How Much Do You Know About State Debt?

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# wrong text: Sorry, that's incorrect. # right text: That's correct! # social text incomplete: How much debt can states afford? Find out in this @PewStates quiz. https://pew.org/2RM1oHc # social text complete: What do you know about state debt? I took the quiz and got {score} out of {total_questions}. Test yourself and share your results. ? This state has the lowest debt per capita in the United States. - Alabama - Georgia - Iowa + Tennessee !

Tennessee, with $870 of state debt per resident. (Runners-up are Nebraska at $955 and Nevada at $1,163.)

States often compare their debt levels to those of other states using a variety of measures such as debt service to revenues and debt per capita. Debt per capita measures total debt against a state’s population. This metric helps compare debt between states of different sizes. It also helps policymakers understand the debt burden on individual residents, who provide much of the revenue that states use to repay debt in the form of taxes and user fees. Although debt per capita is a useful data point, it is far from the only one. Debt levels are also influenced by the factors in the following questions in this quiz. Taking them into account will lead to creation of a sound peer group against which policymakers can meaningfully compare debt.

- Wyoming ? Population growth is associated with more borrowing. This state had the second-highest population growth rate from 2008 to 2017 and an 80 percent increase in state debt from 2008 to 2016. - Colorado - Florida + Texas !

States with increasing populations often need to invest in capital projects to meet growing demand from residents for housing, transportation, infrastructure, etc. States often pay for such infrastructure by selling bonds, whose extended terms allow these long-lasting assets to be paid for over many years.

When comparing debt levels among states, leaders may want to take into account their population growth rates. A marked difference in population growth rates can lead to an unbalanced comparison of state debt levels.

- Idaho - Alabama ? Roughly 25 percent of Montana’s total debt—the money owed by the primary government and major component units such as university systems—is held by the University of Montana and Montana State University. In how many states does higher education borrowing represent at least 10 percent of total debt? + 19 !

In some states, borrowing is mostly conducted by the primary state government. In others, major component units also issue state debt. These units—which include mass transit systems, public colleges and universities, port authorities, and economic development corporations—are legally independent but perform state functions. The sum of a state’s primary government and component unit debt is its total debt.

But component unit debt generally relies less on state funds for repayment than primary government debt does. Often, lenders have no legal claim on state funds if a component unit defaults. As a result, state comparisons based only on total debt may be misleading. When comparing measures of total debt, choosing peers based on how much debt is issued by the primary government relative to component units—or how centralized a state’s debt is—provides more appropriate comparisons.

- 5 - 41 - 10 - 30 ? In which state does local government borrowing account for the least amount of combined state and local debt? - Kansas - Texas - Minnesota + Massachusetts !

In some states, local governments pay for the bulk of capital projects within their jurisdictions. In others, the state government takes on most of the responsibility. As a result, states in which local governments borrow less tend to have higher state debt levels. In Massachusetts, local government borrowing accounts for just 18 percent of combined state and local debt. Meanwhile, the Bay State had the highest debt per capita and debt as a percentage of state personal income in the country.

Knowing what level of government issues the lion’s share of debt in a state will help policymakers make accurate comparisons with the debt of other states.

- Nebraska ? Volatile revenue can make it more challenging for budget officials to plan bond repayment schedules. Which one or more of these steps would mitigate the challenge of revenue volatility and debt management? - Create multiple debt caps, which are limits to the amount of debt that the state can incur. - Pin a debt cap to a multiyear average of revenue, which allows states to set a cap informed by the state’s revenue volatility. - Repay significant amounts of debt with sales tax revenue. + All of the above. !

Revenue volatility measures year-to-year fluctuations in tax collections. States reliant on certain sources of revenue, such as personal income or severance taxes, often have higher revenue volatility.

These fluctuations can pose challenges to policymakers trying to plan for the state’s fiscal future. When a state’s available revenue differs significantly from year to year, it can be difficult to plan for bond payments 15 or 20 years down the road. Also, when revenue drops unexpectedly, fixed costs—including debt service on a state’s bonds—can squeeze other state spending, requiring lawmakers to make critical decisions about how to allocate limited state resources. When comparing state debt, leaders should be mindful that the volatility of a state’s revenue source plays a significant role in debt management and budget planning.

States can alleviate the challenge. Some have multiple debt caps, which are often measured as debt service to revenue. Alaska, for example, has two debt caps: one limiting debt service to 5 percent of revenue, and one that limits debt to 8 percent. These caps allow more flexibility to manage debt when oil revenue fluctuates. Another strategy is to pin a debt cap to a multiyear average of revenue, which can be especially useful in a state where revenue volatility is high. Oklahoma, which has above-average revenue volatility, caps debt service at 5 percent of the average of the general fund revenue for the preceding five fiscal years. Meanwhile, some revenue sources, such as corporate income taxes and severance taxes on natural resources, are highly volatile, making them less suited for repaying debt than more stable sources such as sales taxes.