What Is Overlapping Debt?
Let me explain overlapping debt to you directly: it's the financial obligations of one political jurisdiction that also partly fall on a nearby jurisdiction. You'll see this a lot in the U.S. because most states are split into many jurisdictions for different tax purposes, like funding a new public school or building a new road.
Key Takeaways
- Overlapping debt is when debt issued to fund government activities falls across multiple political jurisdictions, with the joint debt apportioned among them.
- Overlapping debt is quite common among various levels of local government in the U.S., with special districts and fiscal authorities for things like schools and public infrastructure that overlap multiple municipalities.
- The amount of overlapping debt can impact the borrowing costs and credit rating of a municipal government.
- Use of overlapping debt and fiscal authorities tends to bias local governance toward greater total spending, total debt, and higher tax burdens.
Understanding Overlapping Debt
Municipalities issue debt to raise money from the public for capital projects that benefit residents in the region. For instance, if a city or county wants to build a school, airport, highway, or hospital, it typically issues debt to borrow the funds needed for such infrastructure. You have to understand that two municipal government bodies might have overlapping jurisdictions, like a state and a city or a city and a county. Each of these jurisdictions can issue debt in the form of municipal bonds and notes when they need to raise money for major expenses intended to serve all residents in their political area.
When the debt of a municipal authority is shared with another government, we call it overlapping debt. Take this example: a bond funding a project in a county school district could be overlapping debt for a town within that district. The town is only responsible for its proportional share of that overlapping debt. This proportional share, plus the municipality's direct debt, makes up the municipality's overall net debt. That overall net debt is crucial for the municipality's ability to get future debt financing. Also, as a taxpayer, you're responsible for paying your share of the debt from each jurisdiction.
Overlapping debt is often greater than a municipal government's direct debt and is calculated based on the ratio of assessed valuation of taxable property within the municipality's limits to the assessed valuation of each overlapping district. Having this overlapping debt can affect one or both governments' ability to repay.
Economic Implications of Overlapping Debt
Economic research shows that having multiple overlapping local authorities that can issue overlapping debt to fund their activities has significant fiscal effects on local governments. Empirical analyses indicate that this overlapping of jurisdictions tends to create a bias toward more total public sector spending. Other researchers have found that these overlapping local fiscal authorities treat the available tax base and the ability to raise funds via bond issuance as common-pool resources, leading to tragedy-of-the-commons problems.
This means the widespread practice of overlapping governmental authorities issuing overlapping debt increases the size and fiscal burden of local government. Overlapping authorities compete against one another in a political area to exploit the same tax base. Various authorities, responding to different voters and interest groups demanding public spending, end up overexploiting the tax base in a region. They take on more total debt and spend more on public programs and infrastructure than what voters in the region as a whole actually want.
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