Debt Limit

How It Works

Most states impose debt limits on cities through state constitution, state statute, or city charter. Typical limits are set at 5-15% of the total assessed value of taxable property within city limits, with wide variation: California Government Code Section 43605 limits cities to 15% of assessed value; New York's Local Finance Law sets a 7% limit for cities other than New York City (which has a 10% limit); Illinois Municipal Code sets a standard 8.625% limit for non-home-rule municipalities. These limits are designed to prevent cities from over-borrowing and protect future taxpayers from excessive intergenerational burdens. However, many types of debt are exempt from the statutory limit, which can allow effective debt to greatly exceed the stated cap. Common exclusions include revenue bonds supported by enterprise fund revenue (water, sewer, airport), self-supporting debt, certain lease-purchase agreements and certificates of participation (COPs), debt approved by voter referendum, refunding bonds, and debt issued through state bond banks or special authorities. Chicago's debt limit under Illinois home-rule status is essentially the City Council's political tolerance rather than a statutory cap, and the city has used this flexibility to issue general obligation debt that exceeds what non-home-rule cities could issue. Detroit approached and exceeded effective debt capacity in the years before its 2013 bankruptcy through creative structures including pension COPs, which were later central to the bankruptcy litigation. Cities approaching their debt limits face constrained ability to fund capital projects, forcing reliance on state revolving funds, lease structures, and public-private partnerships. Remaining debt capacity is monitored in the CitySpend 20% debt burden factor of the Fiscal Health Score.

Related Terms

• General Obligation Bond (GO Bond), A municipal bond backed by the full faith, credit, and taxing power of the city, meaning the city pledges to raise taxes if necessary to repay bondholders.
• Assessed Value, The value assigned to a property by a government assessor for the purpose of calculating property taxes, which may differ from market value.
• Debt Per Capita, A city's total outstanding debt divided by its population, a key metric for comparing debt burdens across cities of different sizes.