You asked for information on debt affordability analysis. Specifically, you want to know what it consists of, which states use it, and who conducts it.

The description of debt affordability in this report is taken from The Encyclopedia of Public Administration and Public Policy (Simonsen et al., “Debt Affordability,” pgs. 308-312).

DEBT AFFORDABILITY ANALYSIS

Debt affordability analysis is a financial planning tool states and local governments use in the capital planning process to evaluate how much debt they can afford. It is an assessment of their debt, relative to the resources available for repaying that debt. State and local governments generally measure debt affordability by (1) calculating the relationship between their debt levels and resources and (2) comparing their debt statistics to industry standards and those of similar governments. They can use this analysis to estimate how much debt they can afford to issue in the future.

We identified 11 states that use debt affordability analysis: California, Florida, Maryland, Massachusetts, New Mexico, New York, North Carolina, Texas, Vermont, Virginia, and Washington. Attachment 1 lists each state and provides the entity that conducts the analysis, debt ratios it considers, and a link to its most recent report. In four of the states, an advisory committee conducts the analysis (Maryland, North Carolina, Vermont, and Virginia). In the other states, an executive branch agency, debt oversight board, state comptroller, or treasurer conducts it.

Debt Ratios

State and local governments use a number of debt ratios to measure the relationship between their debt service obligations and their ability to repay debt. These commonly include:

● debt per capita – total indebtedness divided by the population

● debt as a percentage of real market value – debt divided by the real market value of all taxable property

● debt as a percentage of personal income – debt divided by a measure of community wealth

● annual debt service as a percentage of general and debt service fund expenditures – portion of general and debt service funds that goes to debt service

● annual debt service as a percentage of operating expenditures – portion of total operating expenditures that goes to debt service

● impact of the debt on the tax rate – portion of the tax rate that is dedicated to paying tax-supported debt

● impact of the debt on the average household – monetary burden on the average household in the community

Comparison to Industry Standards and Similar Governments

State and local governments interpret their debt ratios by comparing them to “rule of thumb” industry standards and those of similar governments. Moody's Investors Service and Standard & Poor annually publish debt statistics which state and local governments can use to assess their debt positions. They may also benchmark their ratios against those of comparable governments, based on population, bond rating, and revenue mix.

Table 1: State Debt Affordability Analysis

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