The Road to Solvency

In my previous column, I discussed how a staggering 22 states are confronting budget shortfalls this year. This was not exactly unforeseen: State Budget Solutions (SBS) and the Government Accountability Office (GAO) have been warning states for years about overspending as well as the dangers of ignoring hidden costs, such as promises to future retirees, that are left unaddressed year after year. Now former Federal Reserve chairman, Paul Volcker, has issued a scathing report highlighting this very problem and confirming what SBS and the GAO have long been warning states about.

Even though 49 states mandate a balanced budget, either constitutionally or statutorily, there is no uniform definition of a balanced budget, and accounting trickery has allowed states to avoid paying for their future obligations. Volcker's report, Truth and Integrity in State Budgeting, shines a light on the "gimmicks and short-term measures that obscure actual financial conditions" of state budgets. While each state in the nation has unique circumstances they must address in their budgets, all states would profit from transparent and outcome-based budgeting methods, in order to better manage future debt obligations and avoid budget shortfalls.

Although state budgets still lack real clarity, a few changes have brought greater attention to some of the unfunded liabilities which threaten to break them. State governments have a set of accounting standards by which they must abide, known as the Government Accounting Standards Board (GASB). In 2012, GASB established a new rule requiring state governments to disclose their public worker pension obligations and other post-employment benefits, principally retiree health care. This new rule forced states to reveal their dirtiest fiscal secret: their pensions, along with other long-term financial obligations, were massively underfunded.

Building on this overdue change in state budget reporting, in mid-2016 GASB will require state governments to carry unfunded retiree-benefit obligations on their balance sheets. This means states will have nowhere to hide their long-term spending obligations.

While GASB and the new Volcker report highlight the major problems with state budgets, the truth is that as of yet nothing has fundamentally changed. In 2008 states underwent severe budgetary challenges, with revenue shortfalls and heightened demand for social programs. These pressures have not vanished during the current recovery, and the probability of another recession hitting our country is hardly remote. This isn't a Republican or Democrat problem; there is more than enough blame to go around. For too long, lawmakers of all stripes have deferred conclusive solutions in favor of short-term fixes.

The first step on the long road to sustainable budgets is to admit the severity of the problem at hand. Real financial clarity would help reveal the full extent of long-term obligations, while shining a light on where tax dollars are currently going. With that knowledge, legislators could start making informed budgetary decisions, in way that aligns government spending with desired real-world outcomes. Failing to seize this moment would only further jeopardize the retirement and health benefits of aging boomers, while leaving millennials with little more than ever-mounting debt.

Bob Williams is the president of State Budget Solutions, a non-partisan organization dedicated to fiscal responsibility and pension reform.