This commentary originally appeared in The Monitor on March 5, 2017.
The rising burden of Texas’ state debt and public pensions must be stopped.
As families across the Rio Grande Valley must limit their reliance on debt, so too must the Texas Legislature. Legislators should do this to not only continue their AAA credit rating by all three major credit rating agencies, but they should also do it to keep the tax burden lighter on you.
While Texas ranks 2nd lowest in state debt per capita among the top 10 most populous states and 16th best nationwide in fiscal health, there are increasingly signs of fiscal fragility. Reforms to state debt and public pensions would help curb these dangers so they don’t come home to roost on Texas families.
When debt is mentioned, there’s usually a negative connotation associated with it. Debt is not inherently bad, but like many things, too much of it can be. State legislators must be vigilant in prioritizing taxpayer dollars in the most effective way, which includes expenditures and tax cuts, to then appropriately manage state debt.
At the end of the 2016 fiscal year, Texas state debt outstanding, which includes only the principal owed, was $49.8 billion. This amount is small compared with Texas’ $1.7 trillion economy. However, it has increased by 52.7 percent above the increase in the state’s population since fiscal year 2006 to $1,790 owed per every man, woman, and child in Texas.
Accounting for the full cost to taxpayers of both the principal and interest owed during the life of the loans, total debt service outstanding is $80.8 billion, bringing the amount owed by every Texan to roughly $3,000.
If these trends and amounts continue to accumulate without proper management and accountability, it could require either higher taxes that destroy economic activity or government spending cuts that could undermine essential government programs.
Lawmakers this session could slow the rising tide of debt by increasing ballot box transparency.
Currently, the Legislature passes bonds for things like roads and then voters consider approving the ballot proposition with just the bond’s purpose and amount available. To provide voters who don’t have sufficient time to obtain more information while working and caring for their family, bond propositions should include more information with so much at stake. This includes the total debt service required to pay the proposed debt and an estimate of the influence on the average taxpayer’s taxes.
Another potential burden plaguing Texans is the rising amount of unfunded liabilities in public pensions from the current setup of costly defined-benefit plans.
The state’s two largest pension systems, Employees Retirement System (ERS) and Teachers Retirement System (TRS), have $41 billion of unfunded liabilities. This amount is the net present value of future benefits paid less expected contributions and investment earnings. The estimated future funding gap that could quickly exhaust these defined-benefit plans is dependent on volatile annual rates of return and fewer contributors paying for more beneficiaries.
For example, the $41 billion unfunded gap for just ERS and TRS is derived by using an assumed 8 percent of annual return, which isn’t met every year despite fund managers taking on more risk. However, assuming a risk-free rate of an average 15-year Treasury note rate of 2.3 percent, research shows that all unfunded liabilities in Texas amount to $360 billion, or about $13,000 per person.
Until state pension systems are not based on payouts without appropriate funding, taxpayers will ultimately be on the hook to fund any potential shortfall.
While there are steps that can kick the can down the road, as past legislatures have taken, the best option is to transition pensions to defined-contribution plans. This would allocate payments of retirement funds based on matching deposited funds of employees and taxpayers instead of payouts today that correspond little with matched deposits.
By passing ballot box transparency for issuances of state debt and converting pensions to defined-contribution plans, legislators can reduce the growing burden of liability payments on current and future generations of Texans. Achieving this will help legislators prioritize taxpayer dollars for essential government provisions and tax cuts so you get the biggest bang for the buck for each dollar sent to Austin.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.