House Budget Committee Chairman Paul Ryan of Wisconsin talked yesterday about cutting federal spending by a staggering $6 trillion in the next decade and in the process eliminating the $14.3 trillion national debt. As incredible as these numbers are, all 50 states face perilous fiscal times as well, but they are less able to cope than the federal government.
States can’t print money, as the federal government can, and they are far more limited in who and how much they can tax. There is one common factor here, though: Washington and the state capitals are drowning in red ink largely because professional politicians promised excessive entitlement benefits without making provisions to pay for them.
The entitlement crisis is seen most vividly at the state level in the unfunded liabilities of government employee pension systems. But getting a handle on the true scope of these debts is difficult. As Bryan Leonard of StateBudgetSolutions.com wrote in a recent study, “one of the most insidious aspects of pension liability is its stealth nature. Pension obligations don’t appear on state balance sheets. As such, states with billions in unfunded pension liabilities may technically brag of ‘balanced’ budgets while being swamped by pension debt. For example, Arkansas claimed a balanced budget last year, but had at least $2 billion in unfunded pension liabilities. Indeed, the unfunded pension promises in most states dwarf the total outstanding debt, tax revenues and spending.”
Fortunately, three recent studies have taken different approaches to this problem and as a result produced ranges of estimates for the liabilities for each of the states. Take Wisconsin, for example, where Gov. Scott Walker and a new Republican state legislative majority tried to address the Badger State’s fiscal problems, only to run into massive opposition from Democrats and government employees. The Pew Center on the States, which compared the value of promised benefits with actual state assets on hand, concluded that Wisconsin taxpayers owe nearly $263 million to present and future government retirees.
Andrew Biggs of the American Enterprise Institute used a different measurement — liabilities compared to conservatively projected stock market returns — and concluded that Wisconsin’s true liabilities are in excess of $62 billion. The numbers looked only slightly better under a projection by Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, who measured liabilities based on the discount rate on zero-coupon Treasury yields. Their method produced a Wisconsin estimate of $56 billion.
For comparison purposes, California’s estimates range from a low of $59 billion to a high of $298 billion. New York is $10.4 billion to $143 billion, Ohio is $19.5 billion to $187 billion and New Jersey is $34.4 billion to $144.8 billion. Even under the conservative Pew estimates, no state’s pensions are properly funded. At $179 million, Washington State has the lowest pension liability among the 50 states. These liabilities are coming due as the Baby Boomers begin to retire, which means entitlement reform — at the federal and state levels — is likely to be the defining political issue for the next decade.