States have shrunk their budget deficits by half compared to one year ago, yet their debt levels remain nearly unchanged. This is due mainly to states continuing to pour money into pensions and health insurance for government workers and retirees.
This is the key finding of the State Debt Report of the nonpartisan State Budget Solutions organization.
State Budget Solutions pegs total state debts at $4.19 trillion, barely changed from last year’s estimate of $4.24 trillion. California has by far the most debt.
“Fiscal year budget gaps alone fell by more than half. The lack of a subsequent, sizable drop in total state debt, however, shows that the cause of state debt is a systemic one requiring far more than annual budget balancing to eliminate,” the report says.
Most of that debt stems from unfunded pension liabilities, which total $2.8 trillion, a figure nearly four times higher than states officially are reporting. The SBS report explains:
“Market-valued unfunded public pension liabilities make up more than half of all state debt, accounting for $2.8 trillion of the total. These market-valued pension liabilities provide a realistic view of the money owed to public pension systems as a result of years of skipped payments, borrowed funds, and inaccurate discount rate assumptions.
“In comparison to market-valued liabilities, traditionally calculated unfunded pension liabilities hide the true enormity of state debt obligations. Unfunded liability figures from the Pew Center on the States rely on much of the same data that states use to continually underfund their pension systems. While market-valued liabilities total $2.8 trillion, the latest traditionally calculated figures total only $760 billion in unfunded pension liabilities.”
The discount rate is the estimated return on investment a pension fund expects to receive. The higher the discount rate, the higher the expected rate of return, and the less money states and local governments need to contribute to pension funds. Most states have been using discount rates far higher than actual returns.
Last month, for instance, the California Public Employees’ Retirement System (CalPERS) announced a 1 percent return for its 2012 fiscal year, far short of its 7.5 percent discount rate. This huge difference between the discount rate and the actual pension investment performance means the state and local governments must put much more money into the pension system to keep up with the growth in liabilities.
In addition to pension liabilities, there are debts related to state-issued bonds and lease obligations, and liabilities such as health insurance and other non-pension benefit guarantees to government workers. These debts total approximately $1.2 trillion.
States also owe smaller amounts, including about $55 billion in budget deficits and $25 billion in unemployment fund loans owed to the federal government.
The most heavily indebted states, according to the SBS report, are
- California, with $617.6 billion owed.
- New York, with $300.1 billion owed.
- Texas, with $287 billion owed.
- New Jersey, with $282.4 billion owed.
- Illinois, with $271.1 billion owed.
State Budget Solutions’ Third Annual State Debt Report: http://www.statebudgetsolutions.org/publications/detail/state-budget-solutions-third-annual-state-debt-report-shows-total-state-debt-over-4-trillion