The State and Local Government Debt Mess

Icon DebtWhile investment guru Warren Buffett is pulling out of municipal bonds, Gov. Rendell says Buffett doesn’t know what he is talking about, and that there is no problem with state and local government debt. Hence he is supporting additional state borrowing for corporate welfare, and encouraging both school districts and local governments to borrow more.

But as Nicole Gelinas writes in the latest City Journal, municipal bonds are indeed becoming a risky investment.

Even during the boom, money fell short. By 2008, state and local debt rose to $2.2 trillion outstanding—49 percent higher, after inflation, than in 2000. Add the health and pension benefits for government workers, and you’re up to a staggering $3.2 trillion. Once the recession’s severity became apparent, state and local officials should have realized that hard fiscal times were coming and begun cutting back on the unsustainable costs. Instead, they have kept on spending, and borrowed to do it: states alone have already borrowed another $15 billion for operating costs over the past two years.

Under Gov. Rendell, Pennsylvania state debt has climbed 78% and combined with local government debt, now accounts for over $9,600 per Pennsylvanian, or $38,400 per family of four – a total that excludes unfunded liabilities in public pensions and government retiree health care. Some cities, like Harrisburg, have such bad debt problems, their bonds are considered “junk.”

Maybe its time to revisit the idea of borrowing our way to prosperity.