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Policy: Budgets & Deficits

Mounting state debts threaten basic services

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Opinion,Op-Eds,Budgets and Deficits,Pensions

Citizens across the country count on state governments to help provide quality education, public safety, and health care to the least fortunate among us.

But now, $5.1 trillion in state government debt threatens those basic services and burdens every resident with an estimated $16,178 share of debt.

According to State Budget Solutions' Annual State Debt Study, debt now accounts for 33 percent of annual gross state product and 469 percent of all fiscal year 2012 state spending.

Put simply, this debt will soon cripple state governments’ ability to deliver vital services.

State Budget Solutions’ calculation combines four components to arrive at an amount of state debt far greater than many public officials will acknowledge.

They are market-valued unfunded public pension liabilities, outstanding primary government debt, other unfunded post-employment benefit liabilities, and outstanding unemployment trust fund loans.

In terms of total debt, the rankings are topped by some usual suspects: California ($778 billion), New York ($387 billion), Texas ($341 billion), Illinois ($321 billion), and Ohio ($321 billion).

Other states' dire dilemmas are highlighted when examined from other angles. Alaska's state debt per capita is $40,714, followed by Hawaii ($33,111), Connecticut ($31,298), Ohio ($27,836), and Illinois ($24,959).

Hawaii has the largest state debt compared to annual gross state product at 64 percent. Ohio at (63 percent), New Mexico (62 percent), Alaska (57 percent), and Mississippi (54 percent) round out the top five.

As state legislative sessions get underway, it is equally enlightening to view state debt in the context of annual state budgets.

Nevada's debt equals 1,048 percent of its fiscal 2012 general and other fund expenditures, followed by Ohio (742 percent), Illinois (727 percent), California (647 percent), and Georgia (633 percent).

The largest component of debt is unfunded public pension liabilities. These comprise $3.9 trillion of the $5.1 trillion total, and present states with one of their most daunting challenges in decades.

Unfortunately, many state governments rely on overly optimistic assumptions that disguise the true size of liabilities and leave public pension plans open for political manipulation.

State Budget Solutions’ calculation, unlike traditional reporting, arrives at this startling sum by a risk-free discount rate that, if employed, would guarantee the retirement security promised to so many public employees.

These unfunded pension liabilities, combined with $529 billion in unfunded retiree health care liabilities, reflect the challenges that face state governments as a result of the retirement promises made to public employees.

Unfunded pension liabilities continue to grow, and, despite a small reduction in OPEB liabilities, only 30 states currently have money set aside to prefund these obligations.

If left unaddressed, the cost of state debt threatens to crowd out funding for services Americans count on from their state governments.

Every dollar spent reducing a state’s unfunded pension liability is a dollar that cannot be spent on education or emergency services.

That fact, however, is what drives too many elected officials to “balance” annual budgets by issuing debt, refusing to set aside money to pay for retiree health care obligations, or skipping required payments into state pension systems. Such decisions only perpetuate a vicious cycle.

In the coming months, when budget battles heat up in state capitals across the country, it is imperative that lawmakers act to put their states on sound financial footing.

Citizens need to be aware of the state debt problem and insist that their elected officials address it to guarantee essential services for themselves and to protect their children’s futures.

Bob Williams is the president of State Budget Solutions and a former Washington state legislator.

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