State and local
ported debt," which only includes debt that
governments are being forced into "painful"
will be paid back by tax revenue.14 Tax-sup-
and "severe" cuts to "popular" programs, and
debt outstanding
ported state debt increased from $230 billion
prisoners are being let out of jails we are told.
has soared from
in 2000 to $398 billion in 2007, a rise of 73 per-
Are governments really that hard hit? Let's
$1.2 trillion
cent. Such rapidly rising indebtedness repre-
look at the data on revenue and spending
sents irresponsible fiscal policy, and state poli-
across the 50 states. Total state tax revenues
in 2000 to
cymakers ought to reverse course and begin
rose 8.9 percent in 2004, 11.3 percent in 2005,
$2.2 trillion by
6.9 percent in 2006, and 4.4 percent in 2007.7
paying debt down.15 Government debt is sim-
Tax revenues will rise about 1.4 percent in
ply taxation that is imposed on the next gener-
the first quarter
2008.8 On the spending side, total state gener-
ation, and it is a particularly costly and non-
of 2008.
al fund budgets rose 3.0 percent in fiscal 2004,
transparent form of taxation.
5.9 percent in fiscal 2005, 8.1 percent in fiscal
In addition to this explicit debt, state tax-
2006, 9.0 percent in fiscal 2007, and an esti-
payers may also face a large burden from under-
mated 5.1 percent in fiscal 2008.9
funded state government pension plans.
Figures from the National Association of
Estimates of the state pension shortfall have
ranged from $361 billion to $700 billion.16 The
State Budget Officers show that spending will
Government Accountability Office reported
rise just 1 percent in fiscal 2009, but that hard-
that the share of state and local pension plans
ly represents a crisis after five years of substan-
tial increases.10 The current state fiscal situa-
that are underfunded has soared in recent
years.17 Many governments have used excessive-
tion is not a crisis, and it can be resolved with
ly optimistic assumptions about the earnings
modest downward adjustments to spending.
likely to be generated on pension fund assets, a
Nonetheless, there is a real state fiscal crisis
practice that financier Warren Buffett has called
on the horizon. It is a longer-term crisis that is
"accounting nonsense."18
being precipitated by rapid increases in
In addition to the debt and pension prob-
Medicaid spending, rising state debt, and huge
lems, state and local governments have built up
unfunded state employee retirement obliga-
huge unfunded obligations in their employee
tions. Medicaid spending is the single largest
retirement health plans. I have estimated that
component of state budgets, and it has been
those unfunded health care obligations total at
growing at more than 7 percent annually this
least $1.4 trillion.19 Consistent with that figure,
decade, with its rapid growth expected to con-
tinue.11 While some states have made modest
the Pew Center on the States estimated that
changes to restrain Medicaid costs, many gov-
unfunded retiree health costs for state govern-
ments alone are about $370 billion.20
ernors are seeking to expand government-fund-
All these figures point to the sad truth that
ed health care programs. Indeed, NASBO
state policymakers have been mortgaging the
reports that half of the governors proposed to
future with their spendthrift and debt-fueled
increase government-funded health care in
their fiscal 2009 budgets.12
policies. States have turned to debt to fund
As state and local spending has grown rapid-
projects that used to be funded by current rev-
ly in recent years, there has been a remarkable
enues. California and other states have been
expansion in state and local government debt.
using debt to cover their short-term operating
During the 1990s, total state and local debt was
expenses, which violates all the rules of sound
fairly stable, as policymakers used rising rev-
state budgeting. And state and local govern-
enues to pay back previous borrowing. But this
ments are using exotic financing tools to con-
decade, state and local debt outstanding has
vert, or securitize, future streams of revenues
soared, as shown in Figure 2. Debt jumped from
into cash to spend today.
$1.2 trillion in 2000 to $2.2 trillion by the first
State and local governments have expand-
quarter of 2008--an 83 percent increase.13
ed retirement benefits for their 16 million
Looking just at state governments, Moody's
workers to excessive levels with little thought
Investors Service publishes data on "tax-sup-
of how those future benefits would be paid.
7