The Wall Street Journal has an interesting article yesterday regarding changes being proposed for the way that state and local governments account for the cost of retired workers.
The proposals, unveiled Monday by an accounting-standards group, would require state and local governments to add retiree-benefit promises to their balance sheets, making governments’ overall financial position appear worse.
The move by the Governmental Accounting Standards Board is intended to give tax payers, policy makers and investors more information about the toll that retirees’ promised benefits will take on states’ and cities’ finances.
The article states that Moody’s Investors Services estimates the change in rules would add about $530 billion to the balance sheets of state governments. (There is no good data on the obligations of local governments, though presumably the new rules would correct that deficiency.) Given that a number of cities, notably Detroit and Stockton, have already filed for bankruptcy protection, one has to wonder how many more might find their borrowing costs rising with the additional liabilities on the books. California for example currently has an estimated unfunded liability of $64.6 billion. How much might that increase under the new rules?
I think these proposed rules, as far as I understand them from the article, are good. They will force state and local governments to actually be upfront with their voters as to what proposed changes to these programs will cost. So when a town government approves an increase (or decrease) in the health and pension benefits for teachers, or other workers, the town government will have to accurately account for how this will impact the long term financial health of the town. This will allow those from whom the governments may need to borrow money correctly asses the financial health, and thus the risk, of the government and charge the correct interest to manage that risk. These are essentially the same standards that private businesses operate under, and for the same reasons.
The glaring omission to this article, which I hope others noted, is that the proposed rules do not apply to the federal government. Some experts, among them hedge fund manager Stan Druckenmiller and Don Watkins in his new book, put the unfunded liabilities of the federal government, primarily Social Security and Medicare, at over $200 trillion, nearly 400 times those of state and local governments, and more than 11 times the normally quoted federal debt of $17 trillion.
One hardly needs to be an economist to understand what the effect might be of suddenly increasing the debt level, which is already about 5 times the income from taxes, 11 fold. Interest rates would certainly go up, which in turn would increase current deficits even absent any additional spending, which in turn further increases the debt level, which leads to higher interest rates and the cycle goes on.
Recall that a couple of years ago the credit rating of the United States was cut when the government showed no signs of a willingness to deal with the existing debt. How much of a downgrade might we face with ten times higher debt and the same lack of political will to do anything meaningful about it?
Which of course is the reason why you are unlikely to see similar accounting rules applied the federal government.