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Debt Management of Ohio's Major Cities

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Municipal debt grew dramatically between 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new financing devices often have been backed only by the "moral obligation" of the governmental unit, their increased use has been a matter of growing concern in municipal bond markets.

Municipal debt grew dramatically between 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new financing devices often have been backed only by the "moral obligation" of the governmental unit, their increased use has been a matter of growing concern in municipal bond markets. An even greater cause for concern has been the heavy volume of short- term borrowing (i.e., with a maturity of one year or less), caused largely by spiraling interest rates and the resulting postponement of long-term debt issues.


Suggested citation: Schnorbus, Robert H., 1981. “Debt Management of Ohio's Major Cities,” Federal Reserve Bank of Cleveland, Economic Commentary, 03.23.1981.

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