Nation’s Debts, Liabilities Could Be Worse Than Government Says

Nation’s Debts, Liabilities Could Be Worse Than Government Says
June 20, 2011

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

According to multiple reports, the nation’s debt situation is much worse than official government estimates.

A June 6 article by USA Today reporter Dennis Cauchon reported the newspaper had concluded, “The federal government's financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit. . . . The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.”

On that same day, Meredith Whitney of Meredith Whitney Advisory Group LLC issued a report to her clients expanding on warnings she issued last year that the municipal bond market could be hit by hundreds of billions of dollars of defaults in the next few years.

‘Startlingly Bleak Picture’
Fortune magazine analyzed the report and noted she “presents a startlingly bleak picture of state debt. States have two types of liabilities that are fully backed by tax revenues. One is on-balance sheet, and the other is excluded from the states' books. The first type is the General Obligation bonds that fund salaries and current expenses. Those are fully visible to investors. But the bigger problem is the giant shadow cast by the pension and OPEB [other post-employment benefits such as health insurance] liabilities that are absent from balance sheets. In fact, states weren't even required to report the OPEB number at all until 2008, and the pension figure is consistently understated because states generally far overestimate future returns on their retirement funds.

“As Whitney shows, these off-balance sheet numbers are an incredible three times the size of all on-balance sheet debt, totaling $2 trillion. The load is rising quickly; the unfunded pension burden has jumped 50% in the past year.”

Sheila Weinberg, founder of the Institute for Truth in Accounting, responded to these reports by saying they may be understatements. The Institute for Truth in Accounting has been analyzing the on-balance sheet and off-balance sheet liabilities for all 50 states and the federal government.

‘Difficult to Calculate’
“As far as the $62 trillion number reported by USA Today, that number has become—how should I say it?—difficult to calculate at this time,” she said.

Weinberg says dubious claims by government are the cause of the problem. She points to the Obamacare legislation, which she says is likely to have far higher costs than official estimates. And she noted the most recent Medicare trustees’ report gives an official liability estimate but does not include a dissent from Medicare’s own actuaries, who estimate greater unfunded liabilities than the trustees acknowledge.

“If you take everything everybody owns—houses, cars, stocks, etc.—it’s less than that $62 trillion,” Weinberg said. “That’s scary.

“The one thing I am happy to see is how budget negotiations are being tied to the debt ceiling,” Weinberg said. “That should always be in sync. If we’re going to use deficit spending, we’re going to have to borrow more money, and we need to be cognizant of this.”

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of FIRE Policy News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)