The indebted states of America

If you define municipal debt simply as what states and localities have borrowed, the total nationwide comes to about $3 trillion. Nevertheless, these governments actually owe more than twice that much, according to estimates from groups like the States Project. The reason for the discrepancy is that states and localities carry another kind of debt—promises of retirement benefits to public-sector workers—and they have radically underfunded the systems that must pay for it. As Boston University Law School professor Jack Michael Beermann wrote recently in the Washington and Lee Law Review, the situation is a “double whammy” for future taxpayers, who not only will have to pay for “the consumption of prior generations” but also will receive “reduced government services” as increased spending on retirement debt crowds out other programs.

Some states have laws stating that annual funding of future pension or health-care payments must be considered part of current budgets, but as Beermann points out, many states don’t. Those states can therefore run deficits—even if they have balanced-budget requirements, as most do—by shortchanging retirement accounts. A report by the Pew Center on the States showed 29 states failing to make the necessary payments into their pension systems in 2010, the latest year for which data are available. Over the last decade, Kansas, a prime offender, has contributed less than 80 percent of the necessary dollars to fund employee pensions, according to a recent report by the Kansas Policy Institute. Even in an economically robust year like 2006, the state government managed to set aside just 64 percent of the necessary funds, one reason that Kansas’s state pension system is less than 50 percent funded.

State and local governments have likewise made ambitious promises to finance the health care of their employees when they retire, yet they have set aside almost no money to do it. Instead, they’re purchasing the health care on a pay-as-you-go basis as workers retire. With workers quitting earlier and living longer, governments suddenly find themselves with little room in current budgets and zero reserve funds. State governments owed nearly $700 billion in health-care promises to retirees, the Pew study estimated, but they had set aside only about 5 percent of that amount. The study found that only one state, Alaska, had paid in advance for more than 50 percent of its obligations. Even states with low levels of other debt had done little to finance retirees’ health-care benefits; Texas, for instance, had set aside just 1 percent of the funds. Similarly, a Pew study of 61 big American cities determined that they owed $126 billion in health-care promises and had paid for only 6 percent.