By Jon Cassidy | Watchdog.org
HOUSTON — A sobering new report on state debt shows that Texas has been lying to itself about its fiscal health.
Texas has the third highest total state debt in the country, at $341 billion, once you count the colossal debts that politicians have been keeping off the balance sheets.
In total indebtedness, Texas surpasses Rust Belt black holes such as Illinois and Ohio, and trails just California and New York.
In per capita terms, the state is middle-of-the-pack, with $13,083 owed by every man, woman and child. The report by State Budget Solutions shows that while Texas isn’t so profligate as the other large states, neither is it “the nation’s shining example for fiscal responsibility,” as a spokesman for Attorney General Greg Abbott recently put it.
Combined, the 50 states have run up $5.1 trillion in debt to pensioners and retirees, as well as bondholders and the federal government, according to the report. That doesn’t include $3.7 trillion in outstanding municipal bonds nationwide.
While every state but Vermont has a balanced budget requirement, they have all evaded that requirement by systematically underfunding pensions. That has allowed politicians to get a lot more government than they were willing to pay for.
For the last decade, the pension debt problem has been metastasizing out of view — off of state balance sheets and obscured by official figures that misrepresent the depth of the hole.
The official figure for all Texas pension debt as of Nov. 2012 was $43.8 billion, according to a report by State Comptroller Susan Combs.
The state’s real pension debt is closer to $244.1 billion, according to the SBS report. Add in $55.4 billion for retiree health care and $41.3 billion in bonds and other official debt and you get the state total.
It’s been easy for union officials and other defenders of the status quo to scoff at figures like those in the SBS report as apparent exaggerations. But that will change after June 30, when new pension accounting rules go into effect, requiring officials to treat unfunded pension debt much like they’d treat their other debts, such as bonds.
To understand the two kinds of accounting, you don’t need to be an expert. Just think of $100 you loaned your rich uncle, and another $100 you loaned your brother-in-law, the degenerate gambler.
You can go ahead count that loan to your uncle as money in the bank, but you wouldn’t think of that other loan the same way. If someone offered to buy the IOU off you for $50, you might well take it.
That $50 is the real value, or market value, of the debt.
In this case, the pension funds are your rich uncle, but they’re pretending to be your degenerate brother-in-law when it suits them, by listing their debt to you as $50. That’s what all the arguing about discount rates is about.
For planning purposes, it’s a little different. If your uncle is going to pay you back in 10 years with the proceeds from a CD, he probably just cares about the $85 or so he needs to buy the CD.
The SBS report calculates pension debt using market value, or the same rules that corporations have to use in accounting for their pensions. It’s the rough equivalent of valuing that $100 at the $85 cost of the CD.
Unlike your degenerate brother-in-law, the pension funds — backed by the power of taxation — are very close to a sure thing, so the value of their IOUs can’t just be lopped in half, like his.
In fact, when the squeeze comes, almost every government screws over its bondholders before it stiffs its pensioners, so a pension is generally thought to be even more secure than a bond.
Now, for planning purposes, the old numbers have some use. If Texas could find $43.8 billion overnight to deposit in its pension funds — about half its annual budget — then officials could rightly say they were back on track, even under the new accounting rules.
But the new rules don’t allow pension funds to continue pretending they’re earning a return on money they don’t have. Pension funds — and by extension, taxpayers and government workers — are actually going to have come up with the big, scary figures in the SBS report (even more, in fact, if you want to count every dollar going out the door without any of this funny discounting math).
They don’t have a plan to do this. The two biggest pension funds in the state aren’t even getting enough in annual payments to cover the “interest” on their unfunded liabilities, putting them on a course for insolvency.
As the most recent annual report from the Employees Retirement System of Texas puts it, this debt “is expected to grow indefinitely.”
Or, as the Austin American-Statesman editorializes, “here in Texas, the retirement funds for teachers and state workers are in good shape. Changing public worker benefits is all the rage, but there is no reason to change Texas’ state pension funds.”
This is simply untrue. According to data from the big pension funds, government workers and the state need to increase their annual payments by almost 30 percent, just to get on a 31-year course to being debt-free.
It’s standard practice for pension funds to aim at paying off their debts over 30 years, but even that target is less than fiscally responsible.
For the present generation to pay its own debts, it would need to schedule a repayment period of no longer than the average remaining period of employment for current workers, which is 12-13 years at most agencies.
Texas’ total debt ranks eighth as a percentage of its budget, putting it next to New Mexico and New Jersey, which are both drowning in pension debt.
But there is some good news in the report. As a percentage of the state economy, Texas’ debt ranks 39th.
That’s because, unlike so many of the others with large debts, Texas has a booming economy and a relatively small state government.
Without a correction in course by the state Legislature, bankruptcy becomes inevitable in the long run, while in the short run, the likelihood increases with each year that the next recession will be enough to ruin the funds’ finances.
Each passing year, the sacrifices required — tax hikes and/or benefit cuts — get more severe.
As more than one actuary has explained, an underfunded pension plan is like a car without shocks driving over a road as bumpy as the Dow. You’ll feel every pothole, and a good one can wreck the car.
Contact Jon Cassidy at [email protected] or @jpcassidy000.