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InsiderOnline Blog: June 2010

The Ways of Debt

State and local “outstanding debt has soared to $2.2 trillion today from $1.4 trillion in 2000. State and local borrowing as a percentage of the country’s GDP has risen to an all-time high of 22% in 2010 from 15%, with projections that it will reach 24% by 2012.” Now “the muni market has all the characteristics of a crisis that might unfold with ‘a widespread cascade in defaults.’”

Those sobering sentences come from Stephen Malanga’s brief Wall Street Journal review of municipal finance’s recent history. He points out that one of the key reasons for the current state of affairs is that after voters wised up following the municipal debt crisis of the 1970s and started rejecting debt-financed projects, the politicians began figuring out ways to get around the voters. For example:

In 2000, Massachusetts moved to make the entity that runs Boston area mass transit, the Massachusetts Bay Transportation Authority, financially independent. As part of the plan the authority was supposed to gradually pay down some $5.6 billion in debt and use cash from operations to finance capital projects.

Instead, the agency deferred payments on its debt, put off capital projects, and borrowed more money, so that it now owes $8.5 billion. Today, the authority is paying a staggering $500 million yearly in debt service, forcing it to neglect maintenance, shelve expansion plans, and cut service. Even so, last year the agency needed a $160 million bailout from taxpayers to close a budget deficit.

Posted on 06/14/10 06:24 PM by Alex Adrianson

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