Even as pension bombs tick, cities and states still borrow far beyond their means, according to a commentary by Richard Ravitch in Friday’s Wall Street Journal. Earlier this year, former Federal Reserve Chairman Paul Volcker and Ravitch released the "Final Report of the State Budget Crisis Task Force" after nearly three years of study and analysis. The report sought to understand whether the states' current fiscal problems were cyclical — caused by the financial collapse of 2008 and likely to abate with economic recovery — or whether they were structural, the result of long-term revenue and spending imbalances. The report's main finding is that in most states and cities the problems are structural and the crisis is deepening. First, contributions to employee pension funds are often well below the levels needed to ensure the payment of the benefits that are contractually or constitutionally guaranteed, let alone those that past trustees and legislatures added on a discretionary basis. The largest single expenditure in most state budgets is for Medicaid. Unfortunately, health-care costs have been rising faster than either inflation or state and local tax revenues, and most economists believe they will rise even faster in the next few years. But the most critical piece of the states' fiscal dilemma is that they are borrowing to cover their operating deficits. They do this directly — by issuing debt securities — but also indirectly. Some states, like New York, make contributions to their pension systems in promissory notes rather than cash. States and cities also sell assets and treat the proceeds as operating revenues, in effect selling off the family silver to stay afloat, according to Ravitch.
