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The red/blue divide in state borrowing Autumn 2018
Economy, finance, and budgets
Politics and law

From the differing entertainment tastes of red- and blue-state residents to the distinctive ways that Republican and Democratic local governments manage fiscal affairs, America’s political divisions are evident in many areas. A new study ranking states by how much debt they carry illustrates another contrast. Those states where Democrats are firmly in control have far more debt, even when adjusted for population size, than Republican-controlled states. So-called red states are also better prepared to deal with their debt when the next fiscal storm arises because they’ve accumulated more of a financial cushion than Democratic states.

The study, by the American Legislative Exchange Council, found that states have incurred some $1.1 trillion in debt through “a diverse array of bond obligations.” Seven big states—California, New York, Texas, New Jersey, Illinois, Massachusetts, and Washington—account for half the total. That’s not surprising, given the size of these states, but comparing all states by debt per resident is revealing. Eight of the ten states that have amassed the most debt per resident—including Connecticut, Rhode Island, Massachusetts, Hawaii, and New Jersey—are categorized by Gallup as solidly Democratic by political affiliation. The only firmly red state on the list of those with the most debt is South Carolina, ranked tenth in debt per resident, at $5,234. Alaska, a state that Gallup classifies as “leaning” Republican, tops the list, at $10,576.

States on the bottom of the list—that is, with the smallest debt per resident—are solidly Republican. With just $112 in debt per resident, Wyoming borrows the least. Six other Republican states also rank low on this measure, including Florida, Tennessee, and Nebraska. Gallup judges three other low-debt states—Arizona, Colorado, and Missouri—as neither red nor blue, regarding them as neutral or “competitive.” Among the ten states with the least amount of debt per resident, none is Democratic.

Debt becomes a bigger worry when states don’t have adequate reserves to cushion themselves against financial downturns. Having lots of debt and little cash in the bank is the worst of both worlds. Here, too, the states show significant differences, according to research by Pew. While Alaska has the most debt, it also has the most cash stashed away, and could operate for more than a year solely on its reserves. Seven Republican-leaning states rank among the top ten in terms of how long they could keep their governments running with the cash they’ve stockpiled—including Wyoming, Nebraska, and Texas. By contrast, the three states with the smallest cash-reserve cushions are politically neutral Pennsylvania and Democratic-controlled New Jersey and Connecticut. Republican states with small cash reserves include Kansas and Kentucky.

Debt in itself is not a problem. Prudently managed, it can be a useful tool for government, especially when borrowed money builds roads or schools that taxpayers will use for generations. Theoretically, if states are spending their borrowed money wisely, it should show in the quality of services. In many states, though, that’s not the case. Consider infrastructure, an area where governments have long used debt to finance projects. The financial-news company 24/7 Wall St. aggregated reports on the conditions of roads and bridges in all 50 states as judged by transportation experts, and then ranked states from best to worst. Some of the states with the worst-ranked infrastructure have also done the most borrowing, including Hawaii, New Jersey, Massachusetts, Rhode Island, Delaware, and California. And a number of low-debt states—including Florida, Montana, Wyoming, and North Dakota—boast high-performing infrastructure.

These rankings might seem mystifying, until one looks at how some states spend money, including borrowed money. Take New Jersey. After the New Jersey Supreme Court ruled in 1998 that the state must finance the rebuilding of decaying urban public schools, Trenton borrowed $8.6 billion for that purpose, including, at the urging of legislators, several billion for schools in well-off suburban districts. The state then handed over much of that money to an agency, the School Construction Corp., which awarded no-bid contracts to firms that contributed to then-governor Jim McGreevey’s political war chest, required expensive union labor on projects, and ignored standard safeguards designed to restrain costs. Building schools at nearly twice the typical cost, the authority ran out of money before completing half its work, forcing New Jersey to borrow another $3.9 billion to complete the court-ordered task. State residents will be paying it off for decades.

The New Jersey case shows how borrowing can be abused, providing a pot of money for governments to run up bills without ensuring that the funds are effectively spent. Taxpayers are the losers.

Photo: Andrii Yalanskyi/iStock

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