Trujillo and Campbell: State and local governments drowning in debt
As the national debt in the United States surpasses a staggering $38 trillion, the debt crisis extends beyond the federal government, manifesting significantly at the state and local levels. Recent findings from the Reason Foundation reveal that state and local governments collectively hold over $6.1 trillion in debt, with states owing approximately $2.7 trillion, cities $1.4 trillion, school districts $1.3 trillion, and counties $760 billion. This financial burden is not evenly distributed; California leads the nation with $1 trillion in combined state and local debt, followed by New York at $800 billion and Texas at $550 billion. The implications of this debt are profound, particularly when viewed on a per-capita basis, where the national average stands at around $18,400 per person. States like New York and Connecticut exceed $30,000 per resident, highlighting the financial strain on taxpayers in these regions.
A significant 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 healthcare promises. Furthermore, the bonds issued for infrastructure projects, which account for 33% of state and local debt, are increasingly diverting funds away from essential services such as education, public safety, and transportation. As local governments grapple with rising interest payments and pension obligations, there is a growing risk of tax increases, which could stifle economic activity and exacerbate existing debt issues. The long-term implications are equally concerning; many municipalities may find themselves in a position where they need to borrow more to address aging infrastructure and other critical needs, potentially leading to higher interest rates and further financial strain on taxpayers.
To navigate this mounting debt crisis, state and local governments must prioritize aligning spending with revenues and utilize budget surpluses in prosperous years to pay down existing debt. Exploring public-private partnerships for large infrastructure projects could also alleviate immediate financial burdens, allowing private entities to shoulder initial costs. Ultimately, reforming pension and healthcare benefits is crucial to ensuring that liabilities are fully funded and do not contribute to future debt accumulation. As Mariana Trujillo and Jordan Campbell from the Reason Foundation emphasize, cities and states that proactively manage their debt and realign their fiscal strategies will be better positioned to thrive in the future, whereas those that continue to defer these critical issues may face dire financial consequences.
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
