Arkansas raised taxes, cut services and spent reserve funds to cope with recent budget crises. Many other states sold bonds, figures from Moody’s Investor Service show.

In 2003, debt owed by states “rose at the fastest rate in the 24 years since we began calculating state debt medians in 1980,” according to a recent study by the bond market analysts. “Propelled by several large ‘mega-deals’, continuing state fiscal stress, and historically low interest rates, state debt rose by 16.8 percent in 2003, well above the 6.5 percent rate of the last two years and the 7.0 percent average of the last 10 years,” Moody’s annual review of state debt found.

General obligation bond issues in Arkansas require voter approval, a restriction some other states don’t have.

“States have turned to the use of debt in order to maintain capital spending for critical infrastructure needs in the face of weakening economies and serious fiscal stress,” the study said. “Weak state revenue performance forced states to redirect cash pay-go budget resources for budget balance and increase their use of debt finance for capital programs. States have also resorted to deficit bond financing to pay for current operations and to reduce costs of rapidly rising retiree benefits.”

In all, states and municipalities in the United States sold $384 billion in bonds in 2003, according to the report.

The record rise in state debt was propelled, in part, by very large bond issues, including multibillion-dollar deals in New York and California. The report said: “Among the largest transactions boosting state debt in 2003 were the $10 billion Illinois pension obligation bond, the $1.8 billion Wisconsin pension obligation bond, the $4.5 billion New York appropriation-backed tobacco bond, the $2.0 billion Oregon pension obligation bond, the $2.6 billion California appropriation-backed tobacco bond and several large New Jersey issues for roads, $960 million, schools, $600 million, and land preservation, $500 million.”

The economy and tax revenues are recovering, but “slow revenue recovery will not be sufficient to support the spending needs for rapidly growing costs in Medicaid, pension costs and K-12 education spending,” the study concluded.” State budgets will remain tight while the demands for capital spending are strong. As they did in 2003, states will continue to rely on debt issuance as a way to maintain capital spending for needed infrastructure projects and to finance operations. State net-tax supported debt in 2004 should continue to grow at above long-term trend rates. Despite the rapid growth of state net tax-supported debt in 2003, state debt burdens relative to the states’ wealth, as measured by personal income, remain low and stable.”