Federal Reserve loans will set governments back

Sheila Weinberg  |  April 17, 2020

The Federal Reserve announced that it would buy municipal bond debt of all 50 states, 16 counties and the ten largest cities. The majority of these governments were in financial trouble before the current crisis. The ten largest cities had already accumulated $261 billion of debt and the 50 states had amassed $1.5 trillion. While Truth in Accounting hasn’t studied all of the 16 counties, the largest five had accumulated $54 billion of debt. 

While these debt calculations include unfunded retirement debt, they do not include capital debt and are offset by non-capital assets. 

For years these financially struggling governments claimed they had balanced budgets while their debt continually increased. Most of the governments were woefully unprepared for any crisis, much less the dramatic one we are currently experiencing. Pension plans are massively underfunded and very little money has been set aside to pay for retiree health care commitments. The 50 states have set aside only 66 cents for each dollar of pension benefits promised and seven cents for each dollar of retiree health care benefits promised. For the ten most populated cities, the amount set aside for each dollar promised is 70 cents for pensions and ten cents for retiree health care benefits.

While these Federal Reserve loans will help in the short term to give governments money to pay for critically needed services and benefits, the loans will most likely harm financially struggling governments and their taxpayers in the long run. Governments may eventually be able to pay back these loans, but the governments’ overall debt will most likely permanently increase. These governments have no mechanism in place to run the true surpluses needed to pay down debt.

In the past, financially stressed governments balanced their budgets by borrowing money or shorting the contributions needed to properly fund their pension and retiree health care benefits. These practices are akin to people claiming they have balanced their budgets by taking out loans or not paying the minimum payments on their credit cards.

Illinois is a good example. After its last budget process Governor J.B. Priztker and legislators claimed a balanced budget and even touted a small surplus. This “surplus” was accomplished by planning to pay  $9 billion into the state’s pension systems, even though the systems’ actuaries calculated that $13 billion was needed to properly fund the systems. California is another example of poor financial management. While Governor Gavin Newsom claimed the state ran a $21 billion surplus last year, the state is in a $275 billion financial hole, including $110 billion of pension debt and $112 billion of retiree health care debt.

Overall the 50 states have amassed $824 billion pension debt and $665 billion of retiree health care debt. The ten cities that are on tap to get Federal Reserve loans have $117 billion in pension and $118 billion in retiree health care debt. While the pension debt is spread among the cities, New York City has the vast majority of retiree health care debt at $106 billion.

The Federal Reserve loans will financially set these governments further back for a long time, if not forever. To pay back this new debt, governments will have to run true surpluses. Before the current crisis, only ten of the states had run annual surpluses that have enabled them to amass money available to pay future bills.

To run true surpluses, city and state governments will need revenues in excess of the costs of current services and benefits plus the amount needed to properly fund their pension and retiree health care benefits systems. While defined benefit amounts will stay the same, money needed to fund governments’ retirement systems will have to increase to offset the current devaluation of retirement plans’ assets due to lower returns on invested funds. 

While most people believe these temporary loans are needed, citizens must understand that this new debt most likely will permanently harm their governments’ finances. Taxpayers may be permanently paying interest on this debt or on new debt that will need to be issued to pay the Federal Reserve loans; future services and benefits may be cut back and less money may be contributed to the pension and retiree health care systems; and, most likely, taxes may be increased.

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