A group called State Budget Solutions issued a report this week that claims to “reveal” the true size of state debt and warns of a looming state budget crisis. In reality, this report does more to obscure than to reveal the fiscal health of the states.
The report greatly exaggerates the longer-term issues that states and localities face relating to bond debt, pension obligations, retiree health costs, and unemployment insurance. (We released a major report earlier this year that addresses these types of misconceptions.) It also lumps these issues together with states’ and localities’ current budget problems, which stem largely from the recession. This creates the mistaken impression that states and localities must take drastic and immediate measures to avoid an imminent meltdown.
Public employee pension funds took a big hit when the stock market fell a few years ago and are about $700 billion short of what they will likely need to cover payments to retirees in coming decades under current law, according to the Pew Center on the States. But states and localities have several decades in which to remedy the pension shortfalls. In most states, a modest increase in funding and changes to pension eligibility or benefits should do the trick. (The small number of states that have skipped contributions or increased benefits without increasing funding may have to make much bigger changes.)
Similarly, states have many years to pay off their bonds — which, in almost all cases, they issued to fund infrastructure projects, not to finance operating costs — and all indications are that they will be able to do so. This debt is not at a high level and is not straining state budgets; interest payments on state and local debt make up only 4 to 5 percent of state and local spending, no more than in the late 1970s. And the schools, roads, bridges, and other infrastructure that these bonds are financing will benefit state residents for decades.
As for states’ shorter-term problems, the report misuses CBPP data on the budget shortfalls that states faced going into fiscal year 2011 by calling those shortfalls “debt.” States closed those budget gaps for fiscal year 2011 more than a year ago, as the CBPP analysis that the report cites makes clear.