Municipal Debt Explained: How Cities Borrow Money

Most U.S. cities carry significant debt — borrowed money used to fund infrastructure, capital projects, and in some cases ongoing operations. Understanding municipal debt is essential for residents who want to know whether their city is on solid financial footing or heading toward a crisis. This guide explains how city debt works and ranks cities by debt burden.

How Cities Borrow Money

Cities access debt markets primarily through the issuance of municipal bonds — securities sold to investors in exchange for future interest payments and principal repayment. There are two main types:

General Obligation Bonds

GO bonds are the most common form of city debt and carry the lowest interest rates. They are backed by the city's full taxing authority — if revenues fall short, the city can raise taxes to repay bondholders. Most states require voter approval for GO bond issuance above certain thresholds, creating democratic accountability for major borrowing decisions.

Revenue Bonds

Revenue bonds are repaid from the income generated by a specific project or service — a toll road, airport, water system, or sports arena. They do not pledge tax revenue, so they typically carry higher interest rates. Revenue bonds allow cities to finance self-sustaining enterprises without burdening the general tax base.

Short-Term Borrowing

Tax anticipation notes (TANs) and revenue anticipation notes (RANs) are short-term instruments cities use to manage cash flow gaps between when revenues arrive and when expenses must be paid. These typically don't appear in long-term debt figures but represent real financial obligations.

Cities With the Highest Debt Per Capita

High debt per capita is not automatically dangerous — cities with major infrastructure investments (airports, water systems, stadiums) legitimately carry more debt that generates revenue to service it. But cities where high debt corresponds with structural deficits, declining populations, or weak credit ratings face real fiscal stress.

See the full debt per capita rankings for all 800+ cities.

Cities With the Highest Debt-to-Revenue Ratios

The debt-to-revenue ratio is a more informative measure of debt burden than raw debt per capita, because it shows how many years of revenue would be needed to retire all debt. A ratio above 3.0 is generally concerning; above 5.0 raises serious fiscal questions.

Cities With the Lowest Debt Per Capita

Low-debt cities have either avoided heavy borrowing or have aggressively paid down debt through strong revenue growth and fiscal discipline. These cities typically have more fiscal flexibility to respond to emergencies without triggering credit downgrades.

The Hidden Debt: Pension Liabilities

Formal bond debt is only part of the fiscal picture. Unfunded pension liabilities — the gap between what pension funds have invested and what they've promised current and future retirees — can dwarf formal debt in some cities. While not always counted in official debt figures, pension obligations represent legally binding commitments to government workers.

Cities like Chicago and Detroit carry pension burdens that significantly worsen their fiscal picture beyond what bond debt alone suggests. See our pension funded ratio rankings to understand this layer of municipal obligation.

Warning Signs of City Fiscal Stress

Researchers at the Lincoln Institute of Land Policy identify several red flags in municipal finance:

• Cash reserves covering less than 30 days of expenses
• Debt service consuming more than 15–20% of revenues
• Structural deficits (recurring expenditures exceeding recurring revenues)
• Pension funded ratio below 60%
• Declining population combined with rising per-capita debt
• Credit rating downgrades in two consecutive years

Our Fiscal Health Score incorporates debt burden as 20% of the composite score, helping identify cities where debt levels are becoming a governance challenge.

Frequently Asked Questions