What State Has the Most Debt? A Look at Key Metrics

State debt represents financial obligations accumulated by individual state governments. Understanding these obligations is important for residents, as state debt influences public services, taxation, and overall economic health. This article explores what constitutes state debt, how it is measured, and factors contributing to its accumulation.

Defining State Debt

State debt encompasses various financial instruments and liabilities a state incurs. A significant portion comes from issuing municipal bonds, which are loans taken out by states or their agencies. These bonds are broadly categorized into general obligation bonds and revenue bonds.

General obligation bonds are backed by the state’s full faith and credit, pledging its general taxing power, including income or sales taxes, to repay bondholders. These bonds often fund projects that do not generate direct revenue, such as public schools, roads, and courthouses. In contrast, revenue bonds are repaid solely from income generated by the specific project they finance, such as tolls from a bridge, utility fees, or airport charges. Their repayment depends on the project’s success rather than the state’s general tax revenue.

Beyond bonds, unfunded pension liabilities represent another substantial component of state debt. These are obligations for future retirement benefits promised to public employees not fully covered by current assets in pension funds. When a pension plan’s assets fall short of promised benefits, an unfunded liability arises. These liabilities accumulate due to factors like insufficient contributions, lower-than-expected investment returns, or changes in actuarial assumptions.

State debt is measured in several ways to provide different perspectives on a state’s financial burden. Total absolute debt refers to the overall dollar amount of a state’s outstanding liabilities. This metric alone can be misleading because it does not account for a state’s population or economic capacity. Debt per capita, calculated by dividing total debt by the state’s population, offers a per-person view of the debt burden. Debt as a percentage of a state’s Gross Domestic Product (GDP) or annual revenue indicates the state’s ability to manage its debt relative to its economic output or income.

Top States by Debt Metrics

The states with the highest debt levels vary significantly depending on the metric used for evaluation. When considering total absolute liabilities, which include bonds and unfunded pension and other post-employment benefit liabilities, California frequently appears at the top. For instance, California had approximately $498 billion in total liabilities at the end of fiscal year 2022. Other states with substantial total liabilities include Illinois, New York, New Jersey, and Texas, each exceeding $200 billion in the same fiscal year.

Looking at debt from a per capita perspective provides a different ranking, highlighting the burden on individual residents. Connecticut often ranks highest in total liabilities per capita, with figures around $27,031 per resident in fiscal year 2022. New Jersey follows closely, with approximately $24,200 in total liabilities per capita. Hawaii, Illinois, and Wyoming also feature among states with high per capita debt.

When examining debt as a percentage of a state’s Gross State Product (GSP) or GDP, which reflects a state’s economic capacity to service its debt, the picture changes again. Hawaii and Connecticut have shown higher percentages of net tax-supported debt relative to their state GDP, with Hawaii at 10.1% and Connecticut at 9.4% in fiscal year 2022. West Virginia also stood out with a state and local debt to GDP ratio of 23.8% in 2023.

Key Drivers of State Debt

States accumulate debt for various reasons, often driven by the need to fund public services and infrastructure. Large-scale infrastructure projects, such as new roads, bridges, public buildings, and utility systems, typically require substantial upfront capital. States often finance these projects through borrowing because their high costs make them difficult to cover entirely through current tax revenues.

Funding for education and social services also contributes to state debt. Public education, healthcare programs like Medicaid, and other social welfare initiatives represent significant and ongoing expenditures. During periods of increased demand for these services or when tax revenues decline, states may resort to borrowing to maintain funding levels and meet obligations to residents.

Economic cycles play a role in state debt accumulation. During economic downturns, state tax revenues from income and sales often decrease as employment falls and consumer spending slows. Simultaneously, demand for state services, such as unemployment benefits and other social safety nets, tends to rise. This creates budget shortfalls that states may cover by issuing debt, bridging the gap until economic conditions improve.

Unfunded pension liabilities are a substantial and growing driver of state debt. These arise when states have not set aside enough money to cover retirement benefits promised to their public employees. As these obligations come due, states may face pressure to use current revenues or borrow to meet commitments, impacting their overall financial health. For example, in fiscal year 2022, unfunded pension liabilities across states reached nearly $1.3 trillion.

Fiscal policy decisions made by state governments also influence debt levels. Long-term financial planning, including choices about tax rates, spending priorities, and how states manage their reserves, can directly affect how much debt a state accumulates over time. These decisions shape a state’s ability to fund its operations and investments without relying excessively on borrowing.