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Tuesday, April 5, 2011

State and Local Government Debt: An Analysis

Steven Maguire
Specialist in Public Finance

The financial consequences of the recession that spanned from December 2007 through June of 2009 has increased congressional interest in the financial health of state and local governments. State and local tax revenues declined, expenditures climbed, and debt increased. Even though tax revenue has begun to rebound, expenditures for unemployment benefits and other social programs remain elevated. Also, federal aid to states, which had increased as part of the American Recovery and Reinvestment Act, has begun to recede. Federal outlays for grants in aid to state and local governments rose from $538 billion in FY2009 to $608.4 billion in FY2010 and are estimated to be $625.2 billion in FY2011. The FY2012 budget provides $584.3 billion in outlays for aid to state and local governments in 2012.

In response to these state and local government fiscal headwinds, several hearings have been held early in the 112
th Congress to examine the health of state and local government finances and the potential effects on the economic recovery. The hearings focused on a range of issues important to state and local governments as well as federal policy makers. The role of state and local government debt was one of these issues. The federal government has a significant stake in this debt market as the tax expenditure for the issuers of tax-exempt state and local governments was recently estimated to be $161.6 billion over the 2010 to 2014 budget window.

This report first provides a broad overview of state and local government finances and how these governments incorporate borrowing into their budget. The second section reports data on state and local government debt and how that debt has changed over time. This section includes a comparative analysis of these debt parameters for each state. The third section discusses different economic perspectives on the use of debt by governments and if governments are intrinsically biased toward borrowing more than is considered economically optimal. The discussion provides background for Congress as it deliberates potential changes in the oversight of the primary and secondary markets for state and local government debt.

Issues related to state and local government finances, such as government pensions and health benefits, are also addressed.

Date of Report: March 31, 2011
Number of Pages: 28
Order Number: R41735
Price: $29.95

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