MOUNDS OF DEBT: Debt in the Commonwealth totals more than $91 billion, according to a new think tank report, but it could be higher.
By Kathryn Watson | Watchdog.org, Virginia Bureau
ALEXANDRIA, Va. — It’s not something either outgoing Gov. Bob McDonnell or incoming governor-elect Terry McAuliffe like to mention in their motivating, memorable speeches.
But if Virginians had to cough up cash to cover the Commonwealth’s debts, it would work out to more than $11,158 per person, according to a new report by Washington, D.C.-based think tank State Budget Solutions. And that number is climbing.
Or, to look at it another way, Virginia’s total estimated debt — more than $91 billion, according to SBS — is almost as much as the two-year budget of $95 billion that the General Assembly will vote on in the coming months.
But those figures reported by SBS don’t include everything, said Virginia State Comptroller David Vonmoll when he took a look at the SBS figures. SBS didn’t calculate things like higher education debt or business-related debt that aren’t required to be included in Virginia’s Annual Comprehensive Financial Report, but are reported to the General Assembly each year.
“These think tanks can kind of gather numbers from here and there and it’s not that cohesive in my view,” Vonmoll told Watchdog.org.
State Budget Solutions did look at three types of debt — unfunded public pension liabilities, outstanding debt listed by the state’s CAFR, and other post-employment benefit (retiree) liabilities.
But it’s unfunded pension liabilities — the money needed but not readily available to cover current and future retirees — that are crippling Virginia, said Cory Eucalitto, the author of SBS’ Fourth Annual State Debt Report. Nationally, Eucalitto said unfunded pension liabilities make up $3.9 trillion of the 50 states’ estimated $5.1 trillion in total debt.
That’s right — trillion with a “T.”
“Public pensions are the largest driver behind that,” Eucalitto said in an interview with Watchdog.org.
In Virginia, unfunded pension liabilities are just under $80 billion, Eucalitto found.
Virginia officials beg to differ. State officials in the Virginia Retirement System place that unfunded liability around $28 billion.
That’s because states like Virginia use a discount rate — the assumed investment return figure — that’s much higher, and some would say, riskier, than the lower, safer rate used by the market.
The higher the discount rate (like the 7.5 percent rate the state uses), the better funded a pension plan appears to be.
The lower the discount rate (like the 3.225 percent SBS used, reflecting a market value, 15-year Treasury bond yield), the more bleak-looking the plan’s funding levels look.
“When you lower the discount rate … that increases the liability,” said Eileen Norcross, senior research fellow at George Mason University’s Mercatus Center in Fairfax.
In other words, it all comes down to a political numbers game, and how much state leaders are willing to paint a pretty picture at the risk of future taxpayers.
If state lawmakers are serious about securing the commonwealth’s fiscal future, they’ll use a safer discount rate that will paint a more realistic picture of the state’s obligations, Norcross said.
Not only do state leaders generally fail to look at pension plan obligations realistically, they fail even to make the payments due on those unrealistic assumptions.
If state leaders want a solid financial footing, that needs to change, Norcross said.
That is, no more pulling stunts to balance the budget like Republican Gov. Bob McDonnell did in 2010, when he used the more than $600 million in scheduled payments to the retirement system to say he had a $500 million “budget surplus.”
Taking money from pension plans is a bipartisan problem, Eucalitto said.
“When it comes to things like unfunded pension liabilities, the tendency of politicians, whether or not states make their contributions to their public pension systems, the desire to sort of skip those payments is pretty bipartisan in a lot of cases,” Eucalitto said. “The regular budget process focuses on balancing an annual budget, no matter, in a lot of cases, what the cost is, whether or not it means borrowing more in the future, kicking the can down the road.”
That’s something citizens can hold their lawmakers accountable for in 2014, Eucalitto said.
“All the states have new legislative sessions coming up where they’re going to be writing new state budgets,” Eucalitto said. “Citizens need to make sure that their elected officials are making their full, required contributions into the pension systems, that they’re not issuing debt and using various budget gimmicks to quote unquote balance the annual budget.”
If Virginia leaders are serious about pension reform, they can still decrease benefits for the future, Norcross said.
And if Virginia leaders are really serious about pension reform, they will switch to a defined contribution plan, Eucalitto said — like what the private sector has.
Otherwise, the money eventually has to come from somewhere — and if not from government services like public safety and education, then from taxpayer pockets directly.
— Kathryn Watson is an investigative reporter for Watchdog.org’s Virginia Bureau, and can be reached at firstname.lastname@example.org.
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