Municipal governments across the United States are looking to rein in spending as pandemic-era stimulus dries up and inflation lingers for longer than expected.
“Clearly there are significant capital needs across the U.S.,” said Michael Rinaldi, senior director at Fitch Ratings’ public finance group. The group issued a AA investment grade general obligation bond rating for New York City in March 2024.
The financial challenges within cities appear to be mounting despite high municipal credit ratings and robust demand for urban commodities like housing. For example, New York City had a total public debt of $177.6 billion at the end of fiscal year 2022, according to researchers at Truth in Accounting, a nonprofit that partners with the University of Denver to promote transparency in public accounting. That translates into a per capita taxpayer burden of $61,200, according to the group’s analysis.
That estimate comes in higher than the one quoted by New York City Comptroller Brad Lander, who says the Big Apple has a public debt burden of roughly $96 billion in 2024 — about $30 billion shy of the city’s debt limit.
The discrepancy, according to Truth in Accounting, comes from pension debt obligations that are underreported and will eventually be pushed on to future taxpayers. “If I don’t pay that invoice, I don’t have to include it in my balanced budget,” said Sheila Weinberg, the group’s founder and CEO.
Truth in Accounting estimates that 53 of the largest cities in the U.S. were not generating enough revenue to pay their bills at the end of fiscal year 2022. The list also highlights fiscal challenges facing cities like Chicago, Houston and Portland, Oregon.
“I think we can all agree that we’re broke,” said Houston Mayor John Whitmire in a March 2024 City Council budget hearing.
Truth in Accounting believes that underfunded pension obligations and retiree health benefits are straining municipal governments nationwide. Detroit’s 2013 municipal bankruptcy was a potent example of the potential effect when the city temporarily suspended pension payments to pump more cash into reserves.
“I believe this is a big problem throughout the country,” said Weinberg. “The voters think, oh, they must be living within their means. And they’re not.”
Weinberg told CNBC that cities and state governments are, in effect, spending tomorrow’s money today in unsustainable fashion.
Meanwhile, in the case of New York City, leaders remain optimistic about future returns.
“We’ve got to be careful because you don’t want to get into too much debt,” said Lander, the city comptroller, while referencing the trade-offs between bond/debt-powered spending and other revenue raising measures like tax increases.
Lander in 2024 voiced support for a $12 billion expansion of New York City’s debt limit to fund existing city services like community colleges and the police department, alongside an expansionary capital program in the face of issues such as the climate crisis.
“You have to make hard choices in budgeting. But it really is important not to be penny wise and pound foolish,” said Lander in an interview with CNBC.
In the meantime, rising debts may lead to dirtier streets, fewer public services and tough decisions from public officials to make ends meet. In New York City, Mayor Eric Adams has introduced a “Program to Eliminate the Gap” which called for three separate 5% city program spending cuts that will affect services including sanitation, library access, public education, stewardships of jails and more.
“To the extent that [New York City] can’t issue debt to finance a portion of their capital plan, that could mean unsafe school conditions, overcrowding and other issues,” said Rinaldi at Fitch Ratings.
In the spring of 2024, Adams walked back from portions of his spending cuts proposal, citing unexpectedly strong economic performance within the city.
“But we’re not of out the woods,” he in a January 2024 press conference, noting that further steps must be taken to ensure the city’s finances remain sound.
Watch the video above to see why so many local governments in the U.S. have financial issues.
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