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Blog

    States and Debt

    01/07/2011

    Democracy and Power:  104 Future Debt Burden

    A government debt is a government claim against personal income and private property – an unpaid tax bill. – Hans F. Sennholz,

    All democracies institute programs for current voters and shift the debt to future workers, even the unborn.  Social Security, Medicare, prescriptions drug benefits for seniors are prime examples in America.

       States and Debt

    The New York Times opinion column partially explains the debt problem of most states in America:

    Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.  (The $140 billion is greatly inflated.  This is the amount The New York Times considers the ideally spending.  Not the difference between the previous budget and revenue projections.)

    However, most states have feebly enforced constitutional restrictions, requiring balanced budgets.  Hence, states are in deep debt. What the NY Times did not emphasize is the states have promised lavish retirements and medical benefits to state employees.  Most are union employees that finance politicians which in turn provide the state workers with good salaries and retirement benefits.  Harmfully, this government scheme is corrupt and has greatly exacerbated the crisis. 

    Bob Williams, of State Budget Solutions, explains the enormous pension disaster:

    Perhaps the single most troubling issue facing states is the sheer magnitude of unfunded pension liabilities. States are in way over their heads when it comes to constitutionally-required retirement and healthcare benefits owed to future and existing retirees.

    The politically powerful, assisted by adoring media mavens, have created these gigantic debts, which must be repaid by our children and grandchildren.  Read how The NY Times proposes to solve the problem:  … federal stimulus money — which has been keeping many states afloat — is largely scheduled to expire. Renewing a portion of that aid would be one of the most effective ways to assist the economy.  In other words, print more money to prop up state governments and extend and enlarge the debt crisis.  This is a continuation of failed governance.

    Advantageously, the American Enterprise Institute (AEI) has studied other countries debt reductions.  Clearly, successful reduction was achieved by cutting government payroll/employment and restructuring transfer payments. 

    Now the NY Times implies the states have made all the cuts they can on transfer payments.  This is non-sense.  The new governor of Florida, Rick Scott, an expert on medical costs, wants the opportunity to reduce souring Medicaid costs.  Governor Perry of Texas recently asked for the same opportunity:

    Instead, Washington should return money to the states via block grants without strings attached, allowing each state to identify the best way to use that money to meet the specific needs of its patients, families and taxpayers.

    Not only would this allow states to tailor their programs to meet the specific challenges of their populations, it would also prime the pump of innovation.

    There will definitely be similar requests from more governors.  Welfare reform is another example; after many years of program escalations and onerous federal regulations, the states were granted the opportunity to run their own programs.  The same must be allowed by the states in all social programs: employment, training, Food Stamps, Medicaid, and education to name a few.

    Now, why the states?  After all, they have created debt and have a gigantic pension crisis.  Unfortunately change will not occur in the federal government, the politically powerful Members of Congress will cling to their power and are prone to increasing programs and regulations.  Likewise, the bureaucrats and supportive allies will assist the enlargement. The federal government stopped enlarging welfare only when the state governors and American people demanded an end to a growing and perverse entitlement. 

    Today, the debt crisis is much bigger.  The American people are demanding a restructuring of debt and transfer payments.  Strong governors are willing to make innovative changes.  Only, the states will make the changes. Without the federal government’s restrictive rules, the states will respond quicker and more directly with their citizens.

     As to the state-pension crisis, the process will be ugly.  The threat of states defaulting on their debt is real.   Each state will struggle with a solution.  However, states can and must substantially reduce state employees.  Further, states must create 401k-defined contribution plans for new employees, which will eventually stop the pension crisis.

    The states must have the opportunity to restructure the federal transfer payments.  The states must lower their cost of employment.  As Governor Rick Scott said, "Give us our power back. Give us our money and let us run our states."

     America’s future is a stake.  Every minute the debt continues, it impairs the prosperity and freedom of our children and grandchildren.  Debt reduction is the crisis of our time.