A $1.5 trillion debt time bomb is ticking in state capitals throughout America — and Democratic strongholds are in the worst shape, according to a report released Tuesday.
Truth in Accounting, a Chicago-based organization that examines state finances, produces an annual “Financial State of the States” report detailing long-term obligations for expenses such as pension benefits and retiree health coverage.
The organization then compares the results with each state’s projected revenues.
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This year’s tally indicates that 40 states at the end of fiscal year 2017 did not have enough money to pay their bills without resorting to budget chicanery to mask long-term debt.
The overall picture is only slightly better than it was a year before, which is something of a surprise to the founder of Truth in Accounting, Sheila Weinberg.
“As the economy is getting better, we would have expected unfunded pensions would go down,” she told LifeZette.
Weinberg said stock market gains have whittled away at pension shortfalls, but she added that an increase in health care costs has offset those gains.
The states combined had $837.5 billion in unfunded pension liabilities and another $663.1 billion in unaccounted-for retiree health costs. Weinberg said state officials often obscure this bleak picture in hard-to-read financial statements that exclude such obligations.
“Elected officials have been telling citizens they’ve been balancing their budgets, but they have not been counting these [employee] retirement costs,” she said.
It is a problem facing most states, but those dominated by Democrats are faring worse. The think tank lists five “sinkhole” states — those with the worst long-term finances. New Jersey, which has had a Democratic-controlled legislature since 2002, ranks last, with a $61,400-per-taxpayer shortfall.
Long-time Democratic bastions Connecticut ($53,400 shortfall), Illinois ($50,800) and Massachusetts ($33,500) also rank among the bottom five.
Kentucky, with a per-taxpayer debt of $39,200, is the only Republican-leaning state in the bottom five, but it has been fairly split at the local level in recent years. Although the GOP won control of both houses and the governor’s office in the 2016 election, Democrats had controlled the House since 1994 and the governor’s office for all but four of those 22 years.
“You can’t fund your government with a level tax rate … We’ve got a structural spending problem.”
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On the other end of the spectrum, the 10 states with projected revenue exceeding long-term financial obligations skew Republican. Alaska is best off, with a long-term surplus of $56,500 per taxpayer. It currently has an independent governor but had Republicans from 2003 through 2014, and the GOP has controlled both houses of the legislature for all but seven years since 1995.
North Dakota ($24,900 surplus), Wyoming ($19,600) Utah ($4,000), South Dakota ($3,100), Idaho ($2,700), and Tennessee ($2,500) all have Republican governors and have had Republican majorities in their legislatures for several years. Nebraska ($1,000) has a nonpartisan legislature but has had Republican governors since 1999.
Among the 10 healthiest states, only Oregon ($1,000) leans Democrat. In Iowa ($500), Republicans have controlled the governor’s office and at least one branch of the legislature since 2011.
There are some reasons to think that state finances do not turn on partisanship alone. Weinberg said most of the states with healthy fiscal outlooks benefit from booming economies.
“A lot of them are oil states, energy-rich states, so they get a lot of revenue from that,” she said.
But Weinberg said policy decisions play an important role. She said healthy states have something important in common: “They have a tendency to only promise what they can afford.”
Illinois: A Case Study
Adam Schuster, budget and tax research director at the Illinois Policy Institute, said his state’s woes relate directly to bad policy decisions — years and years of bad decisions.
Schuster told LifeZette that state spending over the past decade has risen 25 percent faster than the personal income of Illinois residents.
That massive increase mostly is not due to unrealistic ambitions for improving or expanding state services, Schuster said. He pointed to data showing education spending rising 67 percent from 2000 to 2018; the rest of the regular budget is up 16 percent. But during that time period, spending on pensions for retired state workers increased 663 percent, while health care costs are up 215 percent.
Pension costs have jumped from 4 percent of the general fund in 1990 to more than 25 percent today, Schuster said.
“You can’t fund your government with a level tax rate … We’ve got a structural spending problem,” he said.
Schuster said the Illinois Policy Institute, which promotes limited government and free market principles, has proposed two major reforms.
The first would cap state spending increases to a 10-year average of economic growth. So if the average rate over the previous decade were 2.5 percent, state spending could not increase by more than that.
The second suggestion is to modify the way pension benefits accrue and change how cost-of-living increases are given to retired state workers. He said the state uses a formula that is not tied to inflation and results in raises that exceed the increase of the cost of living. He pointed to other states that have raised the retirement age for state workers.
Schuster said the state should have a “rainy day” fund equaling about 5 percent of annual revenue. Such a cushion would represent about $2 billion, allowing Illinois to weather recessions. But the true reserve is only about $100,000, or 81 seconds of state spending, he said.
In the event of a national recession, Shuster said, the state would struggle even to make payments to current pensioners.
A Democratic-controlled legislature and Democratic governor in 2013 agreed on a pension reform bill that would have tackled the issue. But the Illinois Supreme Court struck it down, ruling that it violated the state constitution.
Schuster said he is optimistic about the chances of passing a constitutional amendment that would implement those reforms, but that would take a three-fifths vote in both houses of the legislature and approval by voters in a statewide referendum.
Weinberg, the Truth in Accounting founder, said her organization does not make recommendations other than taking steps to ensuring transparent reporting of states’ fiscal positions. But she said states have only a limited number of options to stanch the red ink.
“The only way to fix that is to bring more money in or take less money out,” she said.