State budget gaps have shrunk by half compared to the previous year, yet the mountain of debt burdening the states has barely budged—indicating a systemic crisis fueled by unfunded liabilities including rising pension and health care costs for retired state workers.
The grim projections were released Tuesday in the third annual State Debt Report from State Budget Solutions (SBS), a nonpartisan budget reform organization that compiles data on budget trends across the 50 states. In this year’s report, the debt monitoring group tallies the states’ debt at $4.19 trillion, little changed from last year’s $4.24 trillion.
Most of that debt stems from unfunded pension liabilities, which total $2.8 trillion. In its report, State Budget Solutions acknowledges its pension liabilities total is significantly higher than the $760 billion figure calculated by the Pew Center for the States, but says the Pew Center uses the states’ own calculation methods, which SBS says masks the true extend of states’ unfunded liabilities.
In contrast, SBS says its emphasis on “reality-based budgeting” provides “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.”
Last month, the California Public Employees’ Retirement System (CalPERS) stunned Wall Street with the announcement of a 1% return for its 2012 fiscal year, far short of its 7.5% return assumptions, thus requiring increased state and local contributions to make up the pension shortfall.
California once again topped the list of debt-plagued states with nearly $628 billion in debt, or more than twice the shortfalls of the next two most indebted states, New York ($300 billion) and Texas ($287 billion). New Jersey ($282 billion) and Illinois ($271 billion) rounded out the list of top five states with the highest debt.
Vermont had the least state debt ($5.8 billion), followed by North Dakota ($6.1 billion), South Dakota ($6.5 billion), Wyoming ($6.9 billion) and Nebraska ($7.8 billion).
Aside from pension liabilities, which account for nearly two-thirds of state indebtedness, the next two largest sources of state debt each contribute about $630 billion, adding up to nearly one-third of state debt.
These sources are outstanding debt such as state-issued bonds and lease obligations, and post-employment benefit liabilities such as health care and other non-pension benefit guarantees to public employees.
The remaining slivers of debt include the state budget gaps, which total $55 billion across the states, and payments the states owe the federal government for unemployment trust fund loans, which total $25 billion. The small budget gap contribution shows how little a difference paring state deficit spending will make in getting total state debt under control.
In its news release announcing the report, State Budget Solutions says most of the minuscule reduction in states’ total debt this year actually came from deficit reductions in state budgets. But the overall debt tally still hovers around $4.2 trillion.
“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.
Following CalPERS' announcement last month of its subpar 2012 investment results, Fitch Ratings warned that “continued weak performance of pensions' investment portfolios is likely to underscore the need for additional changes to benefits, contribution policies and assumptions, including the investment return assumption.”
Also last month, voters in two of California’s largest cities, San Diego and San Jose, supported by large margins measures reining in public employee benefits.
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