ABSTRACT
Debt financing is a major means states and local governments use to pay for capital improvements and to acquire costly capital assets. Debt financing provides policy makers with an effective fiscal tool that can help governments match the costs and benefits of capital investment, promote equity among generations of taxpayers, and stabilize tax rates. However, deciding whether to borrow to finance capital investments and how much to borrow are among the most complex choices policy makers are asked to make. A promise to repay long-term debt obligates resources far in advance, which may preclude financing new programs or other capital investments, spending to reduce outstanding financial obligations, responding to emergencies, or stabilizing or reducing taxes. Decisions are made more difficult by the increasingly complex environment within which public debt is issued. This entry describes and compares the main classes of state and local government-bonded debt, explains financial indicators used for analyzing debt capacity, and identifies key decision points in the debt financing process.
