The effect of constitutional debt limits on state governments' use of public authorities

Conclusion

The results of this empirical analysis support the literature's claim that governments use public authorities to circumvent state constitutional debt limits. The effects of a constitutional debt limit are especially prevalent in states that have a debt limit that applies to both GO and revenue debt. These states have a larger number of public authorities, have more functions that are addressed by public authorities, rely on authorities to issue a larger percentage of the state's public infrastructure debt, and are much more likely to have a public building authority.

The relationship between constitutional debt limits and state governments' use of public authorities is troubling. Rather than evaluating the use of authorities based on their merits, state officials' decisions to use authorities appear to be at least partially motivated by desires to circumvent constitutional debt limits.

In some states, the dollar amount specified in the debt limit is fairly low, e.g., $1 million or less. If state constitutional debt limits are too constraining given the state's capital needs, state officials should re-evaluate their state's debt limits rather than continue to use public authorities to circumvent the limits. Pennsylvania, for example, took a step in this direction in 1968 when state officials revised the state's debt limits from an absolute level of $1 million to a level equal to 1.75 times the average annual tax receipts in the previous five fiscal years. A provision also was added to the Pennsylvania Constitution which specifies that authority debt that is directly or indirectly payable from state revenues is subject to the state's debt limitation. Since these revisions, Pennsylvania has increased its usage of general obligation debt rather than relying on the General State Authority (a public building authority) to issue revenue debt. Staffeldt and Unger (1985) note that these changes have resulted in significant savings in interest costs since interest rates on GO bonds are lower than interest rates on revenue bonds.

In light of the findings of this research, two major options for change can be identified, (1) revise constitutional debt limits so they clearly apply to debt issued by authorities, and (2) increase the debt limit amounts so they are more in line with state officials' needs or desires to issue debt. Without these types of changes, states can be expected to continue to use authorities to circumvent constitutional debt limits.