At a time when property valuations are increasing and Iowans are struggling financially from inflation, local communities must focus on paying their debt off, not finding new spending projects.
Iowa governments took on nearly 7% more debt — almost $1.3 billion — in fiscal year 2022 (FY22). The current Outstanding Obligations Report from the state treasurer shows this to be the largest increase since FY14. Iowa’s state and local governments now collectively owe $20.2 billion, which is roughly $6,320 per resident.
Especially with interest rates rising, property taxpayers should be asking their local officials — from cities, counties, and school districts — whether this is the right time to increase debt spending. Local leaders often tout spending projects as paths to prosperity for their cities and school districts, but this is simply a political assertion. Debt costs money. As interest payments, bond ratings, attorney fees, and more pile up, a pay-as-you-go approach is preferable over taking on debt whenever possible.
Among all levels of Iowa government with outstanding debt, cities currently hold the most. In FY22, cities had $7.5 billion in outstanding debt obligations, requiring $663 million in annual debt-service payments, or 7.7% of total budgeted city expenses.
Breaking down the total outstanding debt statewide by purpose, more than half of FY22 debt went toward public buildings/schools (36%) and utilities/sewer systems (24%). Smaller amounts funded transportation, housing and urban development, health care, and public safety.
Another important way to assess government debt is by the types of debt that have been issued. General obligation (GO) bonds, which voters are accustomed to seeing on the ballot, are the most familiar. This type of debt is backed by the full faith and credit of the government responsible for the bond, which typically translates into the lowest interest rates because governments can always raise taxes to pay bondholders. By voting on and approving such debt, residents have agreed to take the risk upon themselves.
Another common type of government debt is the revenue bond. This type of debt is supported by a specific revenue source, such as income from a utility (water/sewer), enterprise revenue (landfills/ garbage facilities), or a local option sales tax. In theory, the issuing government body may not be responsible for the debt if the revenue doesn’t appear, so the interest is typically higher than for GO bonds. However, defaulting on such bonds can affect the government’s bond rating and make borrowing without voter approval more expensive in the future, so officials have incentive to make bondholders whole no matter what happens.
Overall, Iowa’s debt is 46% general obligation bonds, 50% revenue bonds, 3% loans, and 1% lease-purchase agreements.
Iowa’s state constitution limits the debt of each political subdivision to 5% of the value of the taxable property within it, but this limit only applies to debt payable from property taxes, typically GO bonds. Revenue bonds or other types of debt paid from sources other than property taxes have no legal limit.
To some extent, the higher-than-normal debt in FY22 can be attributed to a carryover from the pandemic and the federal stimulus money sent to local governments, which flooded cities, counties, and school districts with cash. The combination of surging cash and record low interest rates encouraged cities to pursue infrastructure projects and refinance previously held debt.
In the new high-interest-rate environment, these activities need to change. Debt places a burden on taxpayers and can crowd other priorities out of local budgets. At a time when property valuations are increasing and Iowans are struggling financially from inflation, local communities must focus on paying their debt off, not finding new spending projects. A temporary increase for a good reason is understandable, but constant high levels of debt put the taxpayer on the hook for growing interest payments in the future.
The following table shows the top cities, counties, and school districts across the state of Iowa when it comes to debt levels. If you are interested in digging into the debt held by your local governments, visit ITR Local and review the county, city, and school district debt pages.