It's Time to Tackle Debt

An ostrich burying its head in the sand is a classic analogy for avoiding difficult decisions. Though this is a mischaracterization—their heads are buried to protect their eggs from predators—the metaphor is appropriate for Pennsylvania policy.

Some public officials would rather bury their head in the sand than tackle difficult issues such as massive government debt.

Pennsylvania’s fiscal outlook is bleak. In November, the Independent Fiscal Office (IFO) projected a $1.7 billion deficit going into 2019-20—despite robust revenue growth. While some of this deficit stems from increased Health and Human Services spending, it is also the result of past decisions to push costs into next year.

• For fiscal year 2018-19, more than $800 million in Department of Human Services expenses were paid using one-time revenue sources that will not be available next year.
• New debt payments—including PlanCon bonds (school construction), Tobacco Settlement bonds (funds borrowed to balance the 2016-17 budget), and payments for the Farm Show Lease—all begin next year.
• New program expenses for General Assistance, Medicaid Expansion, and shifting state police funding to the General Fund will present additional challenges.

Why debt is a significant problem

Because the state government hasn’t controlled spending, Pennsylvania taxpayers continue to see their overall debt burden increase.

• Pennsylvanians owe more than $128 billion in state and local government debt. This equals $10,015 for every man, woman, and child in the state.
• The totals below include debt in the form of government bonds but exclude unfunded pension liability and other post-employment benefits for public sector employees. In other words, this table actually underestimates the problem.

The debt of state agencies, such as the Pennsylvania Turnpike Commission and Commonwealth Financing Authority, has grown dramatically since 2011.

The picture is even worse if you include retirement benefits

Taxpayers are on the hook for more than $90 billion in unfunded public employee benefits. This amounts to $7,500 for every single person in Pennsylvania. 

• The commonwealth’s two pension plans—the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS)—carry $70 billion in unfunded liabilities.
• Post-employment benefit liabilities, which include retiree health, dental, life, and disability insurance, add more than $20 billion to taxpayers’ burden.  
• According to the Pennsylvania Municipal League, 66 of 67 counties have severely underfunded pension plans. Total unfunded liabilities approached $8 billion in 2015, up from $1 billion in 2013.

Here’s the solution

A “head in the sand” mentality by some politicians has saddled the next generation with unsustainable debt. This is irresponsible and immoral. Here’s how to start digging out:

• Create a defined-contribution plan for all new employees to slow the accumulation of new debt and create a sustainable system with additional flexibility for state workers.
• Tackle the unfunded liability:
  • Increase pension contributions to pay off the unfunded liability over a 20-year period, as required in last year’s House Bill 778.
  • Modify pension plan benefits not yet earned.
  • Limit state spending growth and use revenue options—such as privatizing Pennsylvania’s liquor control system—to pay down the state’s unfunded liability.
• Enact municipal pension reforms, supported by a bipartisan coalition of mayors, to increase transparency, and move to cash balance or defined-contribution plans for new employees in distressed municipalities.

The situation is urgent. According to State Rep. Frank Ryan, a CPA, “Pennsylvania has two to four years to turn around its finances or the state essentially becomes insolvent. A bankruptcy could ensue in the next 10 years, or sooner if we have a recession before then.” Politicians need to stop kicking the can down the road.

An ostrich burying its head in the sand to protect the next generation is noble. Politicians doing it to pass a problem to the next generation? Not so much.