 747, and H.R. 992. BABs are viewed by many observers as a more efficient alternative
to tax-exempt bonds.
Congress may also take a more active role in the oversight of state and local government
pensions. Legislation has been introduced to address state pension issues. H.R. 567 and S. 347
would require greater transparency of state and local government pension systems. Recently,
Moody’s, one of the primary bond rating agencies, announced that it would begin integrating tax-
supported debt and unfunded pension liabilities when evaluating state bond ratings.50
In the near term, however, annual pension costs represent roughly 3% of state and local
government operating expenditures ($82 billion in FY2008). As such, the underfunded pension
systems are a longer term concern and, for most states, have a marginal impact on short term
operating deficits.
49 Securities Exchange Act of 1934, Section 15B(d)(1).
50 Albano, Christine, “Moody’s to Weigh Tax-Backed Debt, Pension Liabilities Together,” The Bond Buyer, January
28, 2011.
Congressional Research Service
18
State and Local Government Debt
Appendix.
Table A-1. Relative Measure of State and Local Government Debt Outstanding
FY2008
Debt Outstanding as Percentage of
Debt Outstanding as Percentage of Tax
Own Source Revenue, FY2008
Revenues, FY2008
State and
State and
State
Local State Local Local State Local
United
States
Total
131.2% 94.0% 176.4% 191.7% 128.5% 281.9%
Alabama
114.8% 59.4% 192.8% 199.5% 93.4% 393.1%
Alaska
62.6% 47.4% 156.0% 102.3% 77.1% 264.7%
Arizona
131.2% 57.8% 220.3% 189.6% 76.8% 356.0%
Arkansas
94.9% 41.9% 253.7% 137.6% 56.9% 461.6%
California
126.3% 85.6% 171.6% 183.4% 103.9% 319.2%
Colorado
158.2% 108.4% 201.3% 254.5% 165.0% 340.5%
Connecticut
132.8% 155.5% 92.5% 159.2% 188.8% 108.4%
Delaware
121.3% 109.4% 168.0% 213.9% 195.3% 284.1%
District
of
Columbia
136.6% 0.0% 136.6% 177.5% 0.0% 177.5%
Florida
126.0% 88.5% 153.6% 193.8% 118.1% 266.1%
Georgia
101.4% 55.4% 142.7% 150.3% 72.3% 240.9%
Hawai
111.4% 83.6% 204.2% 155.0% 117.1% 277.9%
Idaho
72.8% 71.0% 75.5% 116.0% 92.5% 182.5%
Illinois
158.9% 144.2% 174.7% 214.7% 183.2% 253.3%
Indiana
130.5% 95.3% 180.1% 202.8% 131.8% 339.8%
Iowa
84.3% 69.7% 103.4% 133.9% 105.0% 176.8%
Kansas
118.9% 58.3% 198.2% 176.6% 81.5% 320.8%
Kentucky
181.0% 85.9% 374.2% 271.2% 121.4% 638.6%
Louisiana
117.2% 104.5% 134.5% 177.6% 148.9% 223.1%
Maine
96.6% 101.3% 87.8% 131.4% 139.9% 116.4%
Maryland
102.8% 108.4% 95.2% 137.3% 146.8% 124.8%
Massachusetts
194.6% 227.8% 129.7% 273.0% 328.1% 173.2%
Michigan
129.2% 81.2% 205.7% 199.9% 117.3% 358.9%
Minnesota
117.2% 42.5% 244.8% 168.5% 52.1% 501.5%
Mississippi
89.5% 71.9% 115.1% 144.7% 93.5% 286.8%
Missouri
137.5% 125.4% 150.8% 206.9% 179.7% 240.4%
Montana
120.0% 137.9% 85.0% 187.7% 200.3% 156.3%
Nebraska
123.6% 46.9% 204.0% 186.6% 64.3% 344.4%
Nevada
158.0% 56.3% 251.4% 235.2% 69.5% 461.7%
Congressional Research Service
19
State and Local Government Debt
Debt Outstanding as Percentage of
Debt Outstanding as Percentage of Tax
Own Source Revenue, FY2008
Revenues, FY2008
State and
State and
State
Local
State Local Local
State Local
New
Hampshire 146.5% 204.0% 79.1% 212.1% 351.3% 96.5%
New
Jersey
126.0% 131.4% 118.7% 163.5% 172.4% 151.8%
New
Mexico
104.3% 82.7% 165.6% 171.1% 137.5% 261.2%
New
York
146.5% 132.2% 159.1% 195.1% 174.8% 213.3%
North
Carolina 103.7% 66.6% 158.5% 154.2% 86.1% 303.0%
North
Dakota
75.9% 57.0% 122.2% 115.2% 84.4% 197.7%
Ohio
100.2% 72.0% 133.9% 147.1% 102.9% 203.5%
Oklahoma
89.2% 75.3% 113.7% 137.6% 109.6% 196.1%
Oregon
137.9% 98.6% 186.8% 234.7% 160.0% 338.3%
Pennsylvania
154.2% 89.9% 243.1% 219.2% 124.8% 357.1%
Rhode
Island
165.1% 207.3% 95.4% 233.8% 322.7% 117.6%
South
Carolina 150.6% 112.7% 198.2% 277.7% 190.7% 411.7%
South
Dakota
132.5% 157.1% 102.8% 209.9% 257.9% 156.0%
Tennessee
117.9% 25.9% 232.9% 188.3% 37.8% 421.0%
Texas
164.7% 50.9% 277.7% 249.9% 74.5% 437.8%
Utah
110.6% 60.6% 201.1% 178.5% 96.7% 331.7%
Vermont
106.3% 98.1% 149.3% 147.9% 132.5% 247.9%
Virginia
112.6% 76.1% 165.3% 167.2% 118.8% 229.6%
Washington
148.8% 98.1% 211.5% 225.8% 131.0% 385.9%
West
Virginia
97.0% 85.1% 130.7% 153.0% 130.4% 224.5%
Wisconsin
121.7% 105.5% 146.5% 172.8% 146.5% 215.6%
Wyoming
38.8% 38.8% 38.9% 63.5% 55.8% 77.8%
Source: United States Census Bureau, State and Local Government Finances FY2008, released July 2010.
Notes: Note that the data released debt in Wyoming did not meet the Total Quantity Response Rates for the
Census Bureau’s 70% standard.
Congressional Research Service
20
State and Local Government Debt
Table A-2. Change in State Debt and Interest Expense from FY2002 to FY2009
Debt as Share of Personal Income and Interest as Share of General Fund Expenditures
Interest Cost as Share of General Fund
Debt to Personal Income
Expenditures
State
FY2002 FY2009 Change FY2002 FY2009 Change
United
States 7.0% 8.6% 1.5% 4.5% 4.5% 0.0%
Alabama
5.5% 5.2% -0.4% 2.0% 2.0% 0.0%
Alaska 24.9%
21.8%
-3.1%
5.0%
3.7%
-1.2%
Arizona
2.9% 5.6% 2.7% 1.9% 2.8% 0.9%
Arkansas
4.6% 4.4% -0.2% 1.8% 1.6% -0.2%
California
6.0% 8.6% 2.6% 4.7% 5.4% 0.6%
Colorado
4.5% 8.2% 3.6% 3.4% 5.8% 2.4%
Connecticut 13.9% 14.7% 0.8% 8.2% 8.4% 0.2%
Delaware 15.1%
16.9%
1.8%
7.5%
5.2%
-2.3%
Florida
4.0% 5.4% 1.4% 3.2% 3.4% 0.3%
Georgia
3.3% 4.0% 0.7% 2.2% 2.6% 0.4%
Hawai 15.1%
12.6%
-2.5%
7.1%
4.4%
-2.7%
Idaho
7.3% 7.2% -0.1% 4.4% 3.6% -0.8%
Illinois 8.2%
10.5%
2.3%
6.2%
7.1%
0.8%
Indiana 5.4%
10.9%
5.5%
2.8%
4.4%
1.5%
Iowa
4.4% 5.6% 1.2% 1.5% 2.2% 0.7%
Kansas
2.8% 5.3% 2.5% 1.9% 3.5% 1.6%
Kentucky
6.8% 9.6% 2.8% 3.5% 2.9% -0.6%
Louisiana 8.0%
10.4%
2.4%
4.3%
4.5%
0.2%
Maine 11.6%
11.2%
-0.3%
5.1%
4.2%
-0.9%
Maryland
6.1% 8.5% 2.4% 4.6% 4.5% -0.1%
Massachusetts 17.8% 22.8% 5.0% 12.3% 11.7% -0.7%
Michigan
7.2% 8.6% 1.4% 4.3% 3.7% -0.6%
Minnesota 3.7% 4.3% 0.5% 2.3% 3.2% 0.8%
Mississippi 6.3% 6.9% 0.6% 2.6% 1.8% -0.8%
Missouri
7.6% 8.9% 1.3% 4.2% 4.5% 0.3%
Montana 11.8%
14.0%
2.3%
5.0%
4.0%
-0.9%
Nebraska
4.2% 3.6% -0.7% 2.5% 1.7% -0.8%
Nevada
5.4% 4.5% -0.9% 3.9% 3.5% -0.4%
New
Hampshire
12.1%
14.9% 2.8% 10.7% 8.6% -2.2%
New Jersey
9.4%
13.1%
3.7%
5.1%
5.8%
0.7%
New Mexico
9.7%
12.0%
2.3%
3.0%
3.0%
0.0%
New York
13.0%
13.5%
0.5%
8.0%
7.0%
-1.0%
Congressional Research Service
21
State and Local Government Debt
Interest Cost as Share of General Fund
Debt to Personal Income
Expenditures
State
FY2002 FY2009 Change FY2002 FY2009 Change
North
Carolina
4.7% 6.1% 1.4% 2.9% 2.2% -0.7%
North
Dakota 9.7% 6.7% -3.0% 3.9% 4.7% 0.8%
Ohio
5.9% 6.8% 0.9% 4.2% 3.9% -0.3%
Oklahoma 7.1% 7.5% 0.4% 3.5% 3.6% 0.1%
Oregon
7.3% 9.0% 1.7% 2.3% 3.3% 1.0%
Pennsylvania 5.4% 8.3% 2.9% 3.1% 4.0% 0.9%
Rhode Island
17.1%
21.1%
4.0%
6.3%
8.7%
2.5%
South Carolina
9.5%
10.4%
0.9%
6.1%
4.5%
-1.6%
South Dakota
10.8%
11.7%
0.9%
5.9%
4.5%
-1.4%
Tennessee 2.2% 2.2% 0.0% 1.4% 1.2% -0.2%
Texas
3.3% 3.2% -0.1% 2.0% 1.8% -0.2%
Utah
7.9% 7.1% -0.8% 2.7% 2.2% -0.4%
Vermont 13.4%
14.1%
0.8%
5.6%
4.7%
-1.0%
Virginia
5.6% 7.0% 1.4% 4.2% 3.5% -0.7%
Washington 6.8% 8.6% 1.8% 3.7% 4.2% 0.5%
West Virginia
10.3%
11.1%
0.8%
3.9%
3.0%
-0.9%
Wisconsin 8.9% 9.9% 1.0% 5.4% 6.3% 0.9%
Wyoming
8.1% 5.0% -3.1% 4.4% 2.1% -2.3%
Source: CRS calculations based on U.S. Census Bureau Data.
Notes: The general fund expenditures do not include contributions to insurance funds on behalf of employees.
Congressional Research Service
22
State and Local Government Debt
Table A-3. State Debt and Unfunded Pension Obligations
Amounts in Thousands of Dollars
Unfunded
Unfunded
Total Debt and
Total Debt
Pension
Healthcare and
Pension
as Portion
Debt at End
Obligation
Non- Obligation
Obligations
of State
State
of FY2009
FY2008a
FY2008b
FY2009
GDP
United States
$1,044,035,380
$448,895,687
$555,102,484
$2,048,033,551
14.5%
Alabama 8,155,943
9,228,918 15,549,411
32,934,272
19.4%
Alaska 6,589,698
3,522,661
4,032,052
14,144,411
30.9%
Arizona 12,324,879
7,871,120 808,818 21,004,817
8.2%
Arkansas 4,135,051
2,752,546 1,822,241 8,709,838 8.6%
California 134,571,934
59,492,498 62,463,000 256,527,432 13.6%
Colorado 17,202,374
16,813,048 1,127,179 35,142,601 13.9%
Connecticut 28,394,151 15,858,500 26,018,800 70,271,451 30.9%
Delaware 5,984,645 129,359 5,409,600 11,523,604
19.0%
Florida 38,885,422
(1,798,789)
3,081,834
40,168,467
5.4%
Georgia 13,455,164
6,384,903 18,322,123
38,162,190
9.7%
Hawai 6,880,242
5,168,108
10,791,300
22,839,650
34.4%
Idaho 3,508,973
772,200
489,421
4,770,594
8.8%
Illinois 56,962,364 54,383,939 39,946,678 151,292,981 24.0%
Indiana 23,711,889
9,825,830 442,268 33,979,987
12.9%
Iowa 6,353,306
2,694,794
404,300
9,452,400
6.6%
Kansas 5,857,295
8,279,168 316,640
14,453,103
11.6%
Kentucky 13,364,138
12,328,429 11,660,245 37,352,812 23.9%
Louisiana 17,504,772
11,658,734 12,542,953 41,706,459
20.0%
Maine 5,396,983
2,782,173
4,347,702
12,526,858
24.4%
Maryland 23,472,579
10,926,099 14,723,420 49,122,098
17.1%
Massachusetts 74,597,901 21,759,452
15,031,600
111,388,953
30.5%
Michigan 29,591,278
11,514,600 39,878,500 80,984,378
22.0%
Minnesota 9,392,931 10,771,507 1,011,400 21,175,838 8.1%
Mississippi 6,208,639 7,971,277 570,248 14,750,164 15.4%
Missouri 19,217,206
9,025,293 2,851,826 31,094,325
13.0%
Montana 4,763,503
1,549,503 631,918 6,944,924
19.3%
Nebraska 2,516,775 754,748
na
3,271,523 3.8%
Nevada 4,444,804
7,281,752 2,211,439
13,937,995
11.0%
New Hampshire
8,411,660
2,522,175
3,054,188
13,988,023
23.5%
New
Jersey 56,897,866 34,434,055 68,900,000 160,231,921 33.2%
New Mexico
8,001,721
4,519,887
2,946,290
15,467,898
20.7%
New
York 122,651,630
(10,428,000) 56,286,000 168,509,630 15.4%
Congressional Research Service
23
State and Local Government Debt
Unfunded
Unfunded
Total Debt and
Total Debt
Pension
Healthcare and
Pension
as Portion
Debt at End
Obligation
Non- Obligation
Obligations
of State
State
of FY2009
FY2008a
FY2008b
FY2009
GDP
North Carolina
19,910,714
504,760
28,741,560
49,157,034
12.3%
North Dakota
1,752,558
546,500
81,276
2,380,334
7.5%
Ohio 27,949,184
19,502,065
27,025,738
74,476,987
15.8%
Oklahoma 9,855,393 13,172,407 359,800 23,387,600 15.2%
Oregon 12,494,686
10,739,000 609,793 23,843,479
14.4%
Pennsylvania 41,924,042 13,724,480
9,956,800
65,605,322 11.8%
Rhode Island
9,180,938
4,353,892
788,189
14,323,019
29.9%
South Carolina
15,313,021
10,052,684
8,638,076
34,003,781
21.3%
South Dakota
3,626,024
182,870
76,406
3,885,300
10.1%
Tennessee 4,847,786 1,602,802 1,746,879 8,197,467 3.4%
Texas 30,438,160
13,781,228
28,611,584
72,830,972
6.4%
Utah 6,267,888
3,611,399
672,843
10,552,130
9.3%
Vermont 3,426,670 461,551 1,614,581 5,502,802
21.6%
Virginia 24,301,179
10,723,000 2,621,000
37,645,179
9.2%
Washington 24,603,219 (179,100)
7,901,610 32,325,729 9.6%
West Virginia
6,501,995
4,968,709
6,108,398
17,579,102
27.8%
Wisconsin 20,913,355 252,600
1,700,396 22,866,351 9.4%
Wyoming 1,320,852 144,353 174,161 1,639,366 4.4%
Source: CRS Calculations based on U.S. Census Bureau, State Government Finances 2009; and Pew Center on
the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform,”
February 2010.
Notes: The Pew Center pension data are from FY2008. As most pensions are heavily invested, the data do not
reflect the sharp decline in assets value in the last half of 2008 and in 2009. Thus, the underfunding should be
viewed as a conservative estimate.
a. Data are estimates from Pew Center on the States, 2010.
b. Data are estimates from Pew Center on the States, 2010.
Author Contact Information
Steven Maguire
Specialist in Public Finance
smaguire@crs.loc.gov, 7-7841
Congressional Research Service
24