Nov 03 2013

Current and future state debt liabilities

Reform Party of California Commentary

Estimates of unfunded state liabilities and other debt vary but they generally run in the low trillions.[1] Among some experts who follow this issue, there is a building consensus that public employee pensions are a significant source of the overall unfunded liability and they have become unsustainable. The degree of the problem varies from state to state and some states are in good shape.

However, for some states the situation is quite serious. A case in point is California. Although politicians here are boasting about a current $1.2 billion budget “surplus”, there is no acknowledgement that the state faces massive unfunded debt obligations. According to the Economist[2], California’s long-term employee pension gap is $1 trillion if one uses the same accounting standards that apply to private companies. A tactic that some states use to assert that their debt obligations are much smaller than reality is to assume a high return on investments such as 7.5%. Ratings agencies such as Moody’s are aware of accounting deceptions that some states use to obscure the size of the problem from the public.[3] That awareness can increase the cost of servicing debt for the states by making state debt offerings more risky.

It is fair to argue that unrealistic return of asset assumptions by states and the people who benefit from those false assumptions is intentional and designed to deceive the public by making state debt loads look smaller than they are. Actual recent return rates have been small, e.g., Treasury bonds yield around 2%. For California’s CALSTRS teachers fund alone it will take an additional $4.5 billion/year for the next 30 years to catch up with deferred payments.[2] Given the facts, a reasonable question for California’s political leaders is obvious: What budget surplus could you possibly be talking about?

California isn’t the only state facing profound problems. Illinois and New York also face severe unfunded debt obligations. States’ unfunded debt obligations are typically a product of two-party political business as usual. In states such as California, creation of the mess at the state and local levels was bipartisan. If you accept the argument that some portion of the problem, maybe most, was grounded in political self-interest as the Economist suggests and/or special interest money (from public sector unions) as is suggested here, it is reasonable to mistrust two-party politics as too self serving. As the reform Party has argued before[4], special interest money and political self-interest both tend to undermine service to the public interest. Unfortunately, these factors are deeply and irrevocably embedded in two-party politics.

The forces involved in creating and maintaining the situation are not new or unique. The Economist pointed out in it’s article that politicians realized long ago that if they offer more to public sector workers, those workers will generally vote for those politicians in the next election. The logic is simple and clear. The beauty of this politics as usual scheme is that the bill does not have to be paid for years and years. Simply put, today’s politicians and special interests saddle future generations with the debts they incur today for their own immediate self-interests. There is no overwhelming concern for what debt loads our kids and their kids will face. If there was real concern, the parties involved would at least have the courage to be more honest and transparent about the situation.

Before it is possible to even begin reestablishing a more healthy balance of service to the public interest, it will be necessary to walk away from both parties. They simply cannot refocus on service to the public interest given the real constraints that limit their capacity to act. Powerful factors including special interest money and political self-interest largely prevents the two-party system to accurately see, much less effectively address, real problems. Real reform will have to come from elsewhere.


1. $4.2 trillion (http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=6bdeeee9-4560-4904-bb2e-73cea6de06ab); $1.4 trillion for retirement benefits alone (http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Pensions_Update.pdf); debt breakdown by state (https://docs.google.com/spreadsheet/ccc?key=0All0h4lh_xOsdGlvbDBTRlZ5Tjk0elVjY0g5aGM5S0E#gid=0).

2. The Economist, June 15, 2013, pages 13-14, online at http://www.economist.com/news/leaders/21579463-states-cannot-pretend-be-good-financial-health-unless-they-tackle-pensions-ruinous-promises.

3. http://www.nytimes.com/2011/01/27/business/27pension.html?_r=0.

4. Special interest money (http://reformpartyca.org/politics-and-special-interest-money/); political self-interest (http://reformpartyca.org/reform-party-of-california-essays-3/).