Re-Examining Local Debt Limits: A Disaggregated Analysis

Abstract

In the past most state governments have instituted some type of restriction on local government borrowing and debt use in an attempt to prevent the recurrence of the wave of defaults and excessive borrowing which occurred in the late 1800s and early 1900s. The evidence on the effectiveness of these restrictions has been very mixed.' Many of the debt limit studies have not satisfactorily controlled for the other factors affecting debt financing or have not used data which is sufficiently disaggregated to examine the variation in the behavior of individual communities. The purpose of this study is to re-examine the issue of the effectiveness of local debt limitations using a national sample of communities over ten thousand population. This data set exhibits large differences in the debt and financial characteristics of its communities particularly in various population categories and across geographic regions of the country. Thus, the use of this data will allow the testing of hypotheses and the examination of factors affecting debt limitations which have not been possible in previous research. Analysis of the data does indicate that debt limits significantly lower local per capita debt levels, but that debt referenda do not have a substantial effect on the amount of local debt. Section I of the paper presents a brief survey of the earlier literature. In section II, hypotheses about the factors affecting local per capita debt choice are discussed, and the variables used to measure these factors are described. The statistical results of this research are presented in section III while section IV provides a summary of the issues.