Wall Street Journal: The ‘Build America’ Debt Bomb
Meanwhile, investors are realizing that states and localities face long-term costs in addition to their muni debt, especially retirement obligations. Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester assess the 50 states’ unfunded pension bill at $3 trillion, and they say that the municipal tab for pensions could reach $500 billion. That is on top of some $2.8 trillion in outstanding state and local borrowing, according to the Federal Reserve.
The Securities and Exchange Commission drew an explicit link between pension liabilities and municipal debt in August, when it charged New Jersey with fraud in its municipal bond offerings. The SEC cited the state for not revealing the true extent of its pension woes in its bond offerings—a clear indication the agency thinks growing pension debt may impede the ability of some states to meet other obligations.
The governments that have made the most use of BABs have been those with the greatest fiscal problems. The biggest issuer of BABs, California, has relied on an unprecedented number of gimmicks to balance its books in the last two years—such as temporarily increasing tax withholding rates and issuing IOUs to vendors.
A friend of mine brought up this article on Facebook. My immediate thought was that the second Republicans oppose the extension, it will be framed as though they are taking funds away from police and fire and what not.
The same thing happened, in a way, with money in the stimulus package for unemployment benefits. States received the money, but along with the money came strings, and when the federal stimulus money for said benefits ran out, the states were left with an unfunded mandate that wasn’t there before. That’s why Gov. Mark Sanford here in SC wanted to refuse he stimulus money and, in the alternative, asked the White House if it would be okay to use it to pay down state debt. The White House refused, and Sanford (along with Mississippi’s Haley Barbour, Louisiana’s Bobby Jindal, Texas’ Rick Perry and Alaska’s Sarah Palin) were painted as ideologues who put political gamesmanship ahead of the needs of their states.
We need a constitutional spending limit amendment, capping federal spending at one-fifth of GDP, and proportional cuts now to get us there. We need an earmark ban as a symbolic gesture that Washington’s spendthrift ways are history. And even though I believe we have a spending problem and not a revenue problem, we need across the board tax cuts–or, even better, the implementation of a purely consumption-based tax system–in order to attract business and boost revenue. And that’s just a start.