Government Spending

Government Debt on the Road to Ruin

Nearly every state has followed the same basic policy of making promises today and letting someone figure out how to pay for them years from now.

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Americans are addicted to living beyond their means, at least when it comes to the functions of government. That's why the federal debt tripled over the past decade and under President Barack Obama's budget plan would keep growing indefinitely.

Why not? If you don't have to pay for all you get, you're likely to take more than you need.

The problem is hardly confined to Washington. State and local governments can't get away with endless budget deficits because of restrictions on their authority to borrow money. But if you think that keeps them from piling up obligations on future taxpayers, you underestimate their ingenuity.

A common method is setting up generous pensions for government employees while failing to put away the money needed each year to pay the benefits that will inexorably come due. The evidence of where that approach leads is on grim display in Illinois.

Bruce Rauner, the new Republican governor, gave a State of the State address Wednesday that mysteriously failed to address the state's huge public employee pension debt. It's like a biography of George Custer that omits Little Bighorn.

The chance of success is about as small as Custer's. Illinois has a bigger unfunded obligation than any state in the country, exceeding $100 billion and, by some estimates, as high as $250 billion. It has attained that distinction by failures like skipping contributions and assuming the economic good times would never end.

"The deadly combination of nearly 30 years of systematic state underfunding of its employer contributions to the pension systems, followed by the cataclysmic decline in asset values caused by the national meltdown in financial markets over the last year, combined to create an all-time high in the state's unfunded pension liability," said a 2009 governor's task force. These payments now swallow up a quarter of general-fund revenue, at the expense of other programs.

California has a similar problem. Despite the enactment of a modest pension reform bill in 2012, the state controller reported last year that state and local public pension systems now have unfunded liabilities totaling $198 billion—up 30-fold since 2003.

Illinois passed its own mild reform plan, which a state court struck down for violating a constitutional provision that says public pension benefits "shall not be diminished or impaired." If the state Supreme Court agrees, the chance of a true solution will go from slim to none.

If you live in neither of these states, don't assume you are immune. Joshua Rauh, an economist at the Hoover Institution at Stanford University, reports that in the 10 largest cities in America, these obligations have remained swollen despite economic growth and a soaring stock market.

Under the usual accounting standards, they have shrunk less than 2 percent. But under what Rauh regards as a more accurate formula, they have jumped by 40 percent. How did that happen? "Liabilities continued to rise and benefit payments continued to outstrip contributions," he writes.

In a paper published last year in the American Economic Journal: Economic Policy, Rauh and University of Rochester economist Robert Novy-Marx concluded that "with the possible exception of Indiana, there is no state for which the current total contributions by all state and local government entities are greater than the present value of newly accrued benefits."

In time, all these pension gaps can be closed in only two ways: raising taxes or reducing promised payouts. Rauh and Novy-Marx calculate that to put these programs on a sound footing, taxes would have to go up an average of $1,385 per year for every household. In Illinois, the figure is $1,907; in California, it's $1,994. Topping the heap is New York, at $2,250.

Rauner has talked about moving state workers into defined-contribution 401(k)-style pension programs. But that option does nothing to lighten the vast obligations that have already been incurred. And there is a good chance the state courts would disallow it because it would leave these workers with something less than they were promised when they were hired.

Nearly every state has followed the same basic policy of making promises today and letting someone figure out how to pay for them years from now. Illinois may be on the road to ruin, but it's just the lead car in a long parade, passing every exit.

NEXT: Brickbat: Tolerance

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  1. Maybe we should consider a reverse mortgage, then we’ll at least know when the collapse will occur.

    1. Nobody wants to buy this dump.

  2. Greece is calling for a “New Deal” whereby Europe pumps money into its own ass, stimulates economies, and … victory!

    It would appear that they believe all of the bullshit about the American “New Deal”. And the Euro is totally fucked. The end.

    I guess if the dollar remains the world’s reserve currency, the U.S. government can theoretically borrow forever, right? That works until we are no longer #1, at which point we are utterly fucked.

    1. Government can borrow forever and pay US Citizens with the resulting Monopoly money in the future. The question is at what point do creditors like the Chinese demand gold or other hard goods in lieu of funny money.

      1. “the Chinese demand gold or other hard goods in lieu of funny money.”

        What do they do with their U.S. earnings now? I doubt it sits in the Chinese equivalent of Scrooge McDuck’s money bin.

        1. The Chinese are, and have been for some time buying and hoarding gold bullion.
          The UK, France, and other Euro nations have been selling / dumping it because of the high price a short time ago.
          The world NOW uses Fiat currency, not money, since Nixon took us off the gold standard.
          If and when the Chinese decide the time is right they could call in their notes. That would bankrupt us and give them a very good chance the have their currency become money with a gold backing. And that leaves us with paper even the Fed couldn’t do any thing about. Even if they don’t take a chance calling the notes they could very well convince the other countries to go back on the gold standard thereby stabilizing the money situation. Not an inconceivable situation.
          Think about it with all of these states and cities for all intense and purposes bankrupt now we, all of us, are in dire straights.

  3. In other financial news:

    Old, wrinkled guy thinks Greece (and the Euro) is fucked.

    Gallup CEO worries he’ll be joining Luca Brasi for telling the truth about O’s unemployment “success”.

    1. What do those guys know?

      I suspect that they are either wreckers or Kulaks.

      1. And splitters, don’t forget “splitters”

    2. It’s truly amazing how those who care so much for the downtrodden are so willing to ignore them for political ends.

      1. They don’t care for them, they just use them for political fodder. People kept in dependency are loyal voters.

  4. There seems a contradiction in the macroeconomists’ ideas, though. If the debt doesn’t matter, why bother with taxes?

    I guess I’m poisoning the thread about states’ debt with national debt, but I actually don’t understand how that’s supposed to work.

    1. Without paying taxes, how would we get a sense of ownership in our government?

      1. I … I … feel a sense of ownership, sir! Can I be excused now? Or do I have to run for office first?

      2. What is *voting*, chopped liver?

        1. No, there is utility to chopped liver.

          1. Who’s talking “utility”? I thought the topic was “sense of ownership”.

            1. It’s sarcasm, Rich. Poorly execute, probably, but sarcasm nonetheless.

              1. *** scrapes chopped liver out of sarcasm meter ***

        2. It is when the only viable choices are from the Two Approved Parties, who rigged election law so that third parties can never get a serious foothold in politics. Even if they manage to raise enough money and get enough signatures on petitions, once they’re on the ballot they’re treated like a bowel movement on the buffet. ZOMG YOU’LL SPLIT THE VOTEZ!!!1

  5. a constitutional provision that says public pension benefits “shall not be diminished or impaired.

    I’d hate to be the last working stiff in Illinois.

      1. Me too. Are there black labor markets?

  6. Then there’s Russia.

    Obligatory.

    1. Hey! That’s not Meanwhile in Russia!

      1. For you, Playa!

    2. The desire to have a new Cold War seems to be front and center here. Maybe it has something to do with NATO being an alliance without an enemy?

      This is complete and utter bullshit. Russia clearly wasn’t going to let its only warm-water port go away, so that explains Crimea. Now it’s supporting two separatist provinces, probably so it doesn’t have NATO sitting right against its border. The Ukrainian government keeps screeching about the Russkies sending tanks/artillery/soldiers but is strangely unable to produce any real evidence of their presence.

      Everybody wants Uncle Sugar to subsidize their national defense. The best way to do that is to run around screaming about how Vlad Putin is gonna come a-ridin’ through the Fulda Gap.

      1. +1 Brokeback Putin.

      2. It also explains our ‘pivot’ to China. These enemies aren’t going to make themselves!

        1. I know the military is a sacred cow to many, but it sure does seem a lot like a make-work program.

          1. I think the problem is people don’t unserstand how to seperate the military from its civilian task masters. I think the statist look at the military as just another way to grow government.

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    1. You could have gotten a job as a defense analyst instead.

    2. in a short time after I’ve started averaging 15k a month

      “Here’s $3 for your first minute. Tell everyone ‘in a short time after I’ve started averaging 15k a month’.”

  8. A common method is setting up generous pensions for government employees while failing to put away the money needed each year to pay the benefits that will inexorably come due.

    Obviously the solution is to eliminate pensions for future employees. Of course, this will have the effect of reducing the number of employees, so it’s a double win for the taxpayer.

    1. They did that in Orange County for the teachers. I think all new teachers are 403b now. My wife picked the pension plan over the 403b. I’m not sure that is going to payoff. hopefully we won’t need it.

      1. How’s it working out in general? Do the teachers strike more?

        1. No. Because it is for incoming teachers I don’t think anyone complained. Plus Florida isn’t a strong union state so I don’t think there is much expectation of a pension here anyways.

          1. Wow. That’s almost as refreshing as a glass of Florida orange juice!

            1. They give you free orange juice at the florida welcome station. Come on down and spend some of those hard earned bitcoins

  9. Has this been covered at all?

    http://money.cnn.com/2015/02/0…..ry-strike/

    Oil worker union strike grows larger

    Union officials have said they’re not protesting wages, but instead say their members are overworked, facilities are understaffed and management is relying too heavily on unskilled contractors. The union also protested “threats issued to workers if they joined the (labor) strike.”

    1. “unskilled contractors”

      That’s hilarious. Contractors are usually brought in because they do the same work to the same standards ( usually to much higher standards ) at a greatly reduced cost.

      1. …at a greatly reduced cost.

        Methinks you’ve found the safety issue here.

  10. Clearly, the answer is a bailout for Illinois. Otherwise, Illinois will have to leave the USA zone and create its own currency. And no one wants that.

    1. Bye, Illinois! Sucked knowing you!

      1. No, you don’t understand. It’s worse than that.

        Due to some constitutional issues settled about 100 years ago, the only way Illinois can leave the USA zone is through civil war.

        Leave now, while you can, people in Illinois.

    2. I sure hope those Illinois businesses don’t start hoarding.

  11. It leaves me torn between the hope that I kick the bucket before everything falls to ruin and the hope I’m still here to see my fellow citizens ( and non-citizens ) suffer the ruin they’ve foolishly brought upon all of us by giving attention to every meaningless cause in the Universe while completely ignoring our debt.

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  13. Nice to get the Monday nutpunch out of the way so early. Now it won’t hurt so bad when I finish estimating my Illinois tax bill later today.

    My father-in-law is the poster child for what’s wrong with state pensions: retired from teaching at 54, got an extra year of service credit for unused sick pay accrued over his career, got a raise in each of the first three years of retirement (20% total IIRC, he was bought out), now gets an automatic 3% cost of living adjustment each year. He doesn’t get social security, but then again he never had to contribute. His pension is not taxed by the state (current rate for the plebs is 3.75%). Oh, and he still works for the district as a coach (which is all he really wanted to do, anyway), bringing in 20k+ for two seasons.

    As much as I respect contracts (and people smart enough to take advantage of a sweet deal, especially when they’re generous to their daughters and sons-in-law), I have no problem overturning the feed trough for these “public servants,” even if it means they don’t get what they were promised.

    1. As far as being a contract, and therefore untouchable, that might be a reasonable position as long as pension benefits don’t change after they’re earned. But in many cases benefits get raised out of the blue, retroactively, especially when markets are good and politicians see a chance to stroke the unions. Also, I’d be more inclined to protect pension benefits if my government pension – social security – was similarly protected. But social security has absolutely no contractual status, and my accrued benefits have in fact been reduced numerous times over the years.

      1. Any contract signed by one or more parties in full knowledge that the terms cannot or will not be fulfilled, constitutes fraud.

        A fraudulent contract is voidable. A contract is void when, for example, it requires one party “to perform acts that are impossible or depends upon impossible events”.

  14. Ok, yes, wanting more gvernment “goods” tyan we can pay for on an ongoing basis is a huge problem, but that isn’t what is being discussed here. What is being discussed here is the fundamental criminality of government worker unions, which either always were or have evolved to be enterprises for bilking the taxpayers.

  15. Good evidence that defined benefit pensions are a lousy vehicle (for taxpayers) even if politicians try to fund them responsibly: the unfunded benefits for Illinois are estimated at between $100 billion and $250 billion. With that kind of estimating error they can’t possibly be managed well.

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  18. The house of cards will be collapsing soon. Who will bail out the bail out-ers?

  19. Why should a politician push for fiscal responsibility and address the shortfall? Most of the voters are like spoiled children, vote for those that say yes and criticize those mean people that want to be fiscally prudent. Nothing but criticism and likely lose the next election. So much easier to wait for the outcome in Detroit beg for money and blame those that don’t want to give it as evil rich people.

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