The American Legislative Exchange Council (ALEC) has issued its report on state debt for 2022, and while the news is mostly good for Colorado, there are a few warning signs.
Compared to other states, Colorado is in pretty good shape when it comes to bonded obligations. With $7.2 billion, Colorado ranks 16th in the country (with lower debt being better). On a per capita basis, things are even better. The state ranks #7, with $1,250 in bonded debt per person, just over one-third of the national average of $3,727 per person.
For comparison, the least-indebted state, Wyoming, has $32 million in total debt, or $56 per person, while the most-indebted state (no bonus points for guessing), California, has $201 billion in debt, and Connecticut has the most heavily-debt-burdened citizens at $12,242 per capita, or 3.25 times the national average.
New York Governor Kathy Hochul might reflect that people are fleeing her state, with its $8,650 in per capita state debt for Florida, which clocks in at just over $1,400. All that southbound traffic on I-95 has less to do with hate in their hearts than it does with money in their wallets.
Overall, Colorado’s bonded debt is only 1.89% of the state’s Gross State Product, 4th-lowest in the nation.
You can thank Colorado’s state constitution for much of its superior standing as measured by ALEC. It largely prohibits state-level general obligation debt, and even then, it must be approved by a vote of the people. As a result, Colorado’s general obligation debt level is $0. (ALEC’s policy recommendations mention the Taxpayer’s Bill of Rights, or TABOR, but focus on the taxing & spending limitations rather than the debt limitations, for some reason.)
For that reason, the state is more dependent on revenue bonds and business-type activity debt, and on Component Unit Bonds, issued in Colorado by enterprises. Of the $7.2 million, ALEC calculates that $6.8 million is from revenue bonds and business-type activity debt, placing Colorado at 44th in nation. The other $400 million or so comes from debt issued by enterprises, 6th-lowest in the country, despite the fact that the legislature has been pushing more and more activity to enterprises in order to exempt the revenue from TABOR.
What’s ugly doesn’t show up in the ALEC report – the state’s reliance on certificates of participation (COPs) in order to dodge TABOR’s requirements.
TABOR requires a vote for the creation of any multiple-fiscal year direct or indirect district debt. But COPs essentially sell the facilities in question to a purpose-built entity, and then lease them back on a year-to-year basis. The bonds are issued by the entity rather than the government itself, and secured by the expected annual lease payments from the government.
The markets, naturally, aren’t fooled by this dodge. The bonds/COPs are priced by the market as if they were issued by the government itself, rather than the stand-alone authority.
Because the lease obligation by the government is only one year at a time, they can dodge TABOR’s prohibition on multi-year debt obligations, and not require a vote of the people affected. Amazingly, the courts – for whom the idea of restricting government seems to be an alien concept – have let them get away with this legal fiction for decades now.
The ALEC study deliberately excluded COPs because they’re not bonded, considering them to be more of a lease agreement, but they comprise a significant part of the state’s debt. Including government- and business-type activities, they total $5.9 billion, nearly doubling the state’s debt burden. Because ALEC doesn’t include them, it would require another study to make state-to-state comparisons.
ALEC declines to discount back bond payments, using the future value of the payments instead. They admit that this likely overstates the value of the bonds, but argue that discounting them back at the risk-free rate would fail to take into account the fiscal health of each state. I have followed the same methodology here.
We should also bear in mind that this is merely the state-level debt, and doesn’t include municipal, school district, or special taxing district debt, so Colorado’s total debt burden is considerably higher.
Nevertheless, even as stated, it’s nice to be able to report some rare good news about the state’s fiscal situation.
Joshua Sharf is senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.
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