From the testimony of Northwestern University’s Joshua Rauh yesterday before the US House Subcommittee on Courts, Commercial, and Administrative Law:
“….just as companies have ways of issuing debt off their balance sheets, state and local governments have ways around the balanced-budget rules. The most pervasive means of circumventing balanced budget requirements at the state and local level has been to promise public employees pensions without setting aside adequate funds to meet the promises. The bill then is left to future taxpayers when the employees retire and collect their checks. By that time, the politicians who made the promises are long out of office. In some cases, the bills will be so large that the ability of state and local governments to operate will be threatened. Some states will likely seek federal assistance.
The state and local pension crisis in the U.S. reflects the fact that unfunded pension liabilities are the largest loophole in balanced budget pledges. When politicians have spent money without raising taxes, pensions have proven the perfect borrowing vehicle. The Government Accounting Standards Board (GASB) has been complicit in this hidden borrowing by allowing a form of accounting for these promises that violates the principles of financial economics.
This hidden debt will eventually force states and localities to choose among the unpalatable
options of cutting services, raising taxes, attempting to reduce benefits owed to public employees, defaulting on other obligations, or seeking a federal bailout. The best hope for a soft landing for states is to focus on measures that stop the growth of unfunded liabilities, and then attempt to renegotiate the most untenable pension obligations within the allowable state legal structures.
If states perceive implicit federal backing, they may lack the incentives to undertake these
fundamental reforms. If the federal government is interested in limiting the liability of federal taxpayers to bailouts, it should provide states with those incentives by conditioning the availability of federal money on pension reforms that limit off balance sheet borrowing. Urgent action is required to ensure that federal taxpayers will not be the ultimate underwriters of state debts.”
You can read the whole thing by clicking here.
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