Time to avoid Uncle Sam’s debt, buy U.S. states’?
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The budget shortfalls gripping many U.S. states have rattled the $3 trillion municipal bond market. Yet even with unfunded pensions added in, their debt burdens are dwarfed by those of the federal government. There are big structural differences, but the evidence suggests investors should worry less about munis and more about Treasuries.
That’s not to say states like Illinois and California don’t face cash crunches — though many smaller municipal borrowers look in much worse shape. But on the numbers, it’s Washington with the most work to do, and in areas President Barack Obama avoided in his State of the Union address this week.
Many of the 50 states have unfunded pension liabilities bigger than their straight long-term debt loads when discounted back to a single figure, according to a report from Moody’s Investors Service. In the worst cases, the combined total adds up to more than 15 percent of state GDP — that’s in Hawaii, Mississippi and Connecticut — or 3 times revenue (in Oregon, Colorado and Illinois), or roughly $8,000 or more per head, as in Connecticut, Hawaii and Massachusetts.
But consider the federal situation — excluding, as with the state numbers, hulking healthcare obligations. To $9 trillion of debt at the end of the 2010 fiscal year, by the Congressional Budget Office’s numbers, add the $5.4 trillion of unfunded social security obligations through 2084 as calculated by the trustees of the related funds. Combined, that’s nigh on 100 percent of U.S. GDP in 2010 — or almost 7 times federal revenue, according to the CBO, and just shy of $50,000 for every American.
Washington has greater power over taxation and spending than states, and in theory it could modify social security much more easily than states can adjust protected pension entitlements. Moreover, states’ pension reporting is fuzzy and may understate the reality. And, of course, U.S. taxpayers and pensioners will ultimately end up covering state and federal obligations alike.
But with nearly $5 trillion more debt expected to be issued by the federal government in the coming five years, it could be time to avoid Uncle Sam’s debt and buy U.S. states’.