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Tuesday, March 30, 2010 9:01 PM


States have $5.17 Trillion in Pension Obligations, Gap is $3.23 Trillion; State Debt as Share of GDP


As the jobless yet supposedly nascent recovery plods on, states are finding it increasingly difficult to ignore their fiscal woes and pension deficits. The New York Times has some details in State Debt Woes Grow Too Big to Camouflage.

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output, according to one calculation.

Unstated debts pose a bigger problem to states with smaller economies. If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product, according to Andrew Biggs, an economist with the American Enterprise Institute who has been analyzing state debt. Alaska would not qualify either.

Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.

“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded. “But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

Some economists think the last straw for states and cities will be debt hidden in their pension obligations.

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.

In Illinois, the state comptroller recently said the state was nearly $9 billion behind on its bills to vendors, which he called an “ongoing fiscal disaster.” On Monday, Fitch Ratings downgraded several categories of Illinois’s debt, citing the state’s accounts payable backlog. California had to pay its vendors with i.o.u.’s last year.

“These are the things that can precipitate a crisis,” Mr. Rauh said.
Creative Ways Of Hiding Debt

  • New Hampshire took $110 million from a medical malpractice insurance pool to "balance its budget". The State Supreme Court said put it back.
  • Colorado tried to grab a $500 million surplus from Pinnacol Assurance, a state workers’ compensation insurer that was privatized in 2002.
  • Hawaii went to a four-day school week.
  • Connecticut tried to issue its own accounting rules.
  • California is making companies pay 70 percent of their 2010 taxes by June 15.
  • New Jersey and other states make their budgets look balanced by pushing debts into the future. While Greece used a type of foreign-exchange trade to hide debt, the derivatives popular with states and cities have been interest-rate swaps, contracts to hedge against changing rates.

The above points summarized from the article.

Debt as Share of GDP



Fictitious Accounting

Fictitious accounting allows states to pretend their pension plans are in better shape than they really are. Hawaii, Montana, New Jersey, Illinois, Mississippi, Ohio, New Mexico, Rhode Island, and Alaska all have unfunded liabilities of 50% or greater. 20 states have unfunded pension liabilities of 40% or greater.

Most states have pension plan assumptions that assume a 7% rate of return or higher. Such returns simply will not happen. Worse yet, another downturn will cripple states.

$5.17 trillion in pension obligations is a hell of a lot of money. How will it be paid? The answer is it won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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