The Ocean State isn't Greece

The Daily Beast is out this week with one of its link-drawing listicles – “The Most Screwed States” – and guess who they say is the most screwed of all? You guessed it – good ol’ Rhode Island.

How’d they decide that? Pretty simply, actually: They took the state’s estimated total debt ($10 billion), divided it by the size of the state’s economy ($46.5 billion), and voilà – they came up with a state debt-to-GDP ratio of 21.5%, the steepest ratio in the country.

But those numbers are also very misleading – and more than a little bit alarmist. Let me explain.

Guesstimates

First of all, the two figures the site used – $10 billion in debt and $46.5 billion in state GDP – are both guesses. The U.S. Census Bureau’s most recent state debt figure was $8.9 billion as of June 2008, and the U.S. Commerce Department’s most recent Rhode Island GDP total was $47.4 billion, also in 2008. Using those figures, we get a lower (but still pretty steep) debt-to-GDP ratio for Rhode Island of 18.8%.

But wait! There’s more good (or at least less bad) news. Before I get to that, though, let’s step back for a second.

Why do we even care about the state’s debt? Mainly for one very good reason – because taxpayers like you and me are on the hook for it. If the government has borrowed far beyond its means – à la the Greeks – in the end it’s going to be citizens who pay the price, either with higher taxes to pay off the debt or an economic crisis caused by some sort of default. (No American state has defaulted on its bonds since Arkansas did 77 years ago during the Great Depression.)

Not on the hook

That leads to my second bit of good news: Rhode Island taxpayers are not on the hook for the state’s entire $8.9 billion in debt. In fact, we’re on the hook for less than half of it. The reason is because a big chunk of that borrowing is what’s known as “conduit debt.”

Conduit debt is basically when the state goes out and borrows money on behalf of someone else – nonprofits like Brown University or Rhode Island Hospital, or individuals via state agencies like RISLA and Rhode Island Housing. Going through the state makes it easier and cheaper for those entities to borrow money.

When that takes place, the state explicitly tells the people buying that bonds that Rhode Island taxpayers are not on the hook for the money borrowed and will not be paying it back – the money has to be paid by Brown, the hospital, the students who took out the loans, or whomever else used the borrowed money.

In fiscal 2008, the most recent year available, conduit debt made up $5.2 billion of Rhode Island’s $8.9 billion total debt – nearly 60% of the total. Subtract the conduit debt out, and the state’s debt load is a more manageable $3.7 billion. (And some of that $3.7 billion is getting paid back out of other types of revenue, like fees at T.F. Green Airport or federal grants.)

So using that $3.7 billion figure, Rhode Island’s 2008 debt-to-GDP ratio drops all the from 18.8% to 7.8%. (In Greece, the figure is 115% – and no, I didn’t forget a decimal point.)

[Much more after the jump.]

Moody’s agrees

You don’t have to take my word for it, though – you can go to the same source used by the bond buyers themselves, Moody’s Investors Service.

Every year, Moody’s puts out a publication with the exciting title of “State Debt Medians Report.” The aim is to do the same thing The Daily Beast tried to do – quantify how much money each one of the 50 states owes, and put it in perspective by comparing it to the size of their economies and populations. I got a copy of Moody’s most recent report, which includes new figures from the fiscal year that ended June 30, 2009.

The key figure that Moody’s looks at is what it calls “net tax-supported debt,” which they define as “debt secured by state operating resources which could otherwise be used for state operations” – primarily tax revenue.

According to Moody’s, Rhode Island’s net tax-supported debt at the end of fiscal 2009 was $2.2 billion. That comes to $2,127 for every man, woman and child in Rhode Island – or, to use another measure cited by Moody’s, the debt is equal to 5.2 percent of state residents’ combined personal income.

And even if you add in the additional state debt earmarked to be paid back by T.F. Green and other non-tax revenue sources, the total debt only rises to $3.4 billion – again, a lot of money, but a far cry from the $10 billion estimate trumpeted by The Daily Beast.

But even if that $10 billion was way too high, couldn’t we still be the most screwed, just with lower figures?

We could be, but we’re not.

Again using numbers from the Moody’s report, the state’s debt-to-GDP ratio in 2009 was 4.7% – tied with California for the seventh-highest ratio in the country, but significantly less than in #1 Massachusetts, 8.3%; #2 Hawaii, 8.1%; #3 Connecticut, 7.9%; #4 New Jersey, 6.7%; #5 New York, 5.4%; and even slightly less than #6 Mississippi, a bona-fide red state with a debt ratio of 4.8%.

Rhode Island looks even better by the other measure favored by Moody’s, debt as a share of residents’ personal income – the state ranks 10th at 5.2 percent by that measure. And per capita, Rhode Island’s debt total is ninth-highest in the nation.

So we may be screwed, but if so we’re in good company.

Facts are sacred

Now despite everything I just wrote, I don’t want to sound overly sanguine about the state’s financial situation.

Rhode Island faces a host of fiscal problems, including deficits as far as the eye can see, double-digit unemployment, and unfunded pension and health promises to its retirees. The debt level may not be as high as The Daily Beast thinks, but it’s still going in the wrong direction – as a share of income, it’s now at its highest level since 2002 (though still much lower than in the 1990s).

Some of the state’s cities and towns have their own debt problems, none of which are counted in the above figures, as well as unfunded retiree liabilities. (High borrowing helped push Central Falls into receivership.) And though I have no reason to doubt the report done by analysts at Moody’s, that firm hardly covered itself in glory before the financial crisis.

But Rhode Island has a lot of difficult decisions to make over the next few years. And it’s important that as we move forward, we really understand the reality of the state’s problems so we can focus on the right issues, ask the right questions, and make the right choices.

(image: Wikipedia)