Despite a tough economy, debt service for state-issued bonds will be paid on time in the next fiscal year, according to a new report by Moody’s Investors Service. The report, which surveyed the status of state budgets, found that only three states – California, New York and Pennsylvania – have failed to enact a balanced budget by the beginning of the new fiscal year.
Full debt service appropriation was included in all state budgets and is expected to be paid by those that missed the fiscal year deadline as well. Most state fiscal years begin on July 1.
Strong fiscal management
Moody’s optimistic report noted that despite the worst recession since the Great Depression, strong financial management by states was responsible for meeting budget deadlines. By cutting programs and raising revenue, states overcame their large forecasted budget gaps and met their constitutional requirements to balance the new year’s fiscal plan.
For the three states that are past their budget adoption deadlines, mechanisms are in place to ensure debt service is paid. All three have a history of adopting their budgets late and have procedures by which debt service and essential services are financed in lieu of on-time budget passage.
California’s constitution has been interpreted over time by the courts to allow debt service on state bonds, employee salaries and certain other programs to be funded in the absence of an adopted budget. State appropriation debt not covered by the Constitution has built-in timing to allow for late budget adoption since such payments are not due until late in the calendar year.
New York’s fiscal year begins on April 1, meaning its fiscal year is well underway. Nevertheless, the state is required under its constitution to pay general obligation debt service on-time. Debt service legislation has been passed, ensuring that appropriation backed and specific revenue stream debt will be paid when due, regardless of when the state approves its budget.
Pennsylvania has been chronically late in recent years in passing its budget. Pennsylvania, too, is constitutionally required to pay general obligation debt payments on time, even without a specific appropriation. Other state debt service obligations are not due until at least September, giving it time if the budget is delayed. To date, the Commonwealth has never missed a payment.
Debt service excluded from budget battles
As Moody’s correctly points out, budget fights are usually about priorities, the level of spending and taxes – never about meeting state debt obligations. Investors can take comfort in the fact that despite the difficult choices legislatures are being forced to grapple with, the issue of whether to meet a state’s commitment to bondholders has not been a subject of discussion.