Mounting Debt and Grappling with the Budget

By Connor Bevans
June 15th, 2010

 Political pundits have openly voiced their concerns regarding the mounting debt that the United States and many states have endured during the economic downturn. Many are treating Greece as a cautionary tale for the government. While debt and budgets are on the minds of citizens, it is important to inform the public of where we stand as a state.

Over the course of the past 8 fiscal years we have seen dramatic increases in spending coupled with a rise in our state debt. Between the year 2002-2005 state expenditures oscillated between $24-25 billion, while state revenues increased at a rate of about 2.5 percent over that same time period, finishing at $23.986 billion. With the advent of increased Medicaid costs and the Patrick administration, our state has seen much more rapid increases in spending. The FY09 ‘Total expenditures and other financing uses’ was $32.273 billion, which represented an increase of 19 percent since 2006 with revenues keeping relatively even, reaching $31.776 billion in 2009. The gap between revenues and expenditures has continued throughout these past 8 years, which only has added to the soaring debt in Massachusetts.

In 2007 Massachusetts held the highest state per capita debt, at a whopping $10,504; the debt has continued to rise since then. Massachusetts currently holds a debt of over $21 billion, a substantial increase from the $15.796 billion debt that Massachusetts held in 2002. This number does not begin to touch that of California or Greece, but there still should be cause for alarm.

The most concerning aspect of the rising debt is the debate that may ensue over entitlement spending. In Greece there were massive demonstrations over cuts in pensions to state employees. This is a concern that people in Massachusetts do not have to be immediately concerned about. However, this year there is over $15 billion worth of unfunded liability for State Retiree health care; this was a large increase over the $11.3 billion unfunded liability that we had seen in the 2008 fiscal year.

Unfunded liability concerns are not exclusive to Massachusetts. Dr. John Rauh, of Northwestern University’s Kellogg School of Management, cautions that by 2025 over half of states’ pension programs will run out of money because they are assuming rates of return on investments that are too high over the long term. Any investor during the past few years knows that in these unsettled economic climate you cannot assume a certain return on your investment. We are playing a dangerous game with state employees’ future.

We are facing very difficult times, and politicians will have to make very difficult and innovative decisions to close these gaps.