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Local Government Debt Management and Budget Stabilization

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Local Government Budget Stabilization

Part of the book series: Studies in Public Budgeting ((SIPB,volume 2))

Abstract

Debt can be friend or foe when it comes to budget stabilization. While short-term debt may be used to bridge temporary cash shortfalls that arise from incongruent timing of revenue receipts and expenditure payments, most state and local governments have balanced budget requirements that restrict the use of short-term debt for current (or operating) budget expenditures. Long-term debt may be used to leverage operating resources to enhance infrastructure and long-term projects. Nevertheless, excessive amounts of long-term debt will increase the fixed costs associated with debt payments, which could reduce the stability of non-debt-related expenditures. This chapter focuses predominantly on the interaction of state and local long-term debt and budget expenditures. First, we discuss historical trends in the use of long-term debt by state and local governments. We then examine aggregate fiscal data from local governments by state to demonstrate the correlation of expenditure volatility with outstanding debt balances. We find that in 20 % of the states, expenditure volatility increases as debt increases.

The authors appreciate the research assistance of Danny Woodbury.

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Notes

  1. 1.

    Source: Thomson Reuters (based on data available on April 8, 2014).

  2. 2.

    Source: Board of Governors of the Federal Reserve System, Statistical Supplement to the Federal Reserve Bulletin, monthly. Z.1 report Table 104 (accessed online May 2014).

  3. 3.

    The forecast volatility of debt service would be zero under the typical condition that interest rates on municipal securities are fixed by contract. Forecasting volatility on variable-rate debt is not zero, but comprises a relatively small portion of the market.

  4. 4.

    For detailed calculation steps please see the Appendix.

  5. 5.

    See http://www.census.gov/govs/state/index.html.

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Author information

Authors and Affiliations

  1. Martin School of Public Policy and Administration, University of Kentucky, Lexington, KY, USA

    Dwight V. Denison & Zihe Guo

Authors
  1. Dwight V. Denison
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  2. Zihe Guo
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Corresponding author

Correspondence to Dwight V. Denison .

Editor information

Editors and Affiliations

  1. Center for Policy Research, Syracuse University; Maxwell School, Syracuse, New York, USA

    Yilin Hou

Appendix

Appendix

Calculations for scenarios in Table 7.3

 

Revenue shortfall/increase

Revenue impact per dollar

Debt service

Net expenditures

Percent change in net expenditures

A. Revenue and expenditure volatility with no debt

Expected revenue

0.00 %

1.00

–

1.00

0.00 %

−10.00 %

0.90

–

0.90

−10.00 %

−5.00 %

0.95

–

0.95

−5.00 %

5.00 %

1.05

–

1.05

5.00 %

10.00 %

1.10

–

1.10

10.00 %

Standard deviation

7.91 %

0.08

–

0.08

7.91 %

Average

0.00 %

1.00

–

1.00

0.00 %

B. Revenue and expenditure volatility with 10 % debt service

Expected revenue

0.00 %

1.00

0.10

0.90

0.00 %

−10.00 %

0.90

0.10

0.80

−11.11 %

−5.00 %

0.95

0.10

0.85

−5.56 %

5.00 %

1.05

0.10

0.95

5.56 %

10.00 %

1.10

0.10

1.00

11.11 %

Standard deviation

7.91 %

0.08

0

0.08

8.78 %

Average

0.00 %

1.00

0.10

0.90

0.00 %

C. Revenue and expenditure volatility with 25 % debt service

Expected revenue

0.00 %

1.00

0.25

0.75

0.00 %

−10.00 %

0.90

0.25

0.65

−13.33 %

−5.00 %

0.95

0.25

0.70

−6.67 %

5.00 %

1.05

0.25

0.80

6.67 %

10.00 %

1.10

0.25

0.85

13.33 %

Standard deviation

7.91 %

0.08

0

0.08

10.54 %

Average

0.00 %

1.00

0.25

0.75

0.00 %

D. Revenue and expenditure volatility with 50 % debt service

Expected revenue

0.00 %

1.00

0.50

0.50

0.00 %

−10.00 %

0.90

0.50

0.40

−20.00 %

−5.00 %

0.95

0.50

0.45

−10.00 %

5.00 %

1.05

0.50

0.55

10.00 %

10.00 %

1.10

0.50

0.60

20.00 %

Standard deviation

7.91 %

0.08

0

0.08

15.81 %

Average

0.00 %

1.00

0.50

0.50

0.00 %

Standard deviation and average calculations assume an equal likelihood of each revenue scenario. Debt service is assumed constant for the year given the contractual nature of debt. Net expenditures are defined as revenue less debt service under a strict balance budget requirement. Percent change in net expenditures is the change from the expected net expenditures and the net expenditures for a revenue scenario. Variants for the assumptions are discussed in the text.

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Denison, D.V., Guo, Z. (2015). Local Government Debt Management and Budget Stabilization. In: Hou, Y. (eds) Local Government Budget Stabilization. Studies in Public Budgeting, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-15186-1_7

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