State Budget Solutions

Frank Keegan

If our states and municipalities were trauma victims, they would be bleeding out while doctors argued about injuries. Even as financial gurus Paul Volcker and Richard Ravitch studied the municipal and state fiscal crises for a report released this week, public pension debt alone grew to an untreatable $4.6 trillion, according to analysis released Wednesday by economist Andrew Biggs for State Budget Solutions.

Faced with a patient suffering equivalent life-threatening injuries, doctors would order radical surgery, stat. Stop the bleeding. Operate. Amputate. Suture.

But politicians are not doctors — in fact, politicians inflicted the wounds — so they continue palliative measures hiding self-indulgent deception, denial and outright corruption that put America’s economy at risk.

In Report of the State Budget Crisis Task Force, Volcker and Ravitch rehash old data proving state governments were fiscally injured even before the Great Recession, which merely revealed the depth and severity of their trauma.

They say clearly in the introduction: “… the magnitude of the problem is great and extends beyond the impact of the financial crisis and the lingering recession. The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened.”

Of course, they don’t include government obligations to bleeding taxpayers among the priorities for care.

Their study examined six states, but the conclusions apply one degree or another to every state, county, city, town and township in America.

To grasp how fast we’re hemorrhaging, just consider public pensions. The report cites unfunded liabilities at “… approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used.”

Biggs used the latest comprehensive pension data available and, based on those “conservative” accounting standards universally accepted by economists, calculated the pension debt at $4.6 trillion.

That is an increase of almost 50 percent to as much as 300 percent to in less than two years.

Unfortunately, it is the good news. The bad news is pension fund investments remained flat through the first quarter of this year as liabilities increase, mushrooming to cavitate the deeper wound.

The report outlines an array of other traumas first indicated in a Government Accountability Office report released two years ago, based on pre-recession data, concluding “state and local governments must steadily decline.”

GAO said then, “… closing the fiscal gap over the next 50 years would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of a similar magnitude ….”

GAO’s update released in April calculated the required cut or tax increases — every year for 50 years — was up to 12.7 percent, doubling taxes every five years or so to consume the entire U.S. economy in 50 years.

Don’t fall for the declining revenue myth Volcker and Ravitch cite in their Task Force introduction, claiming, “State tax revenues are recovering slowly and remain below their pre-crisis levels.”

According to the April GAO update including state and local taxes, “…from the second quarter of 2009 to the third quarter of 2011, total tax receipts increased nearly 11 percent, returning to prerecession levels of 2007.”

The bottom line for both reports is that no matter how much state and local politicians tax us, it never will be enough.

Even though 43 states and many municipalities recently imposed limited pension reforms on future benefits, those do little or nothing to reduce the increasing unfunded liability. Taxpayers will have to wait decades before those reforms produce significant relief.

Meanwhile, as a report issued this week by the Urban Institute points out: “When state pension plans are underfunded, someone eventually has to pay for the shortfall.”

Politicians are figuring out that citizens and businesses devastated by the Great Recession are not going to stand still for crippling tax increases that produce no government benefits or services of any kind.

So instead of working to heal, they just try to dope us up and push this onto future public workers and taxpayers, the way they have for decades.

The bigger problem is that pensions and the other five “major threats to fiscal sustainability” identified by the Task Force are not the only deep hidden wounds killing local and state governments.

Also hidden are billions of dollars in bond issues the Securities and Exchange Commission is trying to find.

And GAO has found at least $3 trillion in looted state catastrophe insurance funds.

Then there is more than $2 trillion in “critical infrastructure” beyond design life as of 2009 that the American Society of Civil Engineers says must be upgraded or replaced.

Almost three years ago, I estimated the total hidden long-term liabilities of state and local governments at $18 trillion: No matter how bad you think it is, it’s worse.

Since then, it has gotten even worse. It is getting worse every minute. Wounds to the body politic just keep on coming.

Our local and state governments are bleeding out. They need radical surgery, fast.

The Task Force report is drawing attention to realities others have been sounding alarms about for years.

Now is the time to act. Stat.

Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.

frankkeegan@statebudgetsolutions.org