Excessive Debt Weighs Many U.S. States, Local Governments

D.C., Washington, United States (AHN) – Although the federal share of state budgets increased because of stimulus spending, U.S. states and local governments continue to be weighed by too much debt.

Illinois owes large amounts to schools and social service providers, Arizona no longer pays for some types of organ transplants under its Medicaid program and some states are releasing prison inmates to reduce costs, more than as a reward for good behavior.

According to the National Governors Association’s fiscal survey of states released last week, budget issues will be the main challenge facing 29 new U.S. governors who will assume office. The governors-elect will also grapple with weak revenue growth and pre-recession spending levels.

Finance experts warn that state and local government debt will deepen in 2011 as governments assume larger and longer-term risks. They explained that the several trillion dollars’ worth of state and local government debt would take some time to be paid off even if the economy recovers.

Although no state has defaulted on its debt since the 1920s and municipal bankruptcies or defaults are very rare, analysts fear that investors would hesitate to put up businesses in weak states, which may set off a new financial crisis.

The experts compared the situation in Europe where Greek and Irish government debts have also affected the financial standing of other eurozone nations such as Portugal, Spain and Italy.

NGA Executive Director Raymond Scheppach forecast that spending and revenue would not likely return to pre-recession levels until 2013 or 2014.

---