Why U.S. Cities are Facing Financial Troubles
Many large cities across the United States are currently facing deep financial troubles. This is due to a combination of factors, including the drying up of pandemic-era stimulus and lingering inflation. Municipal governments are now looking for ways to rein in spending and address these financial challenges.
According to Michael Rinaldi, Senior Director at Fitch Ratings’ Public Finance Group, there are significant capital needs across the U.S. Despite high municipal credit ratings and robust demand for urban commodities like housing, cities are struggling financially. 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 organization that promotes transparency in public accounting.
This translates into a per capita taxpayer burden of $61,200, as estimated by Truth in Accounting. However, New York City Comptroller Brad Lander suggests that the city’s public debt burden is approximately $96 billion in 2024, which is $30 billion below the city’s debt limit. The discrepancy, according to Truth in Accounting, arises from underreported pension debt obligations that will eventually be passed on to future taxpayers.
The Impact of Underfunded Pension Obligations
Underfunded pension obligations and retiree health benefits are major factors straining municipal governments nationwide. Detroit’s municipal bankruptcy in 2013 serves as a potent example of the potential effects when cities suspend pension payments to allocate more cash into reserves. Sheila Weinberg, the founder and CEO of Truth in Accounting, believes that this is a widespread problem throughout the country.
Weinberg argues that cities and state governments are essentially spending tomorrow’s money today in an unsustainable manner. This creates a false perception among voters that these governments are living within their means, when in reality, they are not. Truth in Accounting estimates that 53 of the largest cities in the U.S. were not generating enough revenue to cover their bills at the end of fiscal year 2022.
The Challenges Faced by Cities
Several cities, including Chicago, Houston, and Portland, Oregon, are highlighted on the list of cities facing fiscal challenges. Houston Mayor John Whitmire acknowledged the city’s financial struggles in a March 2024 city council budget hearing, stating, “I think we can all agree that we’re broke.”
In the case of New York City, leaders remain optimistic about future returns. New York City Comptroller Brad Lander emphasizes the need for careful management of debt and balancing it with other revenue-raising measures, such as tax increases. Lander supports a $12 billion expansion of the city’s debt limit to fund existing city services and an expansionary capital program to address issues like the climate crisis.
However, rising debts may lead to consequences such as dirtier streets, reduced public services, and difficult decisions for public officials. New York City Mayor Eric Adams has proposed a “program to eliminate the gap,” which includes three separate 5% spending cuts affecting services like sanitation, library access, public education, and stewardship of jails. Rinaldi at Fitch Ratings warns that if New York City is unable to issue debt to finance its capital plan, it could result in unsafe school conditions, overcrowding, and other issues.
While Mayor Adams has walked back from some of his spending cuts proposal due to unexpectedly strong economic performance, he acknowledges that further steps must be taken to ensure the city’s finances remain sound.
