. the key distinction between these two types of borrowing is that in the former case an asset is producing services that help to offset the cost of the debt, but this is not so in the latter case. indeed, using debt to finance current operating deficits is equivalent to asking future taxpayers to help finance today ’ s public services. when this occurs, it means that the fiscal surplus offered by the jurisdiction in the future will be diminished by the value of these additional debts. that is, in the future, the cost of servicing this debt will drive a wedge between the taxes paid by households and businesses, and the current services provided to them. of course, within the u. s., households and businesses can react to this wedge by choosing to locate elsewhere. and because the tax base of any jurisdiction depends on the level of local economic activity, this out - migration can lead to ever - higher tax rates or everdiminished services for those who still remain – typically those with fewer opportunities or resources to relocate. today, there are several ways that states and localities can borrow to cover operating deficits ; and the relatively slow economic growth since the financial crisis has increased pressure on their budgets, making such measures more appealing. one mechanism for doing this is to treat borrowed funds as revenues that can be used to balance the budget. another form is asset sales. here the jurisdiction receives cash today in exchange for a reduction in its future assets – sometimes physical like an office building, sometimes financial like tobacco settlement funds – and an increase in its future costs. finally, and perhaps most importantly, is the practice of pushing the cost of current employment services into the future. let me elaborate on this last method. here i ’ m referring to the underfunding of public employee pensions and other post - retirement benefits for current employees. both of these practices add to the indebtedness of the state and local governments with the employees playing the role of creditors. to be clear, while unfunded promises to cover retiree health insurance are very common, unfunded pension liabilities are probably much larger in aggregate magnitude. estimates of unfunded pension liabilities range up to several trillion dollars. while widespread, underfunding of public pensions is not universal. many states have found ways to keep their public pensions reasonably well funded, demonstrating that pushing today ’ s costs into the future is not an inevitable outcome of a democratic government. nonetheless, we have seen evidence that high debt levels combined with diminished services provision can

without successful state and local governments, the fed ’ s dual mandate of maximum sustainable employment with stable prices would be much more difficult to attain. a final important dimension of the state and local sector – and the one that is perhaps most obviously front and center for today ’ s discussion – is its debt. the municipal bond market is very large, with outstanding issues totaling over $ 3. 5 trillion. now this large dollar amount in and of itself is not a problem. when governments invest in long - lived capital goods like water and sewer systems, as well as roads and bridges, it makes sense to finance these assets with debt. debt financing ensures that future residents, who benefit from the services these investments produce, are also required to help pay for them. this principle supports the efficient provision of these long - lived assets. unfortunately, as the volcker - ravitch task force emphasized, issuing debt to finance infrastructure investments is not the only reason that states and localities borrow from the future. governments have also borrowed to cover operating deficits, and this kind of debt has a very different character than debt issued to finance infrastructure. let me take a moment to explain what i mean and why i think this distinction is important. bis central bankers ’ speeches when a jurisdiction borrows to invest in infrastructure, the cost of the debt to local residents – and those considering locating in the jurisdiction – is offset by the value of the services that the infrastructure provides. this tradeoff is part of the “ fiscal surplus ” that a jurisdiction offers : the value of the services minus the tax price that residents have to pay. a well - run capital budget will match these costs and benefits over the life of each project to ensure that the jurisdiction remains attractive to current and future residents. that is, both current and future residents are willing to pay the tax cost of servicing this debt because of the benefits that they receive from the services supported by that debt. now consider a different scenario – one in which the jurisdiction is borrowing to pay for a current year operating deficit. this kind of borrowing is inconsistent with running a balanced budget, which is in principle required in all but one state. but, as people in this room are well aware, states and localities can often find ways to “ get around ” balanced budget requirements if they are determined to do so. one example of this was new york city in the 1960s and early 1970s, where annual operating deficits were repeatedly financed with shortterm debt, until the fiscal crisis exploded in 1974 – 1975