Will US states default again?

State and local government current tax receipts, W070RC1Q027SBEA, total debt of state and local governments, SLGSDODNS, 1949 to 2013, quarterly in billions of dollars

The Federal Government isn’t the only US entity with excessive debt. While US states are obliged to balance their budget every year that doesn’t stop them from issuing debt to address budgetary shortfalls. The chart above shows two series: first, state and local government current tax receipts (black line, W070RC1Q027SBEA) compared to the debt loads of state and local governments (SLGSDODNS, blue line) for the period 1949 to 2013. Both series are measured quarterly in billions of dollars. We see that from the across the series aggregate debt was larger than tax revenue, but only modestly until 1985 when the total issuance approached 200% of revenue. A virtuous combination of paying down debt and increasing tax revenue started to reduce this ratio to a post WWII low of 131% in April 2001.

But from that point issuance surged, with total debt increasing roughly 47% from October 2003 to January 2004, taking the debt to revenue ratio well above 200%. Can they ever pay it back?

In 1841 eight states and the territory of Florida defaulted on their debt. The states has borrowed extensively to finance the development of their infrastructure. Why did they default? They had borrowed far more than their ability to repay their debts, either by means of taxes or land sales.

Can it happen again? Naysayers point to The Federal Government, claiming a default by US states would never be allowed. But could The Federal Government afford to bailout states?

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