Trujillo and Campbell: State and local governments drowning in debt
The recent surge in America’s national debt, which has now surpassed an alarming $38 trillion, is only part of a larger financial crisis affecting state and local governments across the nation. According to a comprehensive review by the Reason Foundation of over 20,000 financial statements from government entities for their 2023 fiscal years, state and local governments collectively hold more than $6.1 trillion in debt. This staggering figure breaks down into $2.7 trillion owed by states, $1.4 trillion by cities, $1.3 trillion by school districts, and $760 billion by counties. California leads the pack with a staggering $1 trillion in debt, followed by New York at $800 billion and Texas at $550 billion, highlighting the significant financial burdens that local governments face.
The implications of this debt crisis are profound, particularly on a per-capita basis. Nationally, state and local government debt averages about $18,400 per person, with states like New York and Connecticut exceeding $30,000 per resident. A significant portion of this debt—over 40%—is tied to unfunded pension and healthcare benefits promised to public workers, amounting to $1.5 trillion in pension debt alone. As governments grapple with rising interest payments and pension obligations, essential services such as education and public safety risk being compromised. This financial strain may lead local governments to consider tax increases, further burdening taxpayers and potentially stifling economic growth.
To navigate this debt crisis, state and local governments must realign spending with revenue sustainably. In prosperous years, budget surpluses should be directed towards debt repayment rather than funding new initiatives. Furthermore, exploring public-private partnerships for large infrastructure projects can alleviate immediate financial burdens by transferring some costs to the private sector. Ultimately, reforming pensions and retiree healthcare benefits is crucial to ensuring long-term fiscal health and preventing the accumulation of further debt. As Mariana Trujillo and Jordan Campbell from the Reason Foundation emphasize, the time has come for state and local governments to confront their debt head-on, as those who act decisively 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
