Structural Deficits and State Borrowing Costs

This study examines the factors that affect the borrowing costs of state governments with specific attention being paid to the impact of state structural deficits (or fiscal imbalances) on borrowing costs. The findings for 1999-2000 suggest that interest costs for state competitively sold municipal securities reflect estimates of state structural deficits. States with a higher structural deficit were found to pay significantly higher interest costs. The evidence implies that bond ratings do not fully reflect the fiscal problems faced by state governments.