Assessing the affordability of state debt.

• Position: News & Numbers

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, according to Assessing the Affordability of State Debt, a report from the Federal Reserve Bank of Boston. Policymakers thus must carefully balance a state's capital needs with efforts to keep debt levels affordable.

The report, which uses illustrative data from the New England states, 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 concludes with recommendations to help guide future affordability assessments:

* Improve the transparency surrounding the many types of obligations that comprise state debt to help actors make rational decisions and avoid unsound borrowing practices.

* Use broader definitions of state debt rather than focusing primarily on net tax-supported debt--the obligations most typically supported in a state's general operating budget--to better capture the overall burden borne by residents and businesses.

* Use multiple debt burden ratios. No single...