State Government Debt Structure

Abstract: This paper documents the debt structure of state governments in the United States. Despite its economic significance for the U.S. economy, little is know about the debt structure of state governments due to severe data limitations. I develop an original machine learning approach to obtain detailed debt structure information for all state governments between 2006 and 2021. The paper shows that revenue bonds constitute the majority of all issued debt. The average duration (maturity) for outstanding debt liabilities is about 8.6 years and shows a declining trajectory over the sample period. Revenue bonds tend to be of longer duration than general obligation debt, and leases are of the shortest maturity among all debt categories. The paper tests the leading hypotheses for determinants of the debt structure in the data. I find that tight market conditions in the municipal bond market shorten the overall debt maturity structure of state issuers. Furthermore, financial strength of the issuer is robustly negatively related to the duration of the debt portfolio, regardless whether measured by fiscal fundamentals or credit spreads. The case study of the territory of Puerto Rico, which underwent a debt restructuring, shows that duration of the debt portfolio shortened substantially in the years preceding the bankruptcy announcement; thus, highlighting the interaction between fiscal fundamentals and debt maturity. The quasi-exogenous variation in credit rating that originates from Moody's recalibration of credit ratings in 2010 has little effect on duration of the debt portfolio. Further, I do not find an effect for neither the changes in the federal debt structure, nor for the SALT deduction cap on state governments’ debt maturity structure.

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