Massachusetts State Debt Among Highest in US
Friday, January 10, 2014
And that number doesn't included unfunded public pension and other post employment benefit liabilities.
In a new report this week, the national public policy group State Budget Solutions tallies a total combined $129.55 billion in state debt owed in the Commonwealth. (The report doesn't consider municipal or federal debt.)
That “total state debt” figure in Massachusetts equals $19,493 for every resident according to Cory Eucalitto, a SBS editor and author of the report. But the numbers, particularly for pensions, are hotly contested.
“Yes, the Commonwealth has debt ... (and) relative to other states, our debt is fairly high,” acknowledged Scott Jordan, Massachusetts' undersecretary of administration and finance. “But there are good reasons for it.”
“There isn't any fundamental reason people should be concerned,” he said.
Report claims states undervalue unfunded liabilities
“One of the best ways to look at it, beyond the per capita figures, is how our figure compares to what states traditionally treat as debt,” Eucalitto told GoLocal.
Most state governments focus exclusively on the “outstanding debt” figure, he said, which doesn't include unfunded pension liabilities that make up $3.9 trillion of the nation's $5.1 trillion total state debt according to SBS estimates.
When state officials do count unfunded pensions, Eucalitto said they do so assuming overly optimistic future investment returns.
“We use a market-valued discount rate which, if adopted, would give states the best guarantee of being able to meet their pension promises,” he said. “We found Massachusetts' unfunded (pension) liability to be $87.9 billion. The state mistakenly assumes it is just $21.6 billion.”
State disagrees with report's pension assessment
James Lamenzo, the chief actuary with the Massachusetts Public Employee Retirement Administration Commission, was trenchant in his defense of the numbers compiled by the state.
“All I can say is it's not the numbers we have in our report — and I stand by our 01/01/13 report,” Lamenzo said. In the most recent valuation report, released last September, Massachusetts pegged unfunded pension liabilities at $28.3 billion at the start of 2013.
Lamenzo said there were too many unknowns for him to respond to the SBS findings. But he said the long-term return assumption used by the state — 8 percent — was a fair and realistic figure. Even given losses in 2008, that return rate has been reflected in recent return periods, he said.
“If I look at our (unfunded) liability at 01/01/13, that liability will double if you go to 4 percent,” Lamenzo continued. “That will make the liability look much worse.” But Lamenzo said he didn't think that forecast was fair.
Lending credence to the state actuary, the National Association of State Retirement Administrators in a report last month pegged median public pension fund returns over a 25-year period ending June 30, 2013, at 8.6 percent — nearly a full percentage above the average assumption of 7.72 percent over that time.
“An investment return assumption that is set too low will overstate liabilities and costs,” that organization said in its December release. On the other side, overstating future returns understates liabilities. “An assumption that is significantly wrong in either direction will cause a misallocation of resources and unfairly distribute costs among generations of taxpayers.”
Over a 10-year period ending last June, that same study reported a 7.1 percent return. The five-year annualized investment return, reflecting the recent recession, was 5.3 percent, the lowest return recorded.
Scott Pattison, the executive director of the National Association of State Budget Officers, said the SBS based their unfunded pension calculations on market value. Because of that, “the figures will look higher than what other organizations might report.”
Jon Carlisle, a spokesperson with the Massachusetts treasurer's office, acknowledged concerns about unfunded liabilities in the state and nationally. “Massachusetts has a plan in place to deal with that,” he responded.
In terms of the state's creditworthiness, “Massachusetts presently has the highest bond rating in its history, and that comes from a responsible fiscal management style,” Carlisle said, “and by being open and transparent with (credit rating agencies).”
Jordan, the state's administration and finance undersecretary, also pointed to Massachusetts' high credit rating — an AA+ from Fitch and Standard & Poor's, and an equivalent mark from Moody's. “They all think our credit is very good.”
Good reasons for the Bay State's debt
In addition to being an old and urban state, requiring investments in infrastructure and repairs from roads to schools, “all aging and in need of repair, and that's what we borrow for,” Jordan said, he also pointed to a nonexistent county level of government in Massachusetts.
In many other states, counties' authority can include jails, roads, community colleges, and public health services, all requiring investment. “We carry a lot of public infrastructure costs at the state level,” Jordan said. And unlike the federal government, the undersecretary said Massachusetts was prohibited by law from borrowing to make up year-to-year budget deficits.
“States, towns, and cities borrow to build things. ... We borrow money to build infrastructure, and it's appropriate for that.”
Additionally, Jordan said that Gov. Deval Patrick's administration had stuck by a “bond cap” policy that held borrowing to 8 percent of the annual budget. “We think that's manageable ... even during difficult financial times,” he said.
Massachusetts' level of debt is the second highest across New England, but far below the local leader, Connecticut, which ranks 12th nationwide with a total debt of $112.37 billion — $31,298 for every resident in the Constitution State — according to the SBS findings.
Rhode Island follows Massachusetts with a total debt figure of $18.86 billion: a per capita amount of $17,960.
New Hampshire follows close behind, with $18.46 billion total and a per capita figure of $13,951, while Maine is next with $16,717,250 ($12,577 per capita).
Vermont has the lowest debt level in New England, at $7.87 billion: a per capita amount of $12,566.
Per capita, Alaska leads the nation in debt, owing $40,714 for each resident.
So what's the solution?
State Budget Solutions' Eucalitto said of the components identified in the report, unfunded pension liabilities were of particular concern. (Massachusetts' pension system was funded at the beginning of 2013 at a 60.6 percent ratio, although the funded percentage had been as high as 85.2 percent in 2000.)
Eucalitto said steps to reduce states' debt include converting defined benefit pension plans into defined contribution plans. In terms of reducing other employment benefit liabilities, states can work to pre-fund those obligations, he said.
Don't look at just debt number alone
Alexandra Zaroulis, a spokesperson with the Massachusetts executive office of administration and finance, cautioned against looking at outstanding debt without the proper perspective, saying financing played an important role in funding infrastructure and economic development. “Just because you have debt doesn't mean it's a bad thing,” she said.
Noah Berger, president of the Massachusetts Budget and Policy Center, agreed with that assessment.
“It is important that a state government responsibly manage its debt, its fiscal condition, and its long-term economic strength,” Berger said. “While it is important to keep debt at a reasonable level, state policy should also reflect the fact that a state can strengthen its economy by borrowing to make smart investments in, for example, high quality transportation infrastructure – just as it is important for state budgets to invest in the education and skills of people to increase the productivity of the state economy.”
“The importance of long-term economic strength should always be considered as part of any discussion about debt,” Berger concluded.
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