Trujillo and Campbell: State and local governments drowning in debt
The national debt of the United States has recently crossed a staggering $38 trillion, but the financial challenges facing the nation extend beyond the federal level. State and local governments are grappling with their own significant debt, totaling over $6.1 trillion. This figure includes $2.7 trillion owed by states, $1.4 trillion by cities, $1.3 trillion by school districts, and $760 billion by counties. A detailed review by the Reason Foundation of more than 20,000 financial statements for the 2023 fiscal year reveals that California leads the nation with $1 trillion in debt across its state and local governments, followed by New York at $800 billion, Texas at $550 billion, and Illinois at $410 billion. Notably, the per-capita debt figures are even more alarming, with states like New York, Connecticut, and New Jersey exceeding $30,000 in state and local debt per resident.
A significant portion of this debt, over 40%, is tied to unfunded pension and healthcare benefits promised to public workers, with state and local pension debt alone amounting to $1.5 trillion. The bonds issued for infrastructure projects, such as roads and schools, account for another third of the total debt. This mounting debt burden has dire implications for taxpayers, as rising annual interest costs and debt payments are forcing local governments to divert funds from essential services like education and public safety. As these governments struggle to manage their financial obligations, there is a growing risk of tax increases that could stifle economic activity in communities already facing fiscal challenges. The long-term consequences of this debt could hinder future borrowing capabilities and increase costs for taxpayers, making it imperative for state and local governments to align spending with revenues.
To address this pressing issue, experts suggest that state and local governments must prioritize fiscal sustainability by using budget surpluses in prosperous years to pay down existing debt rather than expanding programs. Public-private partnerships could also be employed for major infrastructure projects, alleviating the financial burden on taxpayers. Ultimately, reforming pension and retiree healthcare benefits is essential to ensure these obligations are fully funded and to prevent further debt accumulation. As cities and states face the reality of their financial situations, those that act swiftly to manage their debt and right-size government operations will be better positioned for a stable financial future.
The national debt recently surpassed $38 trillion, but America’s debt crisis isn’t limited to the federal government. Less well known is that, nationwide, state and local governments now hold more than $6.1 trillion of their debt.
States owe $2.7 trillion in debt, cities hold $1.4 trillion, school districts have $1.3 trillion, and counties owe $760 billion, according to a review by Reason Foundation of more than 20,000 financial statements filed by government entities for their 2023 fiscal years, the most recent period with complete data available.
In total, California’s state and local governments hold $1 trillion in debt, the highest in the nation. New York’s state and local debt is the second-most, at $800 billion, followed by Texas at $550 billion, Illinois at $410 billion, New Jersey at $310 billion, and Florida at $240 billion.
Additionally, Massachusetts, Pennsylvania, Ohio, Washington, Michigan, Georgia, Maryland, Connecticut, North Carolina and Colorado each have more than $100 billion in state and local government debt.
On a per-capita basis, the state and local debt numbers are even more eye-opening, with states like Hawaii, Delaware and Wyoming having surprisingly large debt loads per resident.
Nationally, state and local government debt amounts to about $18,400 per person. In New York, Connecticut, New Jersey, Illinois and Hawaii, state and local debt exceeds $30,000 a person.
Following them are Massachusetts, California, Alaska, North Dakota, Delaware, Wyoming and Maryland, all of which have state and local liabilities in excess of $20,000 per resident.
Over 40% of state and local government debt consists of unfunded pension and healthcare benefits promised to public workers. State and local pension debt amounts to $1.5 trillion, with an additional $1 trillion in healthcare benefits promised to retirees.
The bonds that governments issue to fund infrastructure projects, such as roads and bridges, to build and upgrade schools, and to pay for other programs, represent an additional 33% of all state and local debt.
These debts have three negative consequences for taxpayers. First, the annual interest costs and debt payments are starting to crowd out essential services. Many local governments are already being forced to divert funds from taxpayers’ priorities, such as education, policing and transportation, to pay for promised public pension benefits that they haven’t set aside the necessary money for.
Second, as governments struggle to cover rising interest and pension payments, some politicians will seek to raise taxes and fees, placing a growing burden on taxpayers. The scale of tax increases needed to pay for these public pension debts could also hinder economic activity within communities, reducing revenues and further increasing debt woes.
Third, current levels of debt weaken long-term balance sheets, harming the future. Some cities and states haven’t borrowed or spent wisely, so they’ll be looking to borrow more money to modernize their infrastructure, schools and technology in the years ahead. However, today’s debt burden will make borrowing more expensive and potentially raise the interest rates on new bond issuances, costing taxpayers even more.
To address this mountain of debt and restore fiscal stability, state and local governments must sustainably align spending with revenues. In years with a robust economy, governments should use budget surpluses to pay down debt rather than funding new or existing programs.
For mega-infrastructure projects, such as major highway and bridge repair, replacement and expansion, public-private partnerships can be used, allowing the private sector to bear the initial construction costs and any overruns, rather than taxpayers.
Ultimately, the most significant drivers of state and local debt are pensions and retiree healthcare benefits, which must be reformed to ensure they are fully funded and prevent the accrual of debt.
State and local governments have far less ability to keep piling up debt the way the federal government does. The bill is coming due, and cities and states that pay down debt quickly and right-size government will be best positioned for the future.
Mariana Trujillo is a managing director of government finance at Reason Foundation, where she coauthored State and Local Government Finance Report. Jordan Campbell is a managing director of government finance at Reason Foundation, where he coauthored State and Local Government Finance Report./InsideSources
