Ensuring State and Municipal Solvency

Oct 01, 2010

"Ensuring State and Municipal Solvency" outlines the tremendous fiscal challenges facing states and municipalities, including long-term structural issues like unfunded pension and health-care obligations, and outlines several options to stabilize the situation.

At this point, cutting back on services and increasing taxes won't be enough to stabilize state and municipal finances, even when the economy fully recovers. It's going to require real paradigm shifts: a fundamental restructuring of budgets and the entire budgeting process, sustainable revenue generation, new efficiencies and federal/state partnerships.

Key data points on the state and municipal budget situation include:

  • At the aggregate level, state and local government pensions suffered losses of $835 billion during the 2007-08 financial meltdown. Through the first quarter of 2010, less than 50 percent of those losses had been recouped.
  • In FY2000, half the states had fully funded pensions; by FY2008 only four (Florida, New York, Washington and Wisconsin) had fully funded plans.
  • Health-care costs at the state and local level are expected to double by 2050.

Proposed solutions include:

  • Preemptive and collective burden sharing
  • Adopting standardized actuarial assumptions, more similar to corporate-sector accounting standards, to ensure more realistic rate-of-return scenarios when determining public-sector pension liabilities
  • Implementing multi-year budgeting plans/rainy-day funds
  • Reassessing possible economies of scale from shared services/consolidation with other governmental entities
  • Establishing control boards as a last resort for states and municipalities in extreme distress
  • Providing short-term federal aid to states and municipalities that actively implement steps to restructure their finances

The report is a joint production of the Milken Institute and the Ewing Marion Kauffman Foundation and is the result of a Financial Innovation LabTM that pulled together a diverse group of state and local officials, union representatives, experts from the capital markets, money managers, academics, public-sector attorneys, and representatives from bond rating agencies.