In Better Economy, State Debt Burdens Become Less Heavy

STATE governments are in the best fiscal shape since the national recession began in 1990, and the debt burden on states is regarded as manageable, although it has been growing.

Even slowly recovering California managed to avoid issuing IOUs, as it had to do during a 65-day budget impasse two years ago. H. D. Palmer, assistant director of the finance department in the California governor's office, says that in adopting a budget last week, ``there were difficult decisions. We made those.''

A recent survey indicated that just 10 states needed to trim planned spending this year, half as many as last year. And 15 states felt flush enough to propose lowering personal income taxes. The survey was conducted by the National Association of State Budget Officers (NASBO) and the National Governors' Association (NGA).

In recessions, states must outlay more for welfare and unemployment. Meanwhile, sales and personal income taxes decrease.

What's more, because of the lag in tax collections, the private sector of the economy recovers a year before the impact is felt on states' general revenues.

``We are beginning to see the signs of an economic recovery in our state,'' says Mr. Palmer of California. He forecasts a revenue increase next year, the state's first in three years.

State revenues are projected to grow by a ``very low'' 2.4 percent for fiscal 1994, and by 4.2 percent for fiscal 1995, says Brian Roherty, NASBO executive director. In a ``normal'' economy, the growth would be 6 percent, consisting of half inflation and half real growth.

Meanwhile, although state debt has been rising, the burden is tolerable, according to the National Conference of State Legislatures (NCSL). On average, states owed $1,460 per capita in 1992, the latest year for which data were available, says Ron Snell, the NCSL's fiscal program director. Adjusted for inflation, that represents a 47 percent rise over a decade.

State debt grew for two reasons, Mr. Snell says. One is that, faced with tightening budgets, states more frequently borrow for capital expenditures and use tax income only for current operations.

Another reason for debt growth is that states foresaw that, in 1986, Congress planned to outlaw borrowing for other than true public purposes. No longer would tax-free bonds be issued for things like industrial parks. In anticipation, ``there was an enormous burst of borrowing,'' Snell says.

State debt appears less troublesome when it is considered that three-fourths of it is in the form of revenue bonds. Those are self-liquidating - the toll road or hospital built with the money will generate revenue to pay back the lenders.

General obligation debt, which is repaid through tax revenues, was only $379 per capita in 1992, or $20 per $1,000 of personal income. States frequently use general-obligation debt to build roads or public buildings. Since 1987, for instance, Texas has issued more than $2.5 billion of bonds to finance the world's largest prison construction program.

General obligation debt is ``pretty manageable,'' Snell says. ``It's genuine investment. It goes into producing wealth,'' unlike the national debt, which is largely an accumulation of operating expense deficits.

In 1992, the national debt was $16,002 per capita (up 95 percent in a decade) and $790 per $1,000 of personal income (up 63 percent). Those figures are about 40 times the state debt load. As of July 8, according to the Bureau of the Public Debt, the national debt stood at $4.6 trillion, up 14 percent in two years.