Long-term Obligations Vary Across States
States commit to future spending when they borrow and when they fail to fully fund retirement costs for public employees. As of fiscal 2010, the largest of these long-term obligations was for unfunded pension liabilities in 31 states, unfunded retiree health care costs in 11 states, and public debt in eight states.
While states pass balanced budgets each year, some spending commitments that will not come due for years go unpaid. A snapshot of debt and unfunded retirement costs in fiscal 2010 shows these obligations ranged from a total of $1.2 billion in South Dakota to $305 billion in California.
States take on these obligations, which are paid over decades, for different reasons. Sometimes a state borrows to build infrastructure projects that deliver services for years in the future and may spur economic growth. When the bill comes due, states usually cover these debt obligations before other expenses. In other instances, a state creates unfunded liabilities by failing to cover the full retirement costs for public services already performed, shifting those expenses to future taxpayers.
Largest Long-term Obligations
|Unfunded pension benefits||31 states|
|Unfunded retiree health care||11 states|
|Public debt||8 states|
This snapshot found, as of fiscal 2010:
These claims on future revenue put pressure on state finances, potentially affecting borrowing costs, credit ratings, and revenue available for other priorities—such as education or health care. However, the degree of fiscal challenge varies depending on the size of a state’s budget, economy, and population, and on the type of liability. States with faster-growing economies may find their obligations more manageable. States also may be able to cut certain costs over time by refinancing debt or trimming retiree health benefits, which have fewer legal protections than pensions.
Besides debt and unfunded retirement costs, states also face other long-term budget pressures, such as expenses for deferred maintenance and upgrades to infrastructure.
Analysis by Kil Huh and Sarah Babbage