The evolution of state-local balance sheets in the US, 1953-2013

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State and local governments hold large debt and asset positions, which shape policy choices in important ways. Yet compared with the federal government, state and local government balance sheets have received little attention. This paper uses data from census of governments and law of motion of public debt to describe historical evolution of state-local debt ratios over the past 60 years. Looking both at aggregated balance sheet variables for the state-local sector as a whole and at variation across states, we make two central claims. First, there is no consistent relationship between state and local budget deficits and changes in state and local government debt ratios. In particular, the 1980s saw a shift in state and local budgets toward surplus but nonetheless saw rising debt ratios. This rise in debt is fully explained by a faster pace of asset accumulation as a result of increased pressure to prefund future expenses, rather than by any increase in current expenditure relative to revenue. Second, budget imbalances at the state level are almost entirely accommodated on the asset side – both in the aggregate and cross-sectionally, larger state-local deficits are mainly associated with reduced net asset accumulation rather than with greater credit-market borrowing. We conclude that in any analysis of state and local government finances, it is essential to give equal attention to the asset and liability sides of the balance sheet.