State debt: How and why US states borrow money

When states take on debt, it’s usually for large infrastructure projects that may benefit multiple generations — for example, replacing bridges, building hospitals, or expanding highways and transit systems.

“Unlike the federal government, states generally limit the use of debt to support capital projects, not operating expenditures,” says Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers and co-author of a recent paper on federal and state fiscal processes.

News reporters are often assigned to cover big capital projects, and that includes understanding the debt that funds those projects. While interest rates on state debt are low overall, if those rates rose that could lead to tough choices for state leaders, including potentially scaling back or scraping capital investments.

While state debt is less of a pressing concern for economists and policymakers than federal debt, there are a few ways state debt could rise in the years to come, including economic recessions and risks from climate change. That’s why it’s important journalists be prepared with a working knowledge of how and why states take on debt.

Keep reading to learn:

• Why do states take on debt?
• How do states borrow money and set interest rates?
• What are differences between state and federal debt?
• Where can I find out more about my state’s debt?
• How do states assess their ability to take on debt?
• How do state and local debt interact?
• How could climate change lead to higher state debt?

Why do states take on debt?

One reason that states issue debt is to pay for expensive projects that may offer public benefits for decades.

These are capital projects, which might include a new or expanded roadway, transit line, wastewater treatment plant or other infrastructure.

“By distributing the cost of a large investment over many years, governments can free up cash on hand to meet their current day-to-day expenses,” according to the State Fiscal Health Project from The Pew Charitable Trusts. “Borrowing for long-lasting infrastructure, primarily by issuing bonds, also spreads the cost over generations of taxpayers, enabling states to finance multiple pressing needs simultaneously.”

States usually issue debt either by law or by ballot measure. In May, for example, Ohio voters approved a measure that allows the state to issue up to $2.5 billion in debt over 10 years to help localities pay for infrastructure projects.

Use the Statewide Ballot Measures Database from the National Conference of State Legislatures to find current and past ballot measures on state debt.

When credit raters assess a state’s creditworthiness, they consider outstanding debt and other factors, such as unfunded pension and health benefits for retired state government workers.

“The ratings agencies put pensions and retiree healthcare right alongside debt for the simple reason that in most places those pension obligations are protected by state law or some other legal protection,” says Justin Marlowe, director of the Center for Municipal Finance. “You can’t just decide one day to not pay your retirees.”

Outstanding debt from bond issuance, pensions and health benefits are the three major types of debt that states carry — and, in most states, unfunded pension liabilities make up the largest share of debt, according to Pew.

An unfunded liability is a shortfall between the assets that a pension fund has on hand and the amount it will have to pay in the future.

Unfunded state pension liabilities are projected to fall from $1.51 trillion in 2024 to $1.35 trillion in 2025, roughly the same as in 2009, according to a 2025 report from the Equable Institute, a nonprofit organization that analyzes public retirement systems.

“There has been little meaningful change in public pension unfunded liabilities over the last fifteen years,” according to the report.

Equable projects that the funded ratio for pension funds will rise from 78.3% in 2024 to 81.4% in 2025, meaning state pension funds, on average, are able to cover more than 80% of their obligations. New Jersey, Illinois, Kentucky and Mississippi are the states with funded ratios under 60%, according to Equable.

Pension liabilities may be concerning to state budget officers and news reporters alike, with good reason. A pension plan that goes insolvent could mean tens of thousands of retirees, or more, losing income they need. The federal Pension Guarantee Benefit Corporation does not insure state and local pensions.

A bankrupt pension plan could also mean potentially higher borrowing costs for the state or local government responsible for the plan. But research suggests state and local pension benefit payments may be reaching their peak and could decline in the coming decades, easing pressure on those plans with an assist from changes that pension fund managers have made and continue to make.

“This previously undocumented pattern reflects the significant reforms enacted by many plans which lower benefits for new hires and cost-of-living adjustments often set beneath the expected pace of inflation,” write the authors of a 2021 analysis in Brookings Papers on Economic Activity. “Under low or moderate asset return assumptions, we find that few plans are likely to exhaust their assets over the next few decades.”

How do states borrow money and who sets interest rates?

States take on debt by issuing municipal bonds.

Municipal bonds are debt obligations that investors buy. Their maturities — the time at which investors are paid back along with any due interest — can vary widely, from 1 to 30 years, according to the Municipal Securities Rulemaking Board, a non-governmental organization that regulates the municipal bond market.  

Municipal bonds can be complex fiscal instruments. Some 60% of municipal debt instruments come with options that, for example, give the bond holder the right to redeem the bond early, according to research by Oliver Giesecke, a research fellow at Stanford University’s Hoover Institution. The average length of state debt obligations is 8.6 years, according to Giesecke’s research.

Investors typically receive semi-yearly interest payments on municipal bonds. The two main types of municipal bonds are general obligation bonds and revenue bonds.

General obligation bonds are backed by the state itself, and the state can raise tax revenues to pay them back. Revenue bonds are paid back with revenue from projects funded, such as a toll road or hospital.

Revenue bonds were the largest share of bonds issued by states and the District of Columbia from 2006 to 2021, followed by general obligation bonds, according to a December 2023 working paper by Giesecke.

State bonds are typically issued through an underwriter, a financial firm that buys the bonds being issued then sells them to investors. This is different from federal debt, which is issued through a range of types of securities and sold at public auction.

Interest rates on municipal bonds are typically set either through a competitive or negotiated bond sale. Small bond issuances are more likely to happen through a competitive sale, where the municipality sets the maturity and value of the bonds it seeks to issue.

Underwriters, or syndicates of underwriters, then bid at various interest rates. The municipality chooses the underwriter offering the lowest rates, because interest rates are the cost of capital. The municipality wants to pay as little as possible for its debt.

Learn more in How are Municipal Bonds Quoted and Priced? by the Municipal Securities Rulemaking Board.

Large bond issuance, into the hundreds of millions or billions of dollars, are more likely to happen through a negotiated sale. It’s also more likely that a state, rather than a city or county, would seek a bond issuance approaching or exceeding a billion dollars.

There are far fewer financial firms that can take on the risk of a large debt issuance. Because an underwriter agrees to buy all (or a large chunk) of the bonds issued, they need to be reasonably sure they can sell those bonds on secondary markets.

Underwriters negotiate interest rates with the municipality based on market forces, such as municipal bond demand and recent sales of comparable bonds. From 2009 to 2023, there was an average of $12.4 billion worth of municipal bonds traded each day, according to the Securities Industry and Financial Markets Association.

What are differences between state and federal debt?

While the federal government routinely takes on debt to make up for yearly budget deficits, states don’t, despite having the legal authority to spend, tax and borrow.

One reason is that most states have some form of balanced budget law. (There is no such requirement at the federal level.) States also often have debt limits set by statute or constitution.

“In terms of where we are currently, state debt levels are relatively low,” White says.

At the moment, investors by and large see state debt as very low risk. Credit rater S&P Global offers a historical table of their state-by-state credit ratings (free registration is required to view it).

Overall municipal debt is paltry compared with federal public debt, which is about $29 trillion. State and local government debt totaled about $3.4 trillion in 2024, according to Federal Reserve data.

States alone have around $1.5 trillion in outstanding debt, according to data the University of Chicago’s Center for Municipal Finance provided to The Journalist’s Resource.

Where can I find out more about my state’s debt?

The Census Bureau is a reliable source of state fiscal health information but its data lags, and the most recent data is from 2022. More recent data on debt and other fiscal issues for states can be found from individual offices of the state treasurer. The Stanford Municipal Finance Dashboard is a valuable source for up-to-date data on the cost of borrowing for states.

The Journalist’s Resource also asked the Center for Municipal Finance to put together a comprehensive database of state and local debt — along with other metrics, such as gross domestic product and debt per capita, which allow for comparisons of debt burdens across states.

New York, for example, had about $162 billion in outstanding debt at the end of its 2023 fiscal year, compared with about $13 billion for Rhode Island. But that debt represents 7% of New York’s gross domestic product, compared with 16% for Rhode Island.

Explore outstanding debt by state below, and download the full spreadsheet here, including additional measures of state debt affordability, such as pension liabilities and debt per capita.

Data provided by the University of Chicago, Center for Municipal Finance. In municipal finance research, debt issued by the District of Columbia is treated as state debt because the District has many features of a state government, such as a Medicaid program. Outstanding debt figures are from Ipreo/S&P and are as of September 1, 2024. “City and County” is consolidated city/county governments — for example, San Francisco, Denver or Indianapolis. “Higher Ed” includes 2- and 4-year public and private institutions. State gross domestic product figures are from the U.S. Department of Commerce, Bureau of Economic Analysis, as of 2024.

How do states assess their ability to take on debt?

States measure debt affordability in a variety of ways, and journalists should be aware of those measures.

“Policymakers often lack the information they need to make evidence-based decisions about whether to issue bonds or how to manage existing debt in a way that aligns with their resources and spending priorities,” according to a 2017 report by Pew about state debt affordability analyses.

Though the report is eight years old, it is one of few available studies on how states assess their debt affordability. It found 29 states produced debt affordability studies from 2010 to 2015, with nine state reports offering policymakers “a clear understanding of their states’ debt levels through careful projections, smart benchmarking comparisons, multiple descriptive metrics, and analysis, among other things,” according to the report.

The assessment methods highlighted in the Pew study include using a comparison value to provide context, such as how debt levels compare to state revenues, both current and projected. State revenue largely comes from a combination of sales tax, personal income tax and corporate income tax, though not all states collect all of those taxes.

Recent analyses suggest this method is widely used among fiscal analysts, along with comparisons to statewide gross domestic product — the total value of goods and services produced in the state. The Connecticut Office of Legislative Research in September 2024 produced a report comparing debt for all 50 states compared with each state’s GDP, revenue and statewide personal income.

Statutory debt limits put a ceiling on state borrowing, but most states are not in danger of hitting those ceilings, Marlowe says. The amount of money available for a particular state to borrow is more influenced by municipal bond markets than debt limits, he says.  

“The real number is what will investors lend you at a rate that you can afford or not afford,” Marlowe says. “Generally, I think most states are nowhere near that [market] limit — although some, like Illinois and others, are probably close enough to it, such that if they had a big borrowing need for something, they might very well find themselves paying a noticeably higher yield on the bonds that they would have to issue.”

Use this database by Pew to access the stress tests and budget assessments your state has produced.

States may also factor results from “stress tests” to estimate how new debt could affect their ability to manage their finances during an economic downturn.

A 50-state stress test conducted by credit rater Moody’s, published in September 2022, found seven states that did not have enough cash on hand to survive a moderate recession without significantly raising taxes, cutting spending, or both. Those states were Alaska, Arizona, Illinois, Maine, Mississippi, New Hampshire and Pennsylvania.

“[H]aving a plan is just as important as having a fund,” according to the Moody’s report. “Most states have the resources to weather a recession but have not yet put together a plan for what to do with them when the business cycle does eventually turn.”

Those cash reserves include rainy day funds, which states usually can only use to make up for unexpected deficits, such as lower tax revenue during recessions, though specific restrictions vary by state.

Learn more about rainy day funds in this report by Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers.

Rainy day funds overall stand at about $122 billion, “near all-time high levels,” White says.

Wyoming has the highest ratio of rainy day fund reserves to general spending at 83%, according to information NASBO has collected.

That means Wyoming can cover a good portion of its yearly spending with just its rainy day fund. New Jersey has the lowest recorded ratio, 0%.

But very low or high rainy day fund ratios require context, White says. States like Wyoming that rely on revenues from industries that tend to have volatile prices, such as energy, tend to keep more rainy day funds in reserve — that way, they’re ready to make up for budget deficits if revenues dip.

“Many states actually have procedures, legal procedures in place, that direct the state’s revenue surplus or budget surplus — or a portion of said surplus — automatically to a rainy day fund,” White says.

How do state and local debt interact?

State and local debt are distinct from one another. States and local governments, such as cities and counties, keep their own budgets and track their debt obligations separately.

Some states have pass-through entities to help local governments issue bonds and find buyers. The Illinois Finance Authority is one example. These entities will sometimes bundle local bond issuances for sale.

They may include bonds to fund projects for health care systems, certain nonprofits, universities, airports and seaports — almost any major public capital investment at the local level.

The state offers visibility, credibility and potentially a wider pool of investors, though repayment obligations often remain with the locality. Projects benefitting rural areas often rely on these state pass-throughs for bond funding, particularly rural hospitals.

“The question of whether they could have borrowed that money, or whether they could have borrowed that money on competitive terms, depends very much in part on the state’s participation,” Marlowe says.

He adds that this debt may appear on the books as debt issued by the state, even if a locality is on the hook for repayment. That’s something journalists should be aware of as they’re investigating state debt numbers. Official bond statements are a good place to look for details on specific bond issuances, who has to repay them and which projects the debt will be used for.

Some states also have a big role in funding local K-12 school construction, White notes.

This may include planning and construction appropriations and other direct financial assistance, or state-issued bonds for school construction, according to the Education Commission of the States, a nonprofit policy research organization that breaks down how each state helps with school construction projects.

State bond banks are another way states help localities raise money for capital projects. They can provide access to debt markets that small issuers would otherwise be locked out of, and they can direct federal dollars to local projects. Unlike pass-through or conduit entities, the debt remains on the books of the bond bank. State bond banks were pioneered in Vermont in the late 1960s. There are 13 states with active bond banks, according to a 2024 report by the Brookings Institution.

How could climate change lead to higher state debt?

While economic recessions can stress state budgets, so can natural disasters like floods and wildfires, which are increasingly common and more severe due to climate change.

Natural disaster response is like a nesting doll. If local government officials can’t afford to respond to a disaster, they turn to a larger entity — the state — for financial help. If the state can’t afford to fully respond, they turn to the federal government.

Even if the federal government does step in, states may have to pay upfront costs, then seek reimbursement from federal agencies, according to a comprehensive report by Pew on how states pay for natural disasters. Many states have a dedicated disaster fund to cover response costs, they may use rainy day funds to pay for natural disaster response, or they can appropriate revenue outside of regular budget cycles.

Though the infrastructure risk of climate change is well documented, municipal bond markets have been slow to price in climate risk — in effect, to charge higher interest rates for areas most at risk of floods, fires, storms and extreme heat related to climate change.

One study from 2023, published in PLOS ONE, looked at more than 700,000 outstanding municipal bonds worth more than $2 trillion in total and found that climate risk had little effect on borrowing costs. The authors write that investors “tend to cite that climate risk has historically not caused many bond defaults, and that the municipal bond market in general has a low default rate.”

But that could be slowly changing with recent disasters. The wildfires that earlier this year decimated swaths of Los Angeles led credit rater S&P Global to downgrade the credit rating of that city’s water and power utility, the largest public utility in the country. Lower credit ratings typically mean higher borrowing costs.

Other research suggests the markets for some bonds do price in certain climate change risks. Specifically, the authors of a 2023 paper in The Review of Financial Studies analyze 18,366 bonds issued from 2001 to 2017 by 238 school districts across 11 states and find higher debt costs starting in 2013 for districts at greater risk of rising sea levels.

Still, by and large, municipal bond markets have not priced in risks from climate change, according to recent reporting from E&E by Politico. Bond issuers often don’t have the resources to identify climate risks, according to E&E. That means there are potentially unknown climate risks that come with municipal bonds.

“Larger issuers with more diversified economies and geographic spread will likely be more insulated from medium-term climate stress,” finds a 2024 analysis by Breckinridge Capital Advisors, an asset management firm. “However, over time, even these jurisdictions may be pressured by the costs associated with building resilient infrastructure and the jurisdictional complications of upgrading infrastructure that often crosses regional lines.”

Additional resources

“50 State Debt Comparison,” Connecticut Office of Legislative Research.

“Budget Processes in the States 2021,” the most recent report from the National Association of State Budget Officers.

Center for Municipal Finance, The University of Chicago.

Find Your State Treasurer, the National Association of State Treasurers.

Fiscal Survey of States, NASBO.

How Are Municipal Bonds Quoted and Priced? Municipal Securities Rulemaking Board.

Official Bond Statements, MSRB.

Stanford Municipal Finance Dashboard, Hoover Institution at Stanford University.

State and Federal Fiscal Processes, NASBO and the University of Utah.

State Budget Office Directory, NASBO.

Summary of Proposed and Enacted Budgets, NASBO.

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