Should Governments Start Borrowing Again?
The word "borrow" may be taboo still, but one economist says states and localities should take advantage of historic low interest rates.
Should state and local governments go on a borrowing binge? At least one economist thinks it might be a good idea.
Not only are interest rates paid on bonds at historic lows, but payments for servicing debt now make up a smaller percentage of general fund revenues for nearly all states and localities. For states, the total is just 2.2 percent, down from 3.4 percent in 1992. Even among the only type of government that has seen its annual interest burden go up -- school districts -- the total is still less than 3 percent of their budgets.
Some governments have gotten into trouble by taking on too much debt and trying to mask fiscal woes by borrowing. Overall, however, there appears to be plenty of borrowing capacity left. Why not lock in low rates now and fund capital projects that could stimulate the economy?
“Why they’re not taking advantage is a puzzle,” says Ronald C. Fisher, a Michigan State University economist and co-author of a forthcoming paper on debt for State Tax Notes. “If you can sell 20-year bonds today and lock in a rate of 3.5 percent, it seems to me a great opportunity.”
Fisher admits that debt has become deeply unfashionable in American politics, and that few governors will want to brag about borrowing big sums to start on a huge public works project. But there are practical reasons for not borrowing more, as well.
States and localities are able to hold onto their good credit ratings -- and low interest rates that result -- by showing rating agencies “that they’re being cautious and conservative about borrowing more,” says Scott Pattison, executive director of the National Association of State Budget Officers.
Financial advisers making assertions that more municipalities are about to go broke have spooked the market, he says. States may want to borrow more, but they’re skittish about exceeding their own cautious debt capacity models. Bond issuance, in fact, is way down this year.
It’s kind of like home interest rates. They’re so low that people should be jumping in to buy or refinance, but in reality few individuals seem able to qualify for loans these days.
We invite you to discuss and comment on this article using social media.
LATEST FINANCE HEADLINES
Single-Payer Health Care Would Cost California More Than Triple Its Budget4 hours ago
An Oregon Lawmaker's Strange Crusade to Save an Iowa Town With Chinese Money6 hours ago
How Much Do States Rely on Federal Funding?2 days ago
The Week in Public Finance: Recalculating Pension Debt, Hartford Discusses the 'B' Word and Prudent Rainy Day Policies5 days ago
Fresh Off Another Downgrade, Connecticut Has a Plan to Lower Borrowing Costs1 week ago
The Week in Public Finance: Revenue Relief in 2018, Good GDP News and the Debt-Shy1 week ago