Trujillo and Campbell: State and local governments drowning in debt
The national debt of the United States has recently surpassed a staggering $38 trillion, but the financial challenges facing the country extend beyond the federal government. A comprehensive review by the Reason Foundation reveals that state and local governments collectively hold over $6.1 trillion in debt, with states accounting for $2.7 trillion, cities for $1.4 trillion, school districts for $1.3 trillion, and counties for $760 billion. This growing debt crisis poses significant implications for taxpayers and the future of public services across the nation.
California leads the pack with a total of $1 trillion in state and local debt, followed by New York at $800 billion and Texas at $550 billion. Notably, on a per-capita basis, states like Hawaii, Delaware, and Wyoming exhibit alarmingly high debt levels relative to their populations, with the national average standing at approximately $18,400 per person. In states like New York and Connecticut, this figure exceeds $30,000, underscoring the financial burden that residents face. 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. This situation is compounded by rising interest costs and debt payments, which are increasingly diverting funds away from essential services such as education and public safety.
To mitigate this looming debt crisis, experts suggest that state and local governments must realign their spending with revenues and prioritize debt repayment, particularly during economic upswings. The implementation of public-private partnerships for major infrastructure projects could also alleviate taxpayer burdens by transferring initial costs to the private sector. Ultimately, reforming pension and retiree healthcare benefits is crucial to ensure these obligations are fully funded and to prevent further debt accumulation. As the financial landscape evolves, states and localities that proactively address their debt will be better positioned for fiscal stability and sustainable growth in the 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
