state deficits and debts

[drhess]

Are states allowed to have a standing debt like the federal government? What about cities? I know cities can issue bonds on the market, but can cities and states debt finance investments during hard times?

[Northern_Piper]

I don’t think there can be a single answer to your question. There are fifty state constitutions, governing the state governments - potentially, each one of those constitutions could take slightly different approaches to this issue. Then, within each state, you’d have to look at the state laws governing municipalities, the city charters, the city by-laws, and so on.

[Little_Nemo]

The majority of state governments have laws which prohibit having a budget deficit. I believe there’s only one or two states which could legally run a deficit.

[ElvisL1ves]

But states often issue bonds for capital construction projects which will generate the revenue needed to pay them off, i.e. toll roads or airport terminals. Usually the enabling legislation establishes a quasi-independent authority for the purpose, so that the debt does not appear on the state’s budget.

I’ve read elsewhere that every state but Vermont is required by its own laws to balance its budget.

[Freddy_the_Pig]

In general, yes, cities and states can incur debt–as any resident of California or anyone old enough to remember the New York City bankruptcy of the 1970’s can attest. However, state constitutions and laws place various restrictions on state and local borrowing capacity.

To give you an idea of the complexity of these restrictions, let me quote the relevant section of the Illinois Constitution:

SECTION 9. STATE DEBT
(a) No State debt shall be incurred except as provided
in this Section. For the purpose of this Section, “State
debt” means bonds or other evidences of indebtedness which
are secured by the full faith and credit of the State or are
required to be repaid, directly or indirectly, from tax
revenue and which are incurred by the State, any department,
authority, public corporation or quasi-public corporation of
the State, any State college or university, or any other
public agency created by the State, but not by units of local
government, or school districts.
(b) State debt for specific purposes may be incurred or
the payment of State or other debt guaranteed in such amounts
as may be provided either in a law passed by the vote of
three-fifths of the members elected to each house of the
General Assembly or in a law approved by a majority of the
electors voting on the question at the next general election
following passage. Any law providing for the incurring or
guaranteeing of debt shall set forth the specific purposes
and the manner of repayment.
© State debt in anticipation of revenues to be
collected in a fiscal year may be incurred by law in an
amount not exceeding 5% of the State’s appropriations for
that fiscal year. Such debt shall be retired from the
revenues realized in that fiscal year.
(d) State debt may be incurred by law in an amount not
exceeding 15% of the State’s appropriations for that fiscal
year to meet deficits caused by emergencies or failures of
revenue. Such law shall provide that the debt be repaid
within one year of the date it is incurred.
(e) State debt may be incurred by law to refund
outstanding State debt if the refunding debt matures within
the term of the outstanding State debt.
(f) The State, departments, authorities, public
corporations and quasi-public corporations of the State, the
State colleges and universities and other public agencies
created by the State, may issue bonds or other evidences of
indebtedness which are not secured by the full faith and
credit or tax revenue of the State nor required to be repaid,
directly or indirectly, from tax revenue, for such purposes
and in such amounts as may be authorized by law.

Other parts of the constitution, equally lengthy and abstuse, deal with local government borrowing. As you can see, there is no easy answer to your question.