Are you running this command in Privileged EXEC mode, or global config mode? This is a Privileged EXEC command, so when you enter it, your prompt should look like this:
RouterName# debug radius local-server
And not like this:
RouterName(config)# debug radius local-server
Please also note that since this is a debug command, it will not appear in your device's running-config, and it may not continue running if you reload or power-cycle your device. It will just show debug messages at the console line and/or log them to the logging buffer and/or to an Syslog server, if configured.