Why States Should Cut Up Their Credit Cards

Coast to coast, states are leaving taxpayers on the hook for massive debt payments over the coming decades as state governments continue to abuse their metaphorical credit cards.

A new report released last week says state governments have more than $5.1 trillion in debt, largely because of pension obligations to former and current state employees, which states now lack the assets to pay off. Pension debt accounts for more than $3.9 billion of that total, but the report also includes outstanding bonded debt, unemployment compensation trust fund debt and debt in the form of “other post-employment benefits,” or OPEB, which is closely linked to pensions and includes retired public employees’ health-care costs.

Though the totals vary significantly from state-to-state, it adds up to an average of more than $16,000 of debt for each man, woman and child in the United States.

Given states’ propensity for putting things on their credit cards, it’s those children who probably have the most to worry about.

Bob Williams, president of State Budget Solutions, the fiscally conservative state policy think tank that authored the report, said the trillions of dollars of debt are the result of “broken promises, reckless leadership and fiscal irresponsibility.”

“Millions of Americans who interact with or rely on their state governments each and every day must understand their state’s true fiscal condition,” Williams said. “Unaddressed state debt will take its toll on state budgets as the money once expected to fund education, health care and more will have to be redirected to pay for these broken promises.”

California leads the pack with $778 billion in state debt, mostly as a result of the state’s $584 billion unfunded public pension liability. New York ($388 billion),Texas ($341 billion), Illinois ($321 billion), and Ohio ($321 billion) round out the top-five states with the largest amounts of state debt.

Residents of Alaska ($40,000 per resident) and Hawaii ($33,000) have the highest levels of state debt on a per capita basis, followed by Connecticut ($31,000), Ohio ($28,000) and Illinois ($25,000).

At the other end of the scale, residents of Indiana have the lowest per capita debt, but they would still be on the hook for more than $6,300 per person.

The point of the study is not to suggest that states should — even if they could — send each resident a bill for their part of the debt at the end of the month. But breaking down the burden to an individual level gives an indication of how much money state governments will have to drain out of the economy to pay off their borrowing.

In some ways, it might be better to send a bill to each resident and be done with it. Instead, states generally pay back bonded debt over a 20-year period after each round of borrowing, and interest costs mean taxpayers end up paying even larger amounts.

In Illinois, more than $1.45 billion on this year’s general budget will be used simply to pay interest on the state’s $130 billion in overall debt, largely driven by borrowing to cover pension obligations.

“Every dollar spent on interest is a dollar not spent on some other pressing need,” said Judy Baar Topinka, the state comptroller.

Illinois has been heaping more debt on beleaguered taxpayers. The state has borrowed $16 billion in the past four years, and taxpayers are facing debt service costs of more than $1 billion per year until the 2030s.

Across the board, pensions are the largest drivers of debt in almost every state.

State Budget Solutions maintains that many states are using inaccurate accounting in determining their pension debt — essentially, states assume they will earn larger returns in future investments and use those assumed future returns to hide part of the debt. In their report, the think tank used a lower rate of future returns in an effort to have a more accurate picture of what taxpayers owe in the coming decades.

“No other debt issue Oklahoma faces holds a candle to the unfunded pension liability. Other than the pension liabilities, the vast majority of the state’s debt is within acceptable, conservative ranges and managed very responsibly,”John Estus, spokesman for the state Office of Management and Enterprise Services, told Oklahoma Watchdog in response to the report.

As sobering as the State Budget Solutions’ report may be, it may not tell the whole story.

The report did not include off-budget borrowing authorities established in many states to take on debt for economic development purposes or to run highways and bridges.

The Pennsylvania Turnpike Commission holds more than $8 billion in debt, ultimately backed by the drivers and taxpayers in the state, but that does not show up on the State Budget Solutions report. Ditto for the $18 billion in debt held by the Port Authority of New York and New Jersey, which oversees the bridges, tunnels, ferries and mass transit operations linking northern New Jersey with New York City.

Dozens of similar authorities exist in every state across the map.

It also does not consider municipal-level debt that taxpayers will ultimately be responsible for paying off, a particularly bad problem in large cities buried by pension costs, such as Detroit, Cincinnati and Chicago.

In New Jersey, for example, the report says residents owe $214 billion in debt. Including local and county pension obligations would increase that figure to more than $277 billion, NJ Watchdog reported this week.

But there are signs state governments might be starting to take their debt problems seriously.

In California, the state with the highest amount of total debt, Gov. Jerry Brown this week proposed spending $11 billion next year to pay down a chunk of the state’s long-term obligations. He said the state must address its “wall of debt.”

The state’s official estimated debt is $450 billion, but State Budget Solutions estimates California to have more than $770 billion in debt to pay off.

Either way, $11 billion is a start. But California and other states have a long way to go.

Eric Boehm
for The Daily Reckoning

Ed. Note: Most people have no idea what portion of the public debt they’ll have to pay. And when the debts eventually come due, there’s bound to be some serious sticker shock. When that happens, you’ll want to be prepared for anything. Sign up for Laissez Faire Today right now, and start learning how you can protect your health, wealth and liberty no matter what happens.

Original article posted on Laissez Faire Today