US State Governments Face Severe Financial Crises

State governments are facing severe financial challenges, with many lacking funds to meet obligations due to rising pension liabilities and federal aid expiration.

### Financial Crisis in U.S. States: A Looming Budget Disaster
* 💰 State governments in the U.S. are facing severe financial challenges, with **27 states reportedly lacking sufficient funds to meet their obligations**.
* 🏦 Connecticut, New Jersey, and Illinois are among the states most affected, with Illinois grappling with a **significant deficit** while also needing to **bail out essential services** like the Chicago Transit Authority and public schools.
* 📉 After receiving approximately **$800 billion in federal aid** to begin the decade, states are now experiencing tighter budgets as **pandemic-induced surpluses dwindle**.
* 📊 In 2022, federal grants accounted for **38% of state spending**, but this reliance on federal funds raises concerns about **long-term sustainability** as those funds are set to **expire in 2026**.
* 📅 States have enacted tax cuts and increased spending during recent economic booms, but many are now questioning the **affordability of these measures** amidst growing fiscal liabilities, particularly pension obligations that burden states like **Illinois and New Jersey**.
* 💸 Pension liabilities are escalating at a rate of **7% annually**, which significantly restricts funds available for critical public services like **education and healthcare**.
* 🌪 As states prepare for future risks like climate change and an aging population, many are conducting **stress tests to assess financial strength and resilience** against economic downturns.
* 📈 While some states are proactively addressing fiscal challenges, the looming **$1.3 trillion pension debt** across various states poses a **significant threat to their financial stability**.

State governments in the US are running out of cash. After meeting our obligations, we have very little money left. One count suggests that 27 states lack the necessary funds to pay their bills. The problem is most prominent in states like Connecticut, New Jersey, and Illinois. Not only the city of Chicago, but the State of Illinois is running straight into a brick wall in terms of its finances. The City of Chicago is facing a $1 billion deficit. The state is facing a massive deficit while also needing to bail out things like the Chicago Transit Authority. Chicago Public Schools is asking for a bailout. The state cannot afford these things. States received about $800 billion from the federal government to kick off the decade. That spending obscured long-running issues. What we're seeing is largely a return to Earth from those pandemic surpluses. You know, we saw a big increase in income taxes.

There was really like a bit of an economic boom. States now are working with tighter budgets as the country's population and infrastructure ages. Even economically powerful states see trouble ahead. To the degree that the states are relying on federal aid, it becomes a daisy chain of vulnerability. State governments account for 15% of the nation's economic output, and they employ 13% of the US workforce. So why are so many state governments going broke? And what can they do to repair their finances? State governments pay for much of the nation's systems of education, health care, transportation, and public housing, but they receive tremendous amounts of help from the federal government to do that. In 2022, federal grants covered 38% of total spending from state governments. That was a bit more than usual. During the pandemic, we saw a lot of one-time revenue.

A lot of one-time expenditures that kind of had the effect of obscuring these long-term challenges that states faced. The ensuing economic boom strengthened state coffers and increased revenues. The increase in revenue helped state leaders lower taxes and increase spending. We, you, all of us together delivered both the largest tax cut ever by a huge margin and the largest increase in teacher salaries in our state's history. We understand that that's, you know, something that is politically palatable, particularly in the time of an election. It is something that if those receipts decline, we may see some future imbalances between, you know, expenditures and revenues that states will have to correct. Virtually every state made a tax cut. In some cases, this is a very intentional plan for states to spend down these unexpectedly high revenues. On the other side, this could really reflect, you

know, tightening budget conditions and states needing to draw on those dollars to help make ends meet right now. But the federal funds given to states will run out in 2026 as a cost of living crisis hits many parts of the country. For too many, the cost of living is too high. The higher cost of living is making some state leaders consider tax relief. That includes places like Wyoming and North Dakota. Statehood that do well are North Dakota, Idaho, South Dakota. And what these states really have in common is that they have a relatively limited fiscal footprint. Many policymakers across the states, they did pretty well managing the pandemic era budget surpluses. A huge looming question out there is around the long-term affordability of the tax cuts and spending increases that were enacted. State governments also have to manage long-running financial liabilities. There are states like Illinois, Connecticut and

New Jersey. While these states really have accumulated a lot of debt after the great financial crisis, the main reason for their weak fiscal stance is the pension obligation. Roughly 86% of public employees receive pensions. These are retirement plans that provide guaranteed income for life. State and cities, in order to attract public servants, may be paying them less money than they would make in the private sector, provide generous pensions, and they ended up getting behind. If pension liabilities are fully accounted for, as many as 27 states lack the money needed to pay their bills. What goes a little bit under the radar is that pension liabilities are an extremely expensive form of debt. The portion of that pension that is unfunded increases by 7% every single year. This debt leaves states with less money to fund public programs. So we're talking hospitals. We're talking about roads.

We're talking about schools. Take Illinois, for example, which owes money to former employees but has less than half of the funds raised to pay them back. We've seen analysis from JP Morgan that says in order to actually fund these enormously generous promises that were made decades ago, you would have to double the state income tax overnight in Illinois. Illinois Governor JB Pritzker has steadily kept spending on areas like roads in addition to education. Penny by Penny. We are still working together, saving important things for our state. This requires tax increases to balance the budget, but that option may not be available to a state like Illinois, which already has relatively high tax rates. Using taxes to raise additional revenue is limited. Higher taxes tend to make people move, especially top earners. That's according to studies on states like California. When the marginal tax rate increases by 3%, California

loses about 0.8% in the tax base in the top income bracket. That's actually substantial, because it's like 1% of the tax base in the very high bracket, which for the most part accounts for the majority of tax revenues overall. Moving forward, state governments must respond to emerging risks like more extreme weather, an aging population, and migration. Migration, I believe, is going to be one of the biggest issues that will face the country. In the 2020s, many Americans moved from high tax areas into states like Florida, Texas, and North Carolina. Coincidentally, those states that have those low income taxes, of course, they are attractive because of the climate, but they also have a high degree of climate risk. That's where it gets - it's going to be a real test for politicians in terms of managing a state budget. Florida, for example, has drawn many people with its

lack of state income taxes and business-friendly policies, but it sees risks ahead. Florida is being challenged by a few factors that may be outside of policymakers' control. Within Florida's long-term budget assessment, they actually highlight Medicaid as a growing fiscal concern for the state. And, of course, climate change and hurricanes hitting the state of Florida is a real concern. The federal government generally handles over 75% of disaster-related costs. Agencies like the Federal Emergency Management Authority or FEMA could quickly run out their budgets and require further funds from Congress. I think anyone that's relying on FEMA to be leading the response, that is not the way proper storm response is. There's a great concern of what that future risk is to the federal government, and that FEMA always becomes the bailout for people who haven't planned. It's a big number that's being presented to the

taxpayer. Ultimately, nearly all counties in the United States are exposed to some sort of climate hazard. I don't think people always associate a rising number of heat days with climate. I think the Midwest being exposed to extreme heat can compound other hazards, which can be particularly impactful to agriculture. Crop production in the Midwest does contribute to that gross state product. You know, we've seen a lot of food inflation over the last couple of years. Right now, the market isn't pricing in climate risks into securities, into municipal bonds. And so this becomes a future potential bill for state and local governments. Even in North Carolina, where Helene went up and disaster struck. You know, could anyone have really anticipated that you need to check on your health of your infrastructure and can it withstand a severe stress test? The largest banks have to do stress tests coming out of

the Great Recession. There's a similar concept that states actually do. At least 20 states review their financial strength by conducting stress tests or long-term budget assessments, and all 50 are developing rainy day funds. These savings are used during economic downturns. Some states, like New Jersey, Montana, and Illinois, have very low savings in these funds. Other states, like Wyoming and Alaska, could finance their operations for months. Alaska is a very resource-rich state. A lot of its tax revenue is derived from oil prices and what's called severance taxes on that energy production. It really is a double-edged sword for a state like Alaska, as well as other states like North Dakota and Wyoming. This dependence on oil prices and on those severance taxes has really become unsustainable. The point of optimism is that we're seeing more and more states do their assessments, do their

homework to understand whether they are on a fiscally sustainable trajectory these days. For example, the state of Maryland found budget gaps in its long-term assessment conducted in 2022. And to the state leaders' credit, they focused on finding longer-term solutions by raising revenue and some spending cuts. This trend has contributed to strong credit ratings for states across the board. When you're in a healthy condition, right? That's when you're supposed to be planning for adversity and not reacting to it. This is really an opportune time for those issuers who are in geographic areas of high degrees of climate risk. The level of annual issuance of municipal debt may have to double from about 400 to 450 billion to between 800 and 900 billion annually for the assets, the public assets in the US, to be adapted and more resilient to climate hazards. 68% of investment advisors in the United States see

public debt as the top economic issue to the country. I don't think politicians have any plan really to solve this in Illinois, and we saw a hint of this actually during the pandemic. Illinois was going to Congress asking for a $10 billion pension bailout. That is really the only answer they have, because it's so politically toxic to keep raising taxes on Illinois residents. There are certainly tremendous challenges going forward. And there's still like a $1.3 trillion of pension debt outstanding. So that's that's big relative to, you know, the annual revenues that those states receive.

Why 27 U.S. States Are Going Broke

Welcome to the official YouTube channel for CNBC. From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.

For real-time news updates from around the world, visit: http://www.cnbc.com

For CNBC's primetime TV lineup, visit http://tv.cnbc.com

For CNBC's International YouTube channel, visit: http://www.youtube.com/cnbcinternational

CNBC

Financial Struggles of State Governments in the US

Many US state governments are running out of cash, with 27 states lacking funds to pay their bills, particularly in Connecticut, New Jersey, and Illinois.

The financial crisis is exacerbated by the need to bail out essential services like the Chicago Transit Authority and Public Schools.

Federal aid has been crucial for state budgets, covering 38% of total spending in 2022, but the pandemic's one-time revenue and expenditures have obscured long-term financial challenges.

State Budget Challenges and Pension Liabilities

Federal funds to states will run out by 2026, leading to a cost of living crisis and prompting some leaders to consider tax relief.

States with a limited fiscal footprint, like North Dakota and Idaho, have managed pandemic-era budget surpluses, but many are struggling with long-running financial liabilities and pension obligations.

The unfunded portion of pension liabilities increases by 7% each year, leaving as many as 27 states without enough money to pay their bills and limiting funds for essential public programs.

The Impact of Tax Base Loss and Migration on State Governments

8% of their tax base in the top income bracket, which is significant for overall tax revenues.

Migration to low-income tax states like Florida, Texas, and North Carolina is a growing concern, driven by climate and economic factors.

Florida faces future challenges from Medicaid costs and climate change, with FEMA's disaster response funding potentially becoming a burden on the federal government.

Climate Hazards and State Financial Preparedness

counties are exposed to climate hazards, with extreme heat in the Midwest impacting agriculture and contributing to food inflation.

The market is not currently pricing in climate risks, potentially leading to future financial burdens for state and local governments.

In response, states are conducting stress tests and developing rainy day funds to improve their financial resilience, with varying levels of savings across different states.

Fiscal Sustainability and Climate Resilience in State Budgets

Maryland's 2022 long-term assessment revealed budget gaps, prompting state leaders to raise revenue and cut spending for long-term solutions.

The annual issuance of municipal debt may need to double to $800-$900 billion to adapt public assets in the US to climate hazards.

Investment advisors see public debt as the top economic issue, with Illinois facing significant challenges and a $1.