State and local-government spending declined at a 3.3 percent annual pace in the first three months of this year, according to a U.S. Commerce Department report in April. It was the steepest drop since a 3.8 percent tumble in the same quarter last year, and the second-most since a 7.4 percent drop in the three months ending in June 1981, the figures showed.

States and localities have cut more than 580,000 jobs since payrolls peaked in 2008, according to U.S. Labor Department data compiled by Bloomberg.

Municipalities are also seeking new revenue as tax collections lag behind fiscal 2008 levels and state aid is slashed. In suburban Atlanta, DeKalb officials this week increased the property-tax rate 26 percent to rebuild the county's finances after losing its Standard & Poor's bond rating in March.

Cash Levels

"We're not at the point where cash levels for most governments are so weak that there's a tradeoff between running the essential services and making debt-service payments," said Richard Ciccarone, a managing director at McDonnell Investment Management LLC in Oak Brook, Illinois. The company manages more than $7 billion of municipal debt.

State intervention in Pennsylvania, through a mechanism called Act 47, has given cities on the verge of insolvency an alternative way to resolve fiscal difficulties. In Harrisburg, where the City Council voted to prepare for a bankruptcy filing last month, state lawmakers crafted legislation to suspend aid for the municipality should it seek court protection.

New York put suburban Nassau County, one of the nation's wealthiest, under control of an oversight board after finding that its budget was in deficit. Michigan enacted a law this year giving state-appointed fiscal managers the power to take control of financially stressed local governments.

Small Part

States from Wisconsin to Ohio, New Jersey and Massachusetts have also taken steps this year to reduce employee costs for local governments. From curbing contract bargaining to imposing higher employee contributions for health care and pensions, legislatures and governors have sought to ease fiscal burdens for municipalities.

Debt service is generally less than 10 percent of a state or local government's budget, and in many cases it's much less, Richard Raphael, an analyst at Fitch Ratings in New York, said in a report last November.