Trujillo and Campbell: State and local governments drowning in debt
The national debt has recently crossed a staggering $38 trillion, but the financial challenges facing the United States extend beyond the federal government, affecting state and local governments as well. According to a comprehensive review by the Reason Foundation, state and local governments across the country currently hold over $6.1 trillion in debt. This total includes $2.7 trillion owed by states, $1.4 trillion by cities, $1.3 trillion by school districts, and $760 billion by counties. The analysis examined more than 20,000 financial statements from government entities for their 2023 fiscal years, revealing a complex landscape of debt that poses significant implications for taxpayers and public services.
California leads the nation with a staggering $1 trillion in state and local debt, followed by New York at $800 billion and Texas at $550 billion. Notably, states like Illinois, New Jersey, and Florida also contribute significantly to the overall debt levels. Per capita, the figures are even more alarming; on average, state and local debt amounts to approximately $18,400 per person across the nation. In states such as New York and Connecticut, this debt exceeds $30,000 per resident. A substantial portion of this debt—over 40%—is attributed to unfunded pension and healthcare benefits for public workers, amounting to $1.5 trillion in pension liabilities and an additional $1 trillion in retiree healthcare promises. This growing debt burden is starting to crowd out essential services, forcing local governments to divert funds from critical areas like education and public safety to cover these obligations.
The consequences of this mounting debt are profound. As state and local governments grapple with rising interest and pension payments, there is increasing pressure to raise taxes and fees, which can stifle economic growth and further exacerbate debt issues. Additionally, current debt levels weaken long-term fiscal health, making it more difficult for governments to borrow for necessary infrastructure improvements in the future. To mitigate these challenges, experts advocate for sustainable spending practices that align with revenues, emphasizing the importance of using budget surpluses to pay down debt during prosperous economic periods. Moreover, exploring public-private partnerships for large infrastructure projects could help alleviate the financial burden on taxpayers. Ultimately, reforming pension and healthcare benefits is crucial to ensuring that state and local governments can manage their debts responsibly and position themselves for a more 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
