Chapter 6, Problem 12C

A citizens’ group in your state has placed an amendment on an upcoming election ballot. The measure would prohibit new debt issuances by state or local governments, which would presumably reduce taxes as a result of less tax-supported debt. Supporters of the amendment claim the proposed measure will force government to operate more efficiently and cut bloated spending, while opponents fear that public services and the quality of life in the state will be severely affected if the amendment passes.

Required

1. a.      Why do governments typically issue general long-term debt? What types of services might be limited if debt was no longer a financing option?
2. b.      Consider each of the following statements regarding the amendment. Select at least one of the statements (numbered 1–4) to indicate your position on the proposed amendment. Incorporating the statement(s) selected, draft a memo supporting your position on the proposed amendment.
   1. (1) The state has enough money to spend. Government officials can spend more wisely or even cut their spending.
   2. (2) Voters’ frustration with government spending is understandable; however, borrowing restrictions will require that the state and local governments raise fees, reduce construction, or reduce programs and services.
   3. (3) Because there are so many creative ways of public financing, taxpayers are spending millions on long-term debt interest that they never got the opportunity to approve.
   4. (4) This measure is a direct reaction to taxpayer dissatisfaction with government; however, this reaction is so far overreaching that it will impact state jobs and diminish local governments’ ability to provide police and fire protection and to educate our children.