State government debt: an alternative perspective.

• Author: Wulf, Henry
• Position: Forum

The October 1992 Forum article "The Mushrooming of State Debt: A Beast about to Attack?," introduced important questions about state government debt levels. As the authors pointed out, the public sector generally has been increasing its debt in recent years to levels that put many governments at risk. However, is the outlook for the state government sector as potentially damaging as for the federal and local government sectors? Using recent and time series data, we provide a different perspective on the issue, one which suggests that states might be doing a better job of managing their debt than is indicated by the aggregate numbers.

Relative Shares of Public-sector Debt

Considering their important fiscal role in the federal system, state governments have maintained a relatively modest level of long-term indebtedness. In current dollars, long-term debt of all governments at the end of fiscal year 1991 was $4.6 trillion. The federal government accounted for $3.7 trillion, or 80.5 percent. State long-term debt at $342 billion represented 7.5 percent of the total. Long-term debt of the local government sector (counties, municipalities, schools, etc.) was $551 billion, or 12.1 percent of the total.

This is not a recent phenomenon. Exhibit 1 shows the relative shares of public sector debt for selected years from 1961 to 1991. The state share peaked at 9.8 percent in 1981 and has declined since. What might be surprising to many is the fact that state long-term debt is smaller than that of the local government sector, and has been throughout the post-World War II period.

The relatively smaller share of state debt is attributable to several factors over and above differences in spending magnitudes among the three levels of government.(1) Most important are state balanced budget requirements, state use of capital budgets and debt limits (often constitutional) that usually require voter approval for bond issues. All three of these conditions are absent from the federal sector.

In the local government sector, larger relative debt shares can be viewed as the consequence of a mismatch between the demand for services and the supply of resources available to finance them. Local government is where many of the traditional government services(schools, utilities, police, fire, etc.) are rendered. Demand for these services continually increases, even during recessions, and occasionally is set by federal or state mandates. As the immediate providers, however...