On Whose Tab? State Bonded Obligations Exceed $1.23 Trillion
The 4th edition of State Bonded Obligations reveals that states have issued over $1.23 trillion in bonded debt, equal to $3,700 for every man, woman, and child in the United States. States issue this debt so they have money to spend today.
Nobel Prize-winning Economist James Buchanan noted that all government debt represents taxes on future generations.
Bonded obligations are the debt that states issue to finance spending today with a promise to pay it back in the future. This is a tax on future generations for spending today.
States largely offer three types of bonds. Bonded obligations by type are displayed in Figure 9 of State Bonded Obligations, recreated below.
The first are general obligation bonds, backed by the “full faith and credit” of the issuing a state, and they make up 34% (over $420 billion) of all such obligations. The phrase “full faith and credit” means that the state is obligated to pay out the debt using existing revenue and, if necessary, create new taxes to pay off the debt.
The second are revenue bonds, which are broken down into governmental activity and business-type activity bonds. Governmental activity bonds vary from state to state but are generally issued for transportation infrastructure and capital projects. They are often funded by legislative appropriations and dedicated tax revenue sources, like fuel taxes, and make up 18.85% (over $232 billion) of all bonded obligations.
Business-type activity bonds are largely self-supporting. For example, universities or toll roads, which generate revenue through fees, lease agreements, tolls, investment returns and other non-tax revenues to pay these bonded obligations. If these non-tax revenue sources dry up, however, the state must pay this debt off using tax revenue. These types of revenue bonds make 18.32% (over $225 billion) of all bonded obligations
The third are bonds issued by component units of the state. Component units are legally separate entities created by state government entities with the authority to issue bonds, such as the transit authority. These make up 28.67% (over $352 billion) of all such debt.
Another measure of fiscal health is debt-to-GDP ratio. Typical nations in the developed world tend to “roll-over” a third of their debt. If the interest rate on this debt is larger than the growth rate of the economy debt will outgrow the economy. As we all know, you do not want to owe more than you’re worth.
All this is intricately related to a state’s creditworthiness, which is essentially a comment on its economic character and integrity. Obviously, as creditworthiness falls, so do the economic prospects for the state, as investment falls since investors no longer trust the states’ ability to pay back their dues.
At the root of every debt problem is a spending problem. States can look to ALEC model policy and the ALEC State Budget Reform Toolkit. ALEC model policies include the Balanced Budget Certification Act and the Tax and Expenditure Limitation Act, which models a tax and expenditure limit after the Taxpayers’ Bill of Rights in Colorado. States can learn more about tax and expenditure limits on the new ALEC website, FiscalRules.org.