In times of fiscal crisis, local governments face difficult decisions related to capital financing. Local government revenues generally decline and expenditures increase during a recession, motivating some officials to attempt to issue more debt in order to leverage existing revenues to reduce budget gaps. Another strategy has been to refinance debt to take advantage of low interest rates that accompany a national recession. By issuing refunding bonds, local governments are able to save money by lowering their current and future interest payments. The first strategy implies an increase in long-term debt outstanding, while the second suggests either no change or a decrease in long-term debt outstanding.

This study theorizes that the net change in outstanding debt depends on the elasticity of different types of debt. The first type of elasticity is the change in new debt with respect to the change in interest prices. The second type of elasticity is the change in new debt with respect to the change in total revenues. The result in overall debt levels depends on the dominant type of debt elasticity. Using debt levels from local governments in the State of Georgia we estimate both types of debt elasticity for general obligation debt as well as revenue-backed debt to identify debt management strategies in time of economic downturns. A log-log model is constructed to examine the factors that explain local jurisdictions’ changes in debt levels and estimate revenue and interest rate elasticity.