The mushrooming of state debt: a beast about to attack?

• Author: Carpenter, Vivian L.

Debt has been cited as the culprit playing a lead role in the decline of several key businesses and public organizations during the past five years. Financial institutions have been one of the most publicized business segments which have fallen prey to mismanagement and under-capitalization. The massive failure of savings and loan institutions and the potential demise of the banking industry are significantly related to poor controls on corporate debt and use of risky debt instruments, such as junk bonds. The investment industry also has been a victim of aggressive management behavior, especially the creation of the junk bond market and relentless issuance of debt to facilitate mergers and acquisitions, with little regard to the longterm effects on cash management.

The public sector has not escaped the recent wave of insolvency. A Wall Street Journal article of June 10, 1991, indicated that Bridgeport, Connecticut's bankruptcy filing was a mere signal of municipal failures to come. In the 1970s, New York City earned the dubious distinction of being the first major urban center to cry for financial assistance from the federal government. The "Big Apple" almost fell to financial chaos during the mid-1970s and was rescued by a series of public and private capital projects. Cleveland and Newark, although less publicized, were also near the brink of financial disaster during this same time period.

The media and academicians generally have focused on municipal, corporate, industrial and federal debt levels. This focus has persisted in spite of the fact that state debt has increased as a percentage of total public debt since the early 1940s. Yet, reducing federal debt levels and the trade deficit has been a major congressional, campaign and media focus.

Several states have significant amounts of debt outstanding. New York State, surprisingly, is not alone as a major state debt issuer, with 1988 per capita total debt of $2,339 in current dollars. In fact, states such as Oregon and Hawaii have higher per capita total debt of $2,461 and $2,666 respectively; and Alaska has the highest per capita debt--$11,635 in current dollars.(1) State debt levels, charted in Exhibit 1, have grown 7,499 percent since 1940 in current dollars or 818 percent in constant 1940 dollars.(2)

The authors used the CPI-Urban Index to calculate the annual inflation rate from 1940 to 1988. These inflation rates were then used, like interest rates, to discount the 1988 total state debt level of $276.8 billion back to 1940 dollars, giving an aggregate debt...