James Surowiekci writing at The New Yorker considers whether there is good reason to think California’s fiscal plight puts it on course for a Greek-style collapse. Greece is not the only EU nation in trouble. Add in Portugal, Ireland, Italy and Spain to the massive debt club (a.k.a the PIIGS), with debt levels at 60% of GDP in 2008-2009. By contrast the most fiscally troubled states of California, New York, New Jersey and Illinois had debt-to-GDP ratios of 15% during the same period.
Surowiecki suggests this may be reason to breathe a little easier. The biggest debtor nations in the EU owe three times as much relative to GDP as do their high-debt counterparts in the US. Plus, the states can count on a federal bailout.
Yet, neither of these thoughts are entirely comforting.
First, states have underestimated their pension obligations by threefold. Official reports estimate New Jersey’s unfunded pension obligations at $45 billion. Using more reasonable discount rates to estimate New Jersey’s pension obligation reveals an unfunded liability of $137.9 billion, or 261% of total state debt. That’s before adding in Other Post-Retirement Benefits (OPEB) and health care for public sector workers.
Secondly, a half century of intergovernmental infusions from D.C. in the form of transfers,Medicaid, and stabilization money hasn’t kept the states afloat. Quite the contrary the erosion of fiscal federalism has meant a loss of states’ control over spending and policy.
The FY 2009 stimulus has been as effective as a shot of morphine. States have now spent their education money to expand spending and avoid cuts. Fast forward to FY 2010. Revenues haven’t recovered. Pension obligations loom larger and those “saved and created” jobs are now in search of funds.