What Happens to Your City When the Federal Check Doesn’t Clear?

For my entire adult life, people have warned that Japan's debt was going to blow up its economy. I remember being a much younger investor thinking that it was an obvious trade — no economy could have a debt-to-GDP ratio that high and not lose control of its bond market. At the time, I was very frustrated at being too poor, and too much of an outsider, to be able to take advantage of this obvious opportunity.

How naive I was. And, as it turns out, quite lucky to have avoided that mistake.

Japan has had decades of sustaining what seemed unsustainable, so much so that the phrase "widowmaker trade" was coined to describe the bet against Japanese bonds. It was a sure thing — until it wasn't. It never paid off. Lots of really smart people lost lots of real money waiting for it to happen. 

And yet, now, in 2025, the Japanese Prime Minister is standing before parliament and saying the country's finances are "worse than Greece." That statement came after a failed auction of 20-year government bonds that pushed Japanese yields to their highest levels this century. 

Long-term borrowing costs are spiking across the Japanese yield curve, a sign that investors are no longer willing to hold Japanese debt without a serious premium. The long-experienced stability is cracking, and the bond market is starting to price in the consequences of decades of fiscal denial.

Now, let's be clear: There is no way for Japan to finance its massive public debt at higher interest rates. No chance. Its debt-to-GDP ratio is well over 200%. Even modest increases in borrowing costs quickly balloon into unmanageable interest payments. That is what it means to be worse than Greece: not just that your debt is enormous, but that the cost of carrying it becomes impossible to bear.

When you can't even borrow enough to pay the interest on your own debt, you're not running out of time. You are out of time.

This should give last week's domestic news here in America a bit of urgency: Moody's downgraded the sovereign debt of the U.S. federal government. We are now officially no longer a triple-A country. The last ratings agency to issue such a downgrade has now caved to the obvious. The United States is deeply in debt, is planning to indefinitely run unsustainable deficits, and the world has noticed.

If you are part of a local government, you now need to ask yourself: What happens when the check from Washington doesn't clear?

Welcome to the Deficit Circus

This is where I get more than a little frustrated with the cultural dialogue we have about the nation's debt. On one side, you've got people who become hyper-focused on deficits the moment their team is out of power, then turn around and shrug at trillion-dollar shortfalls when they’re the ones writing the checks.

Then there are the Modern Monetary Theorists who suggest that debt and deficits are just abstractions. If only we were enlightened enough to see that money itself is like fine art — something we collectively agree has value and therefore can never truly run out. That works great in a classroom, but in reality? Try explaining your theory to a bondholder demanding a higher yield.

And of course, there’s the crypto crowd. Brimming with techno-optimism (or is it nihilism?), they don’t just predict a collapse in the dollar, they seem to cheer it on. As if the destruction of the global financial order is going to usher in a golden age of decentralized utopia. Spoiler: It won’t.

Whether it’s partisan emotionalism, intellectual abstraction, or digital hubris, all of these cultural narratives have given us a massive excuse to avoid the conversation we actually need to have: an honest, painful one about the limits of our current financial trajectory.

Abstractions may dominate our national conversation, but for the cities and towns we live in, the consequences of years of fiscal denialism are about to get painfully real.

Cities Are Not Ready

I've spent a lot of time around local government officials and staff, and I can say this confidently: Most cities are completely unprepared for a world where federal money is not easy to get.

Worse, many of them are banking on that money. Literally. Their budgets, their growth plans, their transportation improvements, they're all written as if more federal support is a foregone conclusion.

We've highlighted Houston here recently, with its $160 million deficit and $14.6 billion negative financial position. I'm not trying to pick on Houston (it's far from the worst major city), but it is often cited as a place committed to aggressive growth, limited government, and prudent fiscal management. Beyond the hype, this is what a structurally imbalanced budget looks like.

Net Financial Position measures the difference between financial assets and liabilities. If this is net negative, it means past spending will need to be paid for with future revenue. For Houston, this won’t get better without structural changes.

Now, look at what happened after 2020. That improvement in Houston's finances wasn't the result of smart reform or strategic change — it was the result of a flood of federal pandemic aid.

Government-Transfers-to-Total-Revenue evaluates the percentage of a city’s budget that comes from state/province or federal funding. High reliance on these sources makes a city more vulnerable to policy or funding changes. Houston has no permanent revenue stream to replace the pandemic relief funds.

And since we're talking about rising interest rates — and the potential loss of the ability to suppress them — it's important to point out how Houston's decades-long decline in Net Financial Position was temporarily softened by a unique set of circumstances: Historically low interest rates allowed the city to both borrow more and spend more while simultaneously paying less in interest. It was a convenient, unsustainable anomaly. That trick won't work again.

Net Debt-to-Total Revenues shows the size of the future financial obligation relative to the city’s income.

Interest-to-Total Revenues tracks what percentage of a city’s revenue goes toward paying interest. While the future financial obligation looks like it’s shrinking, this is only possible because interest rates have been low. When interest rates rise, refinancing to a lower rate isn’t possible, and so more of the city’s budget must go toward paying interest. This puts pressure on the budget.

This isn’t just a Houston problem. Nearly every city we looked at with the Finance Decoder was already on a downward financial trajectory before the pandemic. Revenues were failing to keep pace with liabilities. Maintenance was being deferred. Liabilities were being shifted around to close routine budget gaps.

Then the pandemic hit. And ironically, for many local governments, it was a fiscal reprieve. Federal aid flooded into city budgets. Interest rates dropped to historic lows. The financial freefall slowed or even briefly reversed. It gave the illusion of stability, but it was only an illusion.

Today, the federal government is in a far weaker position to help cities in distress. Rising interest rates mean Washington is spending more just to service its own debt, leaving less room for discretionary aid. And if inflation pressures persist, those rates might go much higher.

So we’re not just looking at a future where cities can’t count on federal support. We’re facing one where Washington itself might be powerless to intervene, even if it wanted to.

We Plan Like Money Doesn’t Matter

I'm reminded of a meeting I sat in on back in 2017, one that was very typical of meetings I attended many times during my time as a working engineer. It was hosted by the Omaha-Council Bluffs MPO and included a presentation outlining their regional transportation plan. The room was full of well-meaning professionals. The graphics were polished. The goals were ambitious. And the vision? It was big. Very big.

The first three-quarters of the presentation was packed with elaborate maps, multimodal scenarios, modeled forecasts, and performance metrics tied to everything from safety and equity to accessibility and congestion relief. There were freeway expansions. There were new transit corridors. Bicycle infrastructure. Major system upgrades. Each scenario was presented as if it were shovel-ready, as if we just needed to pick the right configuration and let the money flow.

Then, near the end, they revealed a single financial slide. Quietly. Casually. The total funding gap for their plan was $3.7 billion. Not million — billion. That’s nearly $7,300 for every man, woman, and child in Omaha and Council Bluffs. For a family of four back in 2017, that meant $29,000 in new transportation spending, layered on top of everything they already fund. And still, the presentation just rolled on.

There was no prioritization of projects. No serious talk about what to scale back or delay. No plan to close the gap. Just more slides on long-range visions and "preferred alternatives."

Where is that money supposed to come from? These aren't standalone, one-off projects. They're part of a massive, interlocking system, where each piece is functionally dependent on the others. A new highway interchange requires local road upgrades. A new transit corridor assumes maintenance, operations, and future capital replacements. These projects don't exist in isolation; they're a commitment to an ongoing, layered system of infrastructure, one we're planning as if the funding will simply materialize.

Local governments don't just assume federal support; they depend on it as a default. Most long-range capital plans implicitly (and sometimes explicitly) count on Washington filling the gap. And when the money doesn’t show up? There’s rarely a contingency plan. Rarely a moment of reevaluation. Instead, cities keep building. New commitments stack on top of old ones, often without any reassessment of what’s still feasible.

It’s full speed ahead, as if the partner holding the checkbook isn’t already overdrawn, jittery, and — let’s be honest — completely incapable of bailing anyone out this time.

No One Is Coming To Save You

Here’s the hard truth: The U.S. federal government is broke. Japan is broke. Cities are broke. And the game of kicking the can is ending.

Even if Washington doesn’t default, even if the Treasury keeps issuing bonds, the math is turning against local governments. Rising interest rates mean debt service eats more of every dollar in the federal budget. That leaves less for everything else. Less for grants, infrastructure, and for backstopping local budgets. Even if the political will exists to help cities, the financial capacity likely will not.

We’ve built our cities around implied promises from a partner that no longer has the means to play its part. Let's be honest with ourselves about that.

Local leaders can’t afford to wait for this harsh reality to show up on their own balance sheets. The decisions we make today need to reflect a new assumption: that the support we’ve come to expect is no longer guaranteed.

Strong Towns created the Finance Decoder so that cities can get honest about their numbers. It won’t fix your budget, but it will tell you the truth.

• Is your city financially sustainable?

• Do you have the flexibility to adapt?

• What are you most vulnerable to?

If you haven’t looked at your city’s financial position — really looked at it — now is the time. Not next year. Not after the next grant cycle. Right now.

And if you need help, we're here. We really need everyone to be having this conversation — locally, with neighbors, councils, and community leaders — and then taking their own steps to make their place stronger, more financially productive, and more prosperous.

That starts with our members and our Local Conversations (see if there is one near you), but it can’t end there. We are dedicated to sharing the stories of places that are getting it right. Because when people see what success looks like, when they can point to a city that made smart, courageous decisions and is thriving because of it, that’s when this movement grows.

Don’t wait for the next crisis to fix things. And definitely don’t plan as if the check from Washington will always clear.

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