Texas has $81 billion in hidden debt that doesn’t show up on balance sheets, according to a new study by Truth in Accounting.
This means Texas is $62.6 billion short of the money it needs to pay its long-term bills, which the group calculates as equal to $8,300 per taxpayer.
These figures do not include the $333 billion in bond debt run up by local government agencies, particularly school districts.
When it comes to calculating unfunded liabilities, a few changes in assumptions can produce wildly different figures, so we took a closer look at Truth in Accounting’s numbers. The surprise here is that, if anything, Truth in Accounting is understating the magnitude of the problem.
The group pulls its figures from the state’s annual financial reports, which for this year only are calculated using different rules than the state’s pension funds. The pension funds have started using new accounting rules that showed the old accounting understated pension debts by half.
Even the new accounting rules can understate matters. Texas’ major pension funds are advised by the same actuarial firm that was telling Detroit it could increase benefits right up until the city went bankrupt.
That firm, Gabriel Roeder Smith & Company, is now being sued, accused of misleading officials with heavily backloaded financing plans predicated on assumptions that didn’t pan out. The firm uses similar assumptions with Texas, and those aren’t panning out, either. But let’s start with the big picture.
Truth in Accounting started by adding up all of Texas’ assets and debts, then set aside capital assets, such as roads and buildings, which aren’t going to be sold, as well as the debts associated with them.
That meant the state has $68 billion in unrestricted assets against $130 billion in debt, $91 billion of that for unfunded retiree pensions and health care benefits. Because $81 billion of that debt has always been kept off the books, the state has been able to avoid its balanced budget requirement.
“Texas’s government is treating pension and retirement benefits like a mortgage that’s payable over time,” said Sheila Weinberg, founder of Truth in Accounting, in a statement. “But, it’s nothing like a mortgage — it’s actually a lot like a credit card. State officials are ignoring the minimum payment requirements and continue to accumulate more debt.”
Weinberg’s figure of $42.2 billion for unfunded pension liabilities is pulled from the annual financial report prepared by the state comptroller, but that report understates the debts, due to a quirk in the phase-in period for new accounting rules.
For example, Comptroller Glenn Hegar lists the Texas Employee Retirement System at $6.64 billion in debt, but ERS’ own report calculates $14.5 billion in unfunded liability ($25 billion in assets minus $39.5 billion in liabilities).
Hegar lists the Teachers Retirement System at $31.6 billion short of what it needs. TRS puts itself at $26.7 billion short, but a better estimate would be anywhere from two to four times that amount, as TRS is using an 8 percent discount rate.
A discount rate is basically a rate of return in reverse, used for calculating how much to set aside now if you need a certain amount at some point in the future. In other words, even if TRS gets that 8 percent return on all its investments, it’s still $26.7 billion short of what it needs now.
Just by lowering the discount rate to 7 percent, the liability figure jumps to $47.7 billion.
Almost nobody actually expects investment returns of 8 percent, so the new nationwide accounting rules coming into effect were meant to keep those pie-in-the-sky assumptions from hiding real debt. The problem is actuaries can just use other pie-in-the-sky assumptions.
One of them that’s proven popular with local governments is to assume payroll will grow rapidly. In broad terms, this lets them kick their pension costs down the road, when they can theoretically be more easily absorbed by a much larger government.
A New York Times report on a lawsuit against Gabriel Roeder Smith & Company explains how it works:
“Gabriel Roeder’s method relies on assumed steady payroll growth. It calculates an employer’s required annual contribution as a level percentage of its payroll. This ‘backloads’ the contributions so that they may not cover the plan’s true costs in the early years, but will rise automatically later as the payroll grows.
“If the payroll shrinks, however, the required contributions will skyrocket as a percent of payroll, placing an extraordinary burden on the city and its tax base. The federal pension law that bars companies from using this method is not binding on states or cities, however, and virtually all of them use it.”
Gabriel Roeder’s calculations for how much Texas needs to set aside are predicated on long-term annual payroll growth of 3.5 percent, but that assumption isn’t supported by the state’s history from 2001 to 2014.
The number of ERS members in the workforce has actually declined from 149 million in 2001 to 134 million in 2014. (The number of retirees collecting a pension doubled over the same timeframe.)
If you go back to 2001, apply that 3.5 percent growth assumption, and work forward, the problem becomes clear, as Gabriel Roeder’s own calculations demonstrate. In 2001, the state had a $4.9 billion payroll, and projected growth of $2.8 billion by 2014. Actual growth was just $1.3 billion.
Annual pension costs are calculated as a percentage of payroll.
In household terms, this is like scheduling balloon payments and planning to cover them with a raise that never arrives. The result is much the same: a debt snowball that takes up more and more of the monthly budget but never shrinks.
This article was reprinted with permission from watchdog.org and the Franklin Center. The original author was Jon Cassidy who can be contacted at [email protected] or @jpcassidy000. Original article appears HERE.