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Commentary

State and local government debt worsened slightly in 2010

6 Jan 2013 by Jim Fickett.

As a reminder, here is a short summary on the main features of state and local government debt in the US:

  • If unfunded liabilities are included in the debt picture, then the biggest area is probably unfunded retirement obligations. The present value of such liabilities is hard to measure, but is probably, in aggregate, in the neighborhood of $3 to $4 trillion.
  • Although many people think that balanced budget requirements should mean no explicit debt, explicit debt is, in fact, substantial, at about $3 trillion.
  • A third area that may be substantial, but on which there is no comprehensive data, is private entity debt that is guaranteed by a government entity. It has been common for cities to set up a separate “authority” that borrows to build, say, a sports complex. The debt of the authority does not go on the city's books, but is often guaranteed by the city, and likely to be paid by the city if revenue is not as expected.

The ratio of state and local explicit debt to income is in the neighborhood of 140%; for the federal government the ratio is more like 590%. In both cases the ratio goes up enormously when unfunded liabilities are included. The outcome in the two cases will be very different. State and local governments cannot print money, and so are reducing services. The federal government will almost certainly get out of unaffordable obligations by printing money. Two of the most important financial decisions a person can make are (1) where to live, so as not to be hit too hard by local budget difficulties, and (2) how to prepare for possible high inflation.

The only source for comprehensive financial information on state and local governments is the Census Bureau, which gives annual reports after long delays (2010 is the latest data). Here is the situation for explicit debt through 2010:

Note that the increase of debt has followed a fairly predictable path, so that the ratio of debt to income has depended mainly on the boom time/ recession cycle of income. So as income recovered from the recession in 2010, the debt-to-income ratio held fairly steady.

(See the Reference page State and local government debt for background, sources, and past commentary.)