Taxpayers are slowly realizing that their states and municipalities face growing costs—above all, debt and pension obligations—that will be hard to reduce. The squeeze is already forcing cities and states to cut basic services, since they can’t risk defaulting on their debt. But these politically unpalatable moves are troubling more and more observers of the muni market. Nicole Gelinas has warned in these pages that “once state and local governments have borrowed too much, they may well find a way not to pay their lenders back” (see “Beware the Muni-Bond Bubble,” Spring 2010).

Across America, states and cities have heaped on the debt to build facilities aimed at luring tourists and conventioneers away from other states and cities. For instance, cities have been waging a two-decade-long “arms race,” as University of Texas public policy professor Heywood Sanders puts it, to expand convention centers, and have been funding them through billions of dollars in municipal debt. The result: a market with perhaps 40 percent more space than demand warrants, underperforming facilities, operating deficits, and little economic payoff.

Recall that many states sensibly require all bond offerings to be approved by voters—who have often defeated new borrowing aimed at financing grand, politically inspired projects. But the requirement has led to a rise in maneuvering by officials, who have created quasi-governmental authorities that can issue debt without voter approval. Such backdoor borrowing has become the most common kind of state debt.

Politicians increasingly use municipal debt to create the false appearance that they are balancing the budget.

The other way that muni debt camouflages politicians’ fiscal extravagance is with repayments on bonds that stretch far into the future. Politicians tend to consider debt more palatable than tax increases or spending cuts.

The current crisis in state and local budgets may be the best opportunity in ages to bring reform to the muni market.

Another key reform is to restrain or eliminate the independent authorities.

Finally, states and cities need to limit debt-related fiscal maneuvers.

… we have too long ignored how politicians have become addicted to debt.

Read the full article here: http://www.city-journal.org/printable.php?id=6331

This insightful article is by Steven Malanga, who is the senior editor of City Journal and a senior fellow at the Manhattan Institute. He is the author of the forthcoming Shakedown: The Continuing Conspiracy Against the American Taxpayer