Interest rates are rising, but states aren’t worried yet. Here’s why.

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It’s Saturday, Oct. 28, and we’d like to welcome you to the weekly State and Local Roundup. There’s plenty to keep tabs on, with a federal court striking down Georgia’s voting maps, the Texas House voting to let state and local law enforcement arrest migrants, and universal school choice voucher programs potentially busting some state budgets.

But first we turn to Wall Street, where U.S. Treasury 10-year bond rates have hit highs not seen since the Great Recession. That’s usually a red flag for state and local governments because they use bonds to finance major infrastructure projects. If the rates on Treasury bonds go up, the rates on all sorts of other bonds go up too.

This year, though, state and local governments are in good shape to withstand the higher costs of issuing debt, according to experts. Thanks to federal pandemic aid and strong revenues over the last few years, one of the biggest things going for states right now is that most of them are flush with cash.

“Overall, states remain in a strong fiscal condition,” said Brian Sigritz, the director of state fiscal studies for the National Association of State Budget Officers. “States still have very high rainy day fund levels, and they’ve taken steps to prepare for economic slowdown.”

Having money on hand means that state and local governments aren’t in a hurry to borrow. They can use other revenue streams, federal grants or cash they already have on hand. In fact, Sigritz points out, less than a third of states’ total spending on capital projects comes from bond proceeds.

Fitch Ratings’ Eric Kim, the head of U.S. state ratings, said states haven’t had to change their strategies for issuing bonds yet.

“States are absolutely still in the capital markets and issuing debt,” he explained. “It’s just that they don’t have to do quite as much because they have all the reserves and cash resources on hand that they’ve been able to build up over the past few years.”

Kim also noted that state officials have had a long time to prepare for the higher interest environment. The yields for U.S. Treasury bonds have been climbing for nearly two years. State lawmakers have been cautious when crafting their budgets, including enough money to pay off bonds at higher rates than the states are currently paying. “There’s some built-in cushion to most budgets,” he said.

Cities and other local governments are also unfazed by the higher rates, according to Michael Rinaldi, the head of Fitch’s U.S. local government ratings. When it comes to starting infrastructure projects, the more pressing issue is finding workers and keeping up with inflation in the cost of construction materials and personnel.

“Access to capital might cost them a little bit more,” he said, “but remember, we’re talking about higher interest rates over a 30-year period of debt repayment. So, if it’s a central project that they need to proceed with, I don’t think the higher interest rate environment is going to make them put that project on the back burner.”

Cash-strapped states often resort to short-term borrowing so that they can keep government operations running smoothly while they wait for tax returns to come in. But states like Texas that regularly used short-term debt before the pandemic haven’t had to do it in recent years, which means they won’t have to pay higher interest on those loans either, Kim pointed out.

In fact, many states have used their unusually flush accounts over the last few years to get rid of old debts. Montana Gov. Greg Gianforte signed a budget earlier this year that will pay off the state’s general obligation debt, fulfilling his goal of making the state “debt-free in ’23.” New Jersey lawmakers created a special fund in 2021 to avoid taking on more debt for schools, transportation projects and other capital expenses. And Illinois paid back its “Rail Splitter” bonds of tobacco settlement money that it issued more than a decade ago, marking “the last of the Great Recession deficit financing” that Illinois still owed, Kim said.

Higher interest rates could even be a boon to states in some cases, he added. They are sitting on a lot of cash, and “the amount of interest they are earning on all that cash is remarkable,” Kim said. “They’re getting tens of millions of dollars that they just have never seen before in interest income—and certainly haven’t budgeted for—so that’s been pretty helpful for them.”  

Keep reading as there’s more news to use below, and make sure to come back here for the week’s highlights. If you don’t already and would prefer to get it in your inbox, you can subscribe to this newsletter here. We’ll see you next week.

News to Use

Trends, Common Challenges, Cool Ideas, FYIs and Notable Events

• GUN VIOLENCE: Gun laws in spotlight after deadliest shooting in Maine’s history. Maine’s yellow flag law was supposed to prevent the kind of mass shooting that claimed 18 lives in Lewiston Wednesday night. The law allows police officers to seize weapons from people who are a risk to themselves or others. But it was not invoked against Robert Card, 40, of Bowdoin, even though local law enforcement said he spent weeks in a mental health facility this summer, claimed to hear voices and threatened to shoot up a National Guard base in Saco. The law, considered by some to be a model for national legislation because of its due-process safeguards, is now sure to face renewed scrutiny as gun control activists in Maine and across the U.S. call for tougher gun laws. Maine rolled out the yellow flag law in 2020 after officials rejected the more common red flag law adopted by many states. Both versions are aimed at getting guns out of the hands of people experiencing a mental health crisis. Maine’s version requires a medical assessment and recommendation, while police can act without those prerequisites in states with red flag laws.


• REDISTRICTING: Georgia’s voting maps are struck down. Republicans in Georgia violated a landmark civil rights law in drawing voting maps that diluted the power of Black voters, a federal judge in Atlanta ruled on Thursday, ordering that new maps must be drawn in time for the 2024 elections. The legislature must now move swiftly to sketch out congressional and state legislative districts that provide an equitable level of representation for Black residents who make up more than a third of the state’s population. Gov. Brian Kemp, a Republican, responded by calling a special session of the Georgia General Assembly that will begin on Nov. 29, giving lawmakers 10 days to meet a Dec. 8 deadline. According to the judge, the timeline ensures that “if an acceptable remedy is not produced, there will be time for the court to fashion one.”


• BORDER: Texas lawmakers vote to let local police arrest migrants. A heated moment between Democratic and Republican lawmakers Wednesday caused an hours-long delay in the Texas House as the chamber debated a sweeping border security proposal that would allow for state and local police to arrest migrants living in the state without authorization. The House passed the bill, as well as two others, in a floor session that ended well past midnight. The other pieces of legislation increase the penalty on those engaged in the smuggling of migrants and direct an additional $1.5 billion for the building and maintenance of a state border wall. The proposals head to the Senate, except for the anti-smuggling bill, which heads to Gov. Greg Abbott’s desk.


• SOCIAL MEDIA: States sue Meta claiming it harms children’s mental health. Forty-one states, including California and New York, are suing Meta Platforms Inc. for harming young people and contributing to the youth mental health crisis by knowingly and deliberately designing features on Instagram and Facebook that addict children to its platforms. A lawsuit filed by 33 states in federal court in California, also claims that Meta routinely collects data on children under 13 without their parents’ consent, in violation of federal law. In addition, nine attorneys general are filing lawsuits in their respective states, bringing the total number of states taking action to 41 and Washington, D.C. The suits seek financial damages, restitution and an end to practices that violate the law.


• ELECTIONS: 2023’s state and local tax ballot measures. Come the Nov. 7 elections, there are a number of important tax questions on state and local ballots, according to the Institute on Taxation and Economic Policy. Voters from Ohio to Texas will weigh in on everything from wealth taxes to property taxes next month. Texas, for instance, could vote to prohibit wealth taxes, and Ohio voters could decide to legalize and tax cannabis.


• AUTONOMOUS VEHICLES: Cruise halts driverless car operations nationwide. Self-driving car company Cruise has halted driverless car operations nationwide in an effort to rebuild public trust around the technology. The California-based company, which is a subsidiary of General Motors, announced the change Thursday evening in a post on X. The announcement came just two days after the company paused services in San Francisco after the state Department of Motor Vehicles suspended its testing and deployment permits. The suspended permits followed a high-profile incident and spat between the California department and the self-driving company after the DMV accused the company of withholding information about a hit-and-run incident earlier this month, according to Route Fifty’s Daniel C. Vock.


• REDISTRICTING: North Carolina has new maps for the 2024 elections. North Carolina’s new maps for the 2024 elections, passed by the General Assembly on Wednesday, are likely to give Republicans who drew them at least three more seats in Congress and shore up their supermajority in the legislature. With state law allowing no role for the governor in redistricting, Democratic Gov. Roy Cooper cannot take any action to block them from becoming law. Legal challenges to the new maps are all but certain, but opponents will likely need to focus on racial gerrymandering. After gaining a Republican majority in the 2022 elections, the state Supreme Court said that it would not rule on claims of partisan gerrymandering.


• SCHOOL VOUCHERS: High adoption rates may bust some state budgets. In some states, higher-income families can now use taxpayer money to cover private school tuition—and more people than projected are taking up the offer, which might force scrambles to shore up state budgets. Initially, the programs were designed for lower-income students, but that’s changing. Since last year, nine states have adopted universal school choice vouchers—programs that phase out, eliminate or significantly raise income limits. “It busts the budget because it’s taking on as a public expense what’s previously been a private cost,” Josh Cowen, an education policy professor at Michigan State University, told the Associated Press. Four states—Arizona, Florida, Iowa and Ohio—have reported numbers with more approved applications than expected. The states might need to come up with more money for their programs as a result. In the remaining five, it’s too soon to tell the effect.


• WATER: Disaster averted on Colorado River—for now. Enough water likely will fill the Colorado River’s two major reservoirs for the next three years to stave off a hydroelectric power failure and other worst-case scenarios, federal officials said Wednesday. The declaration is based on unexpectedly heavy snowfall in the Rocky Mountains last winter and states’ commitments to reduce water use. With the improved forecasts, the federal government appears poised to move forward with a plan by the seven states in the Colorado River Basin to reduce use for the next three years. Earlier this year, federal officials proposed forcibly cutting the amount of water sent downstream to the Lower Basin if the states could not find a compromise on reducing use. On Wednesday, the officials said they had ruled out those forced cuts.


• HOUSING: Following probe, S.F. ordered to change how it approves new housing. California housing authorities are demanding a host of changes to the way San Francisco approves new housing following a yearlong state review into the city’s notoriously difficult permitting process. The first-of-its-kind probe found that the city’s policies and politics stifle the construction of apartments or condos at nearly every step, driving developers to pursue business elsewhere. The state’s report, released Wednesday, spells out 18 actions the city must take and a specific timeline for completing them. The actions include rewriting city laws governing the housing permitting and appeals process. Last week at an event in Washington, D.C., Mayor London Breed addressed the issue of how long it takes to get housing built in the city and talked about efforts to streamline construction there.


• COVID FUNDS: $1.4B in potential federal revenue unaccounted for in Maryland. During the pandemic, federal COVID relief packages distributed more than $4 trillion across the U.S. But in Maryland, where lawmakers have for years tried to understand how the money it received was being utilized, an audit released Tuesday found a “pervasive lack of documentation” and that the state Department of Health did not properly monitor how the state used millions of dollars during the public health emergency. The audit also identified questionable management of contractors. “This is the worst audit I’ve ever seen,” said Sen. Clarence Lam, chair of the state Senate Joint Audit and Evaluation Committee. Auditors concluded that $1.4 billion in potential federal revenue is currently unaccounted for and will need to conduct a more comprehensive analysis to determine whether the state can be reimbursed for the expenses. The shortfall could exacerbate concerns about a tight budget in the upcoming fiscal year.

Picture of the Week

Back in the 1970s, the famous “I Love New York” logo gave the struggling city a boost. This week, San Francisco’s business leaders debuted a new $4 million ad campaign they hope can do the same for their city. New signs with the logo “It All Starts Here” have started popping up in the windows of businesses across the city. The placards, with the motto depicted like two street signs crossing at an intersection, are all part of a campaign funded by the city’s business leaders to try to lure new business to San Francisco and repair the city’s beleaguered image. “It’s meant to remind San Franciscans that the city of cable cars, Levi’s jeans, the Summer of Love, Gap Inc., Uber, Harvey Milk and the Golden State Warriors still has an exciting future ahead of it,” reported The New York Times.

What They’re Saying

"I am mayor because God gave me the authority to be mayor." 

New York City Mayor Eric Adams, who made the comment Wednesday in an interview on Radio Visíon Cristiana, has frequently turned to his religious base during his tenure. Talking about the city’s migrant crisis, the mayor suggested the city could pay houses of worship if they provided housing to migrants. "If we could allow our houses of worship to house the migrants in their various spaces that they have available, it would have a major impact on the cost [of housing]," Adams said. "If you have a large parking lot and are willing to put up a tent, we could pay you for the space.” He added that other indoor spaces that churches have available could be used as dormitories.