EXography: Unfunded public employee pensions drive state debts skyward
By Mark Tapscott
State governments are piling up debt almost as fast as the federal government, with a total of $5.1 trillion now on their books.
Calculated on a per capita basis, the $5.1 trillion represents an obligation of $16,178 for every state resident in the country, according to State Budget Solutions' fourth annual State Debt Report.
State Budget Solutions is a 501(c)(3) educational foundation that focuses on state spending and budget issues.
The $5.1 trillion has accumulated despite various forms of balanced-budget requirements and spending limitations on the books in most states.
The debt also provides a disconcerting look at the value of countless proclamations by state officials from both major political parties across the country about their devotion to responsible spending and running tight fiscal ships.
By far the biggest portion of the debt -- 79 percent of the $5.1 trillion -- is linked to unfundedpublic pension liabilities of state employees and retirees.
The SBS study includes three other factors in its measure of total state debt, including "outstanding government debt, unfunded other post-employment benefit liabilities, and outstanding unemployment trust fund loans."
According to study author Cory Eucalitto, "Together, these four factors present an all-inclusive view of state obligations not conventionally presented but that both lawmakers and taxpayers nonetheless must confront."
Viewed in terms of total debt, big states dominate the top 10, with California being in the worst shape at $778 billion. Most of the Golden State's total is accounted for by public pension liabilities at $584 billion.
Given the prominence of unfunded public employee pension liabilities in state debt, the role of unions representing government workers is an important factor.
Nearly 36 percent of all government employees in America are members of unions, according to theBureau of Labor Statistics, but the situation varies greatly from one state to another.
According to federal Current Population Survey data compiled by unionstats.com, 59 percent of all state and local public employees are members of unions in California.
But New York, which ranks second on total debt, has a far higher portion of its public employees in unions, at 71 percent.
For Illinois, the percentage is 49.8, and for Ohio, 39.7. The Texas percentage of 19 is low in comparison to the other four, but it dwarfs the private sector there, in which only 3.4 percent of employees are union members.
It should be noted that the CPS does not break out unionized state employees separately from local workers, so the relationship between a state's unfunded public employee pension liabilities and its percentage of unionized state government workers is not a direct one.
But it is an important one because public employee unions push for more generous benefits and oppose efforts to reform such programs, according Eileen Norcross, a senior research fellow at George Mason University who specializes in state government issues.
The key factor driving such liabilities is the way state officials measure the financial health of their pension programs, she said.
"The way these things are valued is how much they think the plans will return. That’s very uncertain," Norcross said.
"They tie the liability to the expected return. That’s like saying I’m going to value my mortgage according to the return I expect to get on my 401(k)," Norcross said.
Other factors driving state pension liabilities are "skipping payments, issuing debt to pay for annual contributions, and accounting sleights have all contributed to this problem. Reform in this area is crucial to budget health," she said.
The State Budget Crisis Task Force, another think tank-based effort to address state spending and debt issues, recently offered suggested measures officials should consider to get a handle on spiraling debt:
– Using a form of accrual-based budgeting instead of cash-based budgeting. Doing so would mean recognizing financial transactions in the year they occurred instead of a projected date.
– Going to multi-year budget cycles.
– Maintaining and increasing rainy day funds that are faithfully funded and expended only for specified purposes.
– Using borrowing authority only to support long-term capital projects, not to eliminate existing debt.
The task force was a project of the Pew Charitable Trusts State and Consumer Initiatives.
Mark Tapscott is executive editor of the Washington Examiner.
Click on the map to launch the EXography report which includes an interactive map and charts from the State Debt Report.