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Fiscal expert says state governments in big trouble

By ThisIsReno

By Sean Whaley, Nevada News Bureau: State governments across the country are facing budget deficits and a tough economy right now, but failure to get a handle on long-term liabilities, from unfunded pensions to subsidized health care for retired workers, could jeopardize any recovery, a fiscal expert said today.

Bob Williams, founder and senior fellow of the Evergreen Freedom Foundation and a member of the ALEC board of scholars, said states may have to deal with decades of budget challenges due to employee and retiree medical costs and pension payments.

Williams spoke about these and other challenges in a teleconference from San Diego, where he is attending the American Legislative Exchange Conference (ALEC) annual meeting. Williams said a focus of the meeting will be offering practical solutions to member lawmakers from across the country on how to get a handle on these issues.

Nevada is one of many states facing these challenges.

Nevada’s public employee pension system had a long-term unfunded liability of $9.1 billion as of June 30, 2009, according to the officials who manage the program. Some independent reports suggest the liability is much higher.

The Nevada Legislature in 2009 made some modest reforms to the pension system for new hires, but the long-term liability is already on the books for current public employees when they retire.

Williams said many states mask the real extent of these liabilities using a variety of techniques, such as assuming a higher rate of returns on investments than is realistic.

“But the real crisis coming up is the unfunded retiree health care costs,” he said.

Nevada subsidizes health insurance coverage for retired state employees and their dependents.

A 2008 study commissioned by the Las Vegas Chamber of Commerce estimated the cost of providing the subsidized care at $4 billion over 30 years. The state has not invested money to pay this benefit, instead using a “pay as you go” approach.

The chamber warned that failure to make major changes to the benefit will mean a shift away from funding programs such as education to pay the rising retiree health care costs. The cost of the program in 2008 was under $50 million a year.

Other budget challenges are the states’ reliance on federal stimulus funds to balance their budgets in the current and prior fiscal years, and the need to repay billions borrowed from the federal government to pay unemployment benefits, Williams said. Employers will see likely see tax hikes to repay the unemployment loans, although such moves could run many out of business, he said.

Nevada is expected to borrow as much as $1 billion to pay unemployment benefits through the end of the current recession. The state has borrowed over $450 million already.

Williams said many governors across the nation are working on the assumption that the Obama Administration will forgive the loans to states for unemployment benefits.

Williams said federal stimulus funds allowed states to spend at a higher level than they otherwise would have. But when the funding stops, states must continue the spending under “maintenance of effort” requirements.

The anticipated loss of federal stimulus funds for future budgets is a major factor in Nevada’s anticipated $3 billion-plus revenue shortfall for the upcoming two-year budget.

State government economies are not expected to recover until two years after their private sector economies recover, he said.

But the situation may be even more dire, Williams said. He cited a March U.S. Government Accountability Office (GAO) report to Congress that suggests the fiscal position of state and local governments will steadily decline through 2060, primarily due to health care costs.

The GAO report says: “The decline in the sector’s operating balance is primarily driven by rising health care costs. The fiscal challenges confronting the state and local sector add to the nation’s overall fiscal difficulties. Because most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in GAO’s simulations suggest the fiscal pressures the sector faces and the extent to which these governments will need to make substantial policy changes to avoid growing imbalances.”

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