State governments across the U.S. are racing to attract large-scale data center projects fueled by cloud computing and artificial intelligence; however, a new analysis suggests that the long-term fiscal trade-offs could significantly impact state and local budgets. While the report does not directly address public employee retirement systems, its findings raise questions that are increasingly relevant for pension trustees and administrators, particularly regarding tax policy, infrastructure costs, and long-term fiscal sustainability.

In an August 2025 report, McKinsey & Company examined how states can balance the economic benefits of data center development with mounting infrastructure costs, tax incentives, and resource constraints, warning that the fiscal impact extends well beyond short-term job creation.

According to The data center balance: How U.S. states can navigate the opportunities and challenges, nearly $7 trillion in global capital expenditures is expected to flow into data center infrastructure by 2030, with more than 40 percent of that investment occurring in the United States.

Related: TEXPERS Deep Dive Podcast

TEXPERS members who want a quick, plain-language walkthrough of this report can also listen to a recent episode of the TEXPERS Deep Dive podcast.

In under 15 minutes, the episode breaks down the McKinsey analysis in easy-to-understand terms, highlighting practical questions and considerations that trustees and administrators can bring back to their boards when evaluating long-term fiscal and infrastructure issues tied to economic development.

The podcast is designed for busy pension fiduciaries looking for context, clarity, and actionable insights without technical jargon.

Why pension fiduciaries should pay attention

While the McKinsey report is aimed at state policymakers, its findings are relevant to public employee retirement fund trustees and administrators because state and local fiscal health is closely tied to employer contribution capacity.

To attract hyperscalers and colocation providers, states and local governments often offer sales tax exemptions, property tax abatements, and infrastructure subsidies, McKinsey reported. Over time, those incentives can reduce net tax revenues, particularly once construction activity subsides and permanent employment levels stabilize.

The report notes that data centers are capital-intensive but relatively labor-light once operational, creating a risk that long-term tax concessions may outweigh recurring fiscal benefits. For pension systems, constrained revenues can complicate budget planning and heighten pressure during economic downturns.

Infrastructure growth versus long-term liabilities

McKinsey also highlighted the scale of infrastructure investment required to support data centers, especially in electricity generation, transmission, and water supply.

U.S. data center electricity demand is projected to triple between 2023 and 2030, according to the report, adding roughly 460 terawatt-hours of new demand nationwide. Meeting that demand will require billions in utility and grid investments, often backed by public financing or ratepayer-supported utilities.

Concerns about grid reliability are already emerging. In its 2024 Long-Term Reliability Assessment, the North American Electric Reliability Corporation warned of tightening reserve margins and elevated risk of supply shortfalls in several U.S. regions as electricity demand accelerates.

Water usage is another growing issue. WestWater Research estimates that U.S. data center-related water demand could increase by 170 percent by 2030, raising concerns for drought-prone communities and competing public needs.

For public pension systems, these infrastructure commitments matter because unanticipated long-term liabilities can weaken overall government balance sheets, indirectly increasing financial risk for retirement plans.

Economic development trade-offs under scrutiny

Several states cited in the McKinsey analysis, including Virginia and Ohio, have experienced significant economic activity tied to data center growth, resulting in billions of dollars in supported output and expanded construction employment.

At the same time, policy groups have raised questions about whether incentive structures are sustainable. Policy Matters Ohio, a nonprofit research organization, has argued that long-term tax breaks for data centers could cost the state hundreds of millions of dollars while delivering limited recurring revenue.

McKinsey emphasized that states must evaluate opportunity costs, noting that land, power, and public capital committed to data centers may crowd out other investments, including housing, transportation, and manufacturing.

A planning lens for pension trustees and administrators

Although pension boards do not control economic development policy, the report underscores the importance of coordinated long-term planning, a principle familiar to fiduciaries.

McKinsey recommended that states adopt integrated economic models that assess not only projected job creation and tax receipts, but also infrastructure strain, environmental impacts, and the risk of stranded assets in the event of changing demand forecasts.

For public employee retirement systems, those considerations align with core governance priorities: sustainable funding, realistic assumptions, and resilience through economic cycles.

Why it matters for TEXPERS members

As data center development expands into secondary and emerging markets, including parts of Texas, trustees and administrators may increasingly encounter these issues through budget discussions, legislative proposals, and infrastructure financing decisions.

The McKinsey analysis makes clear that economic growth strategies and pension sustainability are not separate conversations. When states balance development incentives with long-term fiscal discipline, both public services and retirement systems are better positioned to remain secure.

About the Author: Allen Jones serves as TEXPERS' Director of Communications and Event Marketing. He brings more than two decades of experience in journalism and publication management and now guides the Association's strategic communications. [email protected]