How much debt is too much is a very good question and one frequently asked of a rating agency. Unfortunately, it is also one with no precise answer. Municipal credit analysis is directed toward a determination of debt affordability and, all other things being equal, a lower level of debt should produce a higher security assessment. However, it rarely works that easily because things are never equal and the amount of debt acceptable is related to a number of other considerations. Analysis must take into account other factors in addition to an assessment of debt obligations themselves. These include the extent and quality of economic resources, financial capability and performance, the functions and attitudes toward those functions of the government, and legal restrictions on the ability to act. Among governments, these factors vary widely, some are difficult to quantify, and, in addition, a positive bottom line or net profit is not the principal motivation of government. For these and other reasons, municipal credit analysis is not primarily ratio driven.

However, there are several useful and accepted measurements that can provide a guideline for a safe or comfortable debt level. Some caveats should be observed. Ratios should be seen as pertaining to ranges and not to absolute levels. Further, safe ranges will differ from states to local governments, partly because of function, but also because of tax base. Most local governments rely on property taxes, which in the aggregate provide about three-quarters of own source revenues. On the other hand, states rely primarily on personal income and sales taxes, which again in the aggregate account for about two-thirds of state raised taxes.

There are several well accepted ratios to measure the burden of debt on resources, of which the best known is debt per capita, or debt divided by the population. This is not considered a very meaningful ratio, but it does indicate what the citizen burden could be in a collapse of taxable wealth. A second ratio is the relation of debt to the estimated full value of property, which is most useful for local debt as it reflects the likely tax base. For states, it is less valuable as they generally do not levy property taxes and the figures become less precise on the state's larger base. Third is the relationship of debt to personal income. This is probably the best measurement for a state because it captures both the wealth and the tax base. It also is useful for local governments, especially those that use sales or income taxes. Unfortunately, the data are available only at the state and county levels, limiting its general use.

Next is debt service, that is principal and interest payments related to available own source revenues. This is clearly an excellent measure. Yet, it is difficult to use comparatively because of the use of special obligation debt, role of borrowing vehicles, and prevalence of separate funds. In addition, the varying treatments of revenue raised for local aid can skew the ratio as much of the revenue raised for re-distribution may not really be generally available.

For decades, the concept of "coverage" for general debt service has been tempting. By defining all fixed costs, the truly "available" revenue can be related to debt service, achieving similarity to coverage of revenue bond debt service from net available revenue. While the idea has always been tantalizing, especially to analysts with a corporate ratio-driven background, pitfalls include changing definitions of fixed costs, such as pension contributions or entitlement requirements. If operating surplus is the proxy for net revenue, these days the analyst is likely to be looking at 1.0 times coverage.

It should be stressed that debt in the measurement context means any obligation for which the subject government is providing the money to service debt, no matter who the issuer. For local governments, this is overall debt, or the both the debt directly issued and the share of the debt issued by other jurisdictions having the same tax base. For states, it would include all the various instruments utilized, certificates of participation, leases, contracts, and borrowing by authorities.

Debt related to estimated full value of property, although not the best indication, is low for most states. For local governments, permissible levels are somewhat difficult to define mostly because of varying functions, but surely a level of 10% should raise questions. On average, the ratio is probably 2% 5% for local units.

For personal income and debt service ratios, 10% again is the beginning of the danger zone. Empirically, when this level is reached, states tend to cut back on their own whether or not observers are concerned. Apparently, this level consumes too much of budgetary resources for comfort and crowds out programmatic needs.

On average, state debt as a percentage of personal income has fluctuated in a narrow band of 2% 4% for over three decades. Cyclically, it rises in stressed times and falls in good times. In the 1970s, several states had ratios of over 10% of personal income, but few do now. This is a combination of deliberate reduction of debt levels and more rapid growth of resources than of debt during the 1980s. While precise measurement is difficult, most states devote 5% or less of general revenue to debt service.

Since growth in the 1980s outpaced borrowing, governments generally entered this recession without a heavy debt overhang. Looking into the immediate future, it is likely that debt will begin to increase more rapidly than resources, particularly at the state level for economic development. While there is some leeway, ratios can rise quickly in a slow or no-growth period and with the pressure from operating needs, low or moderate debt levels are prudent, both to protect ratings and to accomplish governmental goals, even though they alone do not determine credit standing.

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