State and State Authority Debt Issuance: 1996-2005

States collectively issued more than $1.1 trillion in bonds between 1996 and 2005, an action fueled in part by the near 40-year low interest rates and weak revenue growth that marked the most recent economic downturn. The primary purposes of most bonds issued by states were to fund infrastructure and capital projects and replace "pay as you go" financing. Additionally, refunding constituted a significant percentage of debt issuance as states took advantage of low interest rates to refinance bonds with higher interest rates.

States issue two kinds of debt: 1) general obligation debt which is secured by the "full faith and credit" of the issuing state and 2) revenue backed debt, which is secured by the anticipated stream of revenue generated by the issuing authority. An example of revenue-backed debt, also called self-supporting debt, is a higher education institution issuing bonds to construct a dormitory and securing those bonds with tuition and fees.

Figure 1 illustrates the changes in debt issuance between 1996 and 2005 for states and state authorities such as higher education commissions, port authorities, housing finance authorities, etc. State debt issuance peaked in 2003 at $167.4 billion as states struggled with budget shortfalls.

Figure 1. State Debt Issuance 1996-2005

State Debt Issuance 1996-2005

Source: Thomson Financial, October 2006.

By 2002, both state and state authority debt issuance had more than doubled the level reported in 1996 and remained at approximately the same level by 2005. Over the course of the 10-year period covered in this analysis, state debt issuance had risen from $14.4 billion in 1996 to $31.3 billion in 2005, while state authority debt issuance rose from $53.1 billion in 1996 to $129.3 billion in 2005.

Figure 2 provides a comparison of the number of issues or bonds that states and state authorities issued between 1996 and 2005. During the 10-year period, states averaged 226 issues per year while state authorities averaged 1,819 issues annually.

Figure 2. Number of Bonds Issued 1996-2005

Source: Thomson Financial, October 2006.

Rising interest rates are expected to slow the pace of debt issuance as the cost of borrowing increases and state refunding of existing bonds declines. Growing year-end balances also may afford states the option of returning to "pay as you go" financing for infrastructure and capital projects, although a backlog of capital project needs may continue to drive new debt issuance for some states.

Posted October 2006.
Email statebudget-info@ncsl.org for more information.
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