New research from the New England Public Policy Center at the Federal Reserve Bank of Boston explores the different ways to assess the affordability of state debt and uses those findings to offer guidance to states in examining their own debt burdens.

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," said the report's author, Senior Policy Analyst Jennifer Weiner. "If debt service is too high, it can crowd out other public spending or increase taxes and fees, so policymakers must carefully balance a state's capital needs with efforts to keep debt levels affordable."

The report highlights some considerations faced by policymakers or analysts when gauging state debt affordability, including how to define state debt and which metrics and approaches can help assess state debt burdens. It also offers recommendations to help policymakers assess the affordability of potential debt. These include improving transparency around various forms of state debt, examining alternative definitions of debt and multiple debt burden ratios, and timing affordability analyses to inform capital planning.

This paper and an accompanying policy brief that highlights common elements and best practices found in state debt affordability studies are both now available here:

http://www.bostonfed.org/economic/neppc/index.htm