Assessing the affordability of state debt

Jennifer Weiner

No 13-2, New England Public Policy Center Research Report from Federal Reserve Bank of Boston

Abstract: State governments commonly issue debt to finance the construction of roads, schools, and other investments in infrastructure that are important for economic growth and competitiveness. While borrowing funds can facilitate these investments, there is also a danger in allowing debt to grow unchecked. If debt service is too high, it can crowd out other public spending or else necessitate burdensome taxes or fees. Policymakers thus must carefully balance a state's capital needs with efforts to keep debt levels affordable. This report highlights some considerations faced by policymakers or analysts when gauging state debt affordability, including how to define state debt and which metrics and approaches to use to assess state debt burdens. The report, which uses illustrative data from the New England states, concludes with recommendations to help guide future affordability assessments. These include improving transparency surrounding the various forms of state debt, examining alternative definitions of debt and multiple debt burden ratios, and timing affordability analyses to inform capital planning.

Pages: 40 pages
Date: 2013-12-01
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