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States hide trillions in debt

by Bryan Leonard, Phil Marrone | July 22, 2010

Aggregate state debt now exceeds $1.7 trillion, with much more potentially hidden off the official books.

The biggest problem-states include Alabama, California, New York, Illinois, Massachusetts, and Pennsylvania.

Research by State Budget Solutions reveals the total official financial liability for each state according to the latest comprehensive annual data available. The research included total debt outstanding, recent budget shortfalls, pension and retirement health care liabilities, and Unemployment Trust Fund loans. The research also looks at the overall financial landscape for each state by considering top income tax rates, past economic performance, and economic outlook.

As of 2009, total state debt averages $16,582 for each of the 107 million private sector workers in the United States.

Pensions and Other Post Employment Benefits play a crucial role in budget strain. Minimum unfunded liabilities totaled more than $1 trillion before markets crashed and states deferred their Annual Required Contributions. Estimates of the true retirement liability are as high as $3 trillion, and Unemployment Trust Fund loans and stagnant employment rates add billions more.

Economist Joshua Rauh of Northwestern University estimates that many of the entitlement promises could go under within the next decade just from trying to fund their current liabilities, even if all future benefits are fully funded.

Income tax rates were obtained from the Federation of Tax Administrators and state rankings are from the American Legislative Exchange Council's 2010 report "Rich States, Poor States."

Outstanding debt and outstanding debt per capita were obtained from each state's most recent
Comprehensive Annual Financial Report, which can lag current data by one to three years. Pension and OPEB liabilities were obtained from PEW's "Trillion Dollar Gap" report on pension funds as of 2008. Official Unfunded Pension Liabilities based on assumptions of annual investment returns of 7-8.5 percent are from the CAFRs of each state's major pension funds.

Unemployment Trust Fund Loans are from the National Council of State Legislators, and current budget shortfalls are from the Wall Street Journal and the Center on Budget and Policy Priorities. Total State debt is the sum of outstanding official debt, pension and OPEB liabilities, Unemployment loans, and current budget gap. Figures for debt per private worker were computed using data from the Bureau of Labor Statistics.

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