Trujillo and Campbell: State and local governments drowning in debt
The national debt has recently crossed a staggering $38 trillion, but the financial crisis facing America extends beyond the federal level, as state and local governments collectively grapple with over $6.1 trillion in debt. A comprehensive review by the Reason Foundation reveals that states owe $2.7 trillion, cities hold $1.4 trillion, school districts account for $1.3 trillion, and counties are responsible for $760 billion in liabilities. California leads the nation with a combined state and local debt of $1 trillion, followed by New York at $800 billion and Texas at $550 billion. This growing debt burden is not only alarming in its sheer size but also in its implications for taxpayers, who are increasingly facing the consequences of these financial obligations.
On a per-capita basis, the debt levels are even more striking. Nationally, state and local government debt averages about $18,400 per person, but in states like New York, Connecticut, and New Jersey, this figure exceeds $30,000. A significant portion of this debt—over 40%—is tied to unfunded pension and healthcare benefits for public workers, amounting to $1.5 trillion in pension obligations and an additional $1 trillion for healthcare. The financial strain of these debts is beginning to crowd out essential public services, forcing local governments to divert funds from critical areas such as education and public safety to cover pension liabilities. As these financial pressures mount, taxpayers may face increased taxes and fees, further stifling economic growth and exacerbating the debt crisis.
To address this looming crisis, state and local governments must align their spending with available revenues sustainably. During economic upturns, budget surpluses should be directed toward debt repayment rather than funding new initiatives. Additionally, public-private partnerships can be utilized for large infrastructure projects, shifting the financial burden away from taxpayers. Ultimately, reforming pension and healthcare benefits is crucial to ensuring that these obligations are fully funded and do not continue to contribute to escalating debt levels. With limited capacity to accumulate debt compared to the federal government, state and local entities must act decisively to manage their financial health, positioning themselves for a more stable 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
