America's Secret Trillion Dollar Debt
When times were good, governors who cut taxes received praise for their "tough" fiscal conservatism. But they may have left taxpayers with a $1 trillion tab.
A PS to my recent column about the huge mind-crunching pension liabilities of state governments: $1 trillion in total, according to the Pew Center for the States.
First, here's a way to think about how much $1 trillion is:
All the states combined collected a little under $2 trillion in revenues before the onset of the recession. For the states to pay an additional $1 trillion would require full economic recovery plus then a 50% increase in all state taxes.
Second, the $1 trillion shortfall casts a disturbing light on those famous CATO rankings of the "fiscal conservatism" of state governors.
See, it turns out that one way to keep current expenditures down is to omit contributions to your state's pension fund.
The latest CATO ranking of the governors awards "A"s to four state executives:
Louisiana's Bobby Jindal
West Virginia's Joe Manchin
Minnesota's Tim Pawlenty
South Carolina's Mark Sanford.
All four men get credit for boldly cutting taxes and resisting tax increases. (Indiana's Mitch Daniels received only a “B” in large part because - in Cato's words "he has not pushed for permanent state tax cuts.")
Now let's see how these four "A" governors do by Pew's scheme. (All numbers below are from 2007 and 2008, ie before the recession hit.)
Pew estimates Louisiana's total retirement liability at $12.54 billion. How much of that is unfunded? Virtually all of it - $12.54 billion of state commitments left to be paid by future taxpayers. To fund those obligations would cost Louisiana a $1.2 billion annual contribution. Louisiana actually contributed $270 million.
West Virginia's liability is estimated at $6.4 billion. Of that liability, $6.1 billion is unfunded. To give credit, West Virginia has stepped up its contributions to its plan. Of the $175 million in estimated required contributions, West Virginia did pay $144 million. However, unlike Louisiana, which has negotiated reductions in future benefits with its employees, West Virginia has made no structural reforms.
Minnesota's obligations are happily more modest - but still no better funded. $1.011 billion in obligations. $1.011 of that obligation unfunded. $110 million in annual contributions required. $46 million actually paid. No steps toward pension reform taken.
South Carolina looks much more alarming. $8.8 billion in obligations. $8.6 billion unfunded. $762 million due each year. $241 million actually paid.
(Indiana has good news and bad news in this regard. At $442 million, its retirement obligation is blessedly light. But none of that obligation is funded, all will have to be paid out of future current revenues.)
All of which is a reminder that measuring current tax rates alone is a very, very flawed way to measure the burden of government.
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