By STEVEN
MALANGA
Earlier
this month, the Securities and Exchange Commission charged Illinois officials
with making misleading statements to bond investors about the state's pension
system. The agency detailed a long list of deceptive practices including failure
to tell investors that the system was so underfunded that it risked bankruptcy.
Illinois taxpayers, as well as the holders of its debt, will ultimately bear
the burden of the officials' misdeeds. But there is nothing unique about the
Prairie State. For years, elected officials in states and municipalities across
the country have been imprudently piling up obligations that are imposing
serious strains on budgets, prompting higher taxes and cutbacks in services.
In
January, city officials in Sacramento, California's capital, reported the
results of a study they had commissioned on all the debt that the municipality
had incurred. At a City Council meeting that the Sacramento Bee reported as "sobering," the city manager
explained that Sacramento had racked up some $2 billion in obligations (mostly
pensions and retiree health care). All this for a municipality of 477,000
residents with an annual general fund budget of just $366 million. Sacramento
finances are already stretched—the city has cut some 1,200 workers, or 20% of
its workforce, in the past several years. Servicing its debt in years to come
will only add more woe, especially given the intractability of public unions.
The budget report noted that "While reducing staff is clearly not the
preferred method for reducing costs, the city has a very limited ability to
reduce the cost of labor absent cooperation from the city's employee
groups."
According
to studies by the Pew Center on the States, states and the biggest cities have
made nearly three-quarters of a trillion dollars in promises to pay for retiree
health-care insurance. Yet governments have set aside only about 5% of the
money they'll need to pay for these promises.
This
year a Chicago city commission reported that retiree health-care expenditures would
soar from $109 million in this year's budget to $541 million in a decade. After
concluding that the expenditures were unaffordable, one member of the
commission proposed that retirees be required to sign on to the Illinois Health
Insurance Exchange being created under President Obama's Affordable Care Act.
Health insurance would be cheaper if it is subsidized by the federal
government. A December report by the States Project, a joint venture of
Harvard's Institute of Politics and the University of Pennsylvania's Fels
Institute of Government, estimated that state and local governments now owe in
sum a staggering $7.3 trillion. Incredibly, the vast majority of this debt has
never been approved by taxpayers, who are often unaware of the extent of their
obligations. Most state constitutions and many municipal charters limit
borrowing and mandate voter approval. No matter. Politicians evade the limits,
issuing billions of dollars in municipal offerings never approved by voters,
sometimes with disastrous consequences. Courts have rubber-stamped many of
these schemes.
The
debt incurred by New Jersey for school projects is a case in point. In 2001,
legislators in Trenton hatched a scheme to borrow a shocking $8.6 billion for
refurbishing school buildings. The reaction to their plan in the press and
among taxpayer groups was so negative that the politicians knew that voters
would never approve it. So the legislature created an independent borrowing
authority.
Since
it, and not taxpayers, would take on the debt, politicians claimed that there
was no need for voters' consent. Taxpayer groups challenged the maneuver. The
state Supreme Court brushed aside their objections, arguing that there was
already precedent for such borrowing. New Jersey's Schools Construction Corp. quickly
squandered half of the money on patronage and inefficient construction
practices, so in 2005 the state borrowed another $3.9 billion. All of the debt
is being repaid by taxpayers. The authority, which was dissolved several years
ago, had no revenues of its own.
Next
door, in New York, a scant 5% of the Empire State's $63 billion in outstanding
debt has ever been authorized by voters, according to the state comptroller.
The rest has been engineered through independent authorities such as the
Transitional Finance Authority. These authorities are designed to circumvent
voters. Of the seven bond offerings that have gone before New York voters in
the past 25 years, four have been defeated. But thanks to unsanctioned debt,
New Yorkers bear the second-highest per capita debt burden in the nation,
$3,258, according to a January report by the state comptroller. New Jersey is
No. 1, at $3,964.
To
prevent the pile-up of hidden debt, taxpayers need to spearhead a revolt that
will narrow the ability of officials to mortgage their future. Any such revolt
will first of all seek an end to government sponsored defined-benefit pension
plans, through which politicians promise benefits years hence to current
employees in a manner that potentially leaves taxpayers on the hook for
unlimited liabilities. Simpler, defined-contribution plans featuring individual
retirement accounts would make government pension systems less expensive and
their accounting more transparent. Similarly, reformers will have to rein in
borrowing by independent authorities and other government entities created to
circumvent current debt limits. No state or municipality should be allowed to
issue any debt for which taxpayers are ultimately liable without voter
approval. Without such reforms, many states risk becoming like Illinois, where
a $7 billion tax increase in 2011 was largely gobbled up by rising pension
costs, leaving the state with a $9 billion backlog of unpaid bills and the
prospect of new taxes to pay off its $271 billion in debt.
This
is a future in which rising taxes don't provide citizens new services but
merely go to pay off hidden debts.
Source:
Wall Street Journal, March 29, 2013, 6:28 p.m. ET Mr. Malanga is a senior
fellow at the Manhattan Institute. This column is adapted from a forthcoming
issue of City Journal, where he is a senior editor. A version of this article
appeared March 30, 2013, on page A11 in the U.S. edition of The Wall Street
Journal, with the headline: The Debt Bomb That Taxpayers Won't See Coming. http://online.wsj.com/article/SB10001424127887324077704578362101467799948.html?mod=WSJ_hp_mostpop_read
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