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Commentary

US state and local government debt, as a percentage of income, grew substantially after the crisis

10 Jan 2012 by Jim Fickett.

State and local government debt began to grow faster than income after the 2000 recession, and the trend accelerated in 2008 and 2009. This is a long-term problem, not a short-term crisis, but it is important to keep an eye on (1) in deciding where to live, and (2) in choosing municipal bonds.

Although glib statements are often made about states having to balance their budgets, state and local governments have accumulated substantial debt, and continue to add more. The only regular and systematic survey of state and local debt is done by the Census Bureau on an annual basis. Gathering and analyzing the data is a slow process; last fall data for 2009 were released. The Census reckoning includes only explicit debt; the main thing it leaves out is unfunded retirement obligations.

Note that following the 2000 recession, debt began to grow faster than income (total receipts as measured in the national accounts). After the most recent recession, this trend accelerated, so that, as of 2009, debt as a fraction of receipts was rising quite rapidly.

Considering not only the explicit debt, but unfunded obligations and hidden debt, the situation is of course worse. Very roughly speaking, what matters is (1) explicit debt, and (2) unfunded retirement obligations. These are, again very roughly speaking, of comparable sizes, and each is much bigger than other types of hidden debt, such as delayed vendor payments or borrowings from the Treasury to pay unemployment insurance.

One should keep an eye on this area for two reasons. First, as a citizen, you should understand the debt situation in any state or municipality where you live (or might live) or hold property. In the long run state and local governments will have to cut their budgets significantly, and the amount by which they will have to cut will vary greatly from one to another. You don't want to live someplace where they can't afford decent schools or an adequate police force.

Second, one should keep an eye on this area if one invests in municipal bonds. I don't foresee major defaults any time soon. However if municipal bonds should lose their tax-exempt status, or if interest rates rise in general, then the debt service costs for some states and municipalities could cause them to consider default.

I surveyed various categories of explicit and implicit debt towards the end of 2010; the results are all referred to on the Reference page State and local government debt. The situation changes slowly, and the conclusions there are still valid. I hope to update the data and conclusions sometime this year.