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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.
Mish
GlobalEconomicAnalysis.blogspot.com
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