State Debt Loads are Soaring

We all know that Uncle Sam is drowning in red ink–if you need a humorous reminder check out Remy’s “Raise the Debt Ceiling.” Well, it turns out that states are not in much better shape. According to a new study by Harvard Economist Jeffrey Miron, for the Mercatus Center, states will reach dangerous debt levels in 20 to 30 years. From the study “The Fiscal Health of the U.S. States” (pdf):

This paper examines the fiscal health of the 50 U.S. states and reaches five conclusions. First, state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound. Second, the key driver of increasing state and local expenditures is heath-care costs, especially Medicaid and subsidies for health-insurance exchanges under the Patient Protection and Affordable Care Act of 2009. Third, states have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate. Fourth, if spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to GDP within 20 to 30 years. Fifth, states differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.

Check out this video to see when your state reaches the danger zone.

Hat tip to Matt Mitchell at Neighborhood Effects

When Will State Pensions Systems Go Broke?

Joshua Rauh recently released a study that made bold predictions about when the asset pool of a state’s pension system would run dry.  Illinois topped the list with a “Year Run Out” estimate of 2018–just eight short years away.  Really?

Well, apparently so.  I recently came across this article in Bloomberg BusinessWeek that states:

Illinois’s Teachers Retirement System may sell $3 billion of investments to pay for benefits this year because the state can’t make its contributions to the fund, a spokesman said.

The pension plan sold $200 million of assets in July and $290 million in August, Dave Urbanek, spokesman for the $33 billion fund, said in a phone interview.

“We understand from the comptroller that there is no money to pay us,” said Urbanek. “If we don’t get a state contribution, we will have to sell more.”

The fund was forced to sell assets last year, too, as it awaited a state contribution. That payment came after Illinois issued $3.47 billion of taxable bonds to fund its pension contribution in January.

Wow, $3 billion is almost 10 percent of the value of the fund!  In eleven years, the asset pool will be completely gone with withdrawals of that size.  I guess Rauh is pretty much right–eight years, eleven years, close enough.  If I was a retired teacher in Illinois, I would be afraid . . . very afraid.  Then again, if I was a taxpayer in Illinois I would be even more afraid.