In our analysis of state governments’ financial condition, we calculate “money needed to pay bills.” This represents the costs a government has incurred in the past that future taxpayers will have to cover.
Our analysis does not include costs incurred in future years. We only look at costs already incurred before the end of the fiscal year—in this case, FY 2016.
Delaware Treasurer Kenneth Simpler recently claimed our Financial State of the States report is “misleading” because it compares the state government’s current assets to all the money it owes over a number of years. According to this logic, then it also would be misleading to compare a person’s assets to his or her bills, including credit card debt. Simpler could say this is a misleading analysis because we are including an individual’s credit card debt, which he or she is planning to pay off over the next few years.
When one uses a credit card, the product or service bought is consumed in the present with the promise that the cost will be paid sometime in the future. When the bill from the credit card company arrives, the cardholder has the choice to either pay off the balance entirely or just a portion. If the cardholder chooses to pay a portion of the balance, then the money that would have gone to pay the entire balance can be spent on something more gratifying than paying debt. But the decision to pay the balance in the future does not negate the fact that the product or service was consumed when the charge was made, or that the cardholder owes the remaining balance.
In a similar way, Delaware and other states are “charging” some current compensation costs to the retirement plans’ “credit card”. When employees work they provide current services to the state and the salary portion of the compensation cost is being paid in the current payroll period, while the retirement benefits’ portion is being charged to the state’s credit card. If the state chooses to pay only a portion of the credit card’s balance, then the money that would have gone to pay the entire balance can be spent on something citizens might view more favorably than paying money into the retirement plans. But the decision to pay the balance in the future does not negate the fact that the retirement benefits’ portion of the compensation cost was incurred when the employees earned them.
And because the state chooses to pay the remaining balance over a number of years does not change the fact the state owes the unfunded balance. Future taxpayers will be burdened with paying these unfunded retirement promises—plus interest—without receiving any services for those tax dollars.
This analogy not only shows why our analysis is legitimate, but also how state governments can mislead taxpayers about their true financial condition.