The United States Of Debt: 10 Years After The Financial Crisis

by Sheila Weinberg: Ten years ago this fall a dangerously teetering banking sector led Americans to worry that financial crisis would engulf private savings and possibly the entire national economy. In October of 2008 the federal government committed $700 billion to shore up Wall Street, and the Dow still suffered an unprecedented 187-point single-week decline.

Recession look-backs often focus on the federal government as protagonist, with national unemployment figures acting as plot points. Less analyzed, are the varied and nuanced ways in which the 50 state governments struggled to navigate the choppy waters of the past decade. Many state budgets were severely strained with the collapsing value of toxic financial assets.

Some of the largest programs on your typical state ledger — retirement and health plans for public employees — sink or swim on the fortunes of Wall Street. The fiscal health of these programs can have life altering impacts on the millions of Americans who rely on them: school teachers, police officers, and countless other public servants.

Risky Business
Many statehouses across the country found that their fund managers had moved away from safe fixed income investments to equities and alternative investments. When the markets dropped, these high-risk high-reward speculations ended up throwing numerous pension and retirement funds hundreds of millions of dollar into the red. The varying levels of risk in different state portfolios ended up having a lasting financial impact that many are still struggling with to this day.

An easily understandable way to measure a government's finances is to size up their assets, minus all the bills, and divide the result by the number of constituent taxpayers. I call the resulting sum a Taxpayer Burden (or Taxpayer Surplus, when the figure is positive.) Taxpayer Burdens have skyrocketed across the country over the past decade as risky investments swamped a patchwork of state pension and retirement plans.

Taxpayer Burden On The Rise
Among the hardest hit, New Jersey's individual Taxpayer Burden has increased from $34,600 in 2009 to $61,400 in 2017, the latest year with available data. Connecticut's Taxpayer Burden increased from $41,200 to $53,400, and Illinois' leaped from $29,100 to $50,800. More than just a vexing public policy debate, these burdens are a real millstone around the necks of our children and grandchildren. Some lawmakers are starting to grapple with the unenviable dilemma of cutting promised benefits for public servants, or else raising taxes without any congruent increase in services.

Some state budget makers lucked out over the past decade. The northwestern plains states have experienced a financial windfall with the exploitation of resources beneath the Bakken Shale Formation. The state with the second largest Taxpayer Surplus, North Dakota, collects $1.6 billion a year from oil revenue, and currently enjoys a Taxpayer Surplus of $24,900. (The state with the highest Taxpayer Surplus in the union is Alaska, no stranger to the wealth of an oil economy.)

Retirement Funds Wise Up
Not every state has had the fortune of striking oil, but others did wise up and reform their pension and retirement plan investment strategies. Utah, for one, has long displayed a spirit of fiscal prudence, and does not promise benefits that it cannot afford to pay.

More concerning are the statehouses that seem to have missed the lessons of the last recession, and continue to double-down on high-risk high-reward investments. For example the Kentucky Retirement System has 85% of its investments in equities, real estate and other alternative investments, while the Illinois Teacher Retirement System has 78% invested in those riskier asset classes.

At a national level, the country's economic outlook couldn't look anymore different from the dark days of 2008. The unemployment rate is down from its high point of 9.9% to a much healthier 3.7%. But as we pass the 10-year mark, there are dark storm clouds on the horizon again over the states that have chosen to double-down on their old investment strategies. What do they think is going to happen next time there is a market downturn?
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Sheila Weinberg, a certified public accountant, is the founder and chief executive officer of Chicago-based Truth in Accounting, a 501(c)(3) non-profit organization that researches government financial data and promotes transparency for a better-informed citizenry. Originally shared at Investor's Business Daily.

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