Debt and the Local Economy: Problems in Benchmarking Local Government Debt Affordability

Abstract

Debt creation imposes an obligation to repay borrowed funds from a wealth base that for most local governments is capitalized in property values. Therefore, the ability to afford debt is tied to the local economy, a factor often overlooked by localities in the analyses of their own position. However, debt levels are also relative, as the many debt affordability studies among governments and by bond rating agencies suggest. We argue here that economic concentration and interjurisdictional coordination fundamentally provide a broader analytical approach to the question a locality asks: Can we afford more debt?