Tuesday, July 7, 2015

The debt time bomb

Another warning about the federal government’s precarious debt burden illustrates why Washington needs to balance its books soon.

The debt time bomb

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Another warning about the federal government’s precarious debt burden illustrates why Washington needs to balance its books soon.

The latest alarm comes from Moody’s Investors Service, which rates the creditworthiness of governments worldwide. Moody’s said the United States’ mushrooming debt could threaten its “triple-A” credit rating.
 

The agency said the United States and other western nations have moved “substantially” closer to losing their top ratings, a reflection of their ability to pay back loans. To lose the status that the United States has enjoyed since 1949 was previously unthinkable.
 

And it’s not just U.S. prestige at stake. A downgrade would harm the federal government’s ability to borrow money cheaply.
 

Washington has been living on borrowed money, especially during the past decade. President Obama’s proposed $3.83 trillion budget would borrow 42 cents of every $1 spent. The federal deficit is expected to rise this year to 10.6 percent of gross domestic product, its highest level since 1946. And the fiscal future looks even dimmer.
 

Lower credit ratings result in higher interest rates. That means repaying the government’s ever-rising debt would cost taxpayers more. And it would leave the government with less money to spend on everything from school books to border fences.
 

A credit downgrade can, and does, happen. Credit problems in Portugal and Greece have forced those nations to cut back drastically on government programs, leading to public unrest.
 

A similar lesson is confronting states from New Jersey to California. Not only has the recession challenged states’ annual budgets, but their growing debt and liabilities from public pensions could make investors leery of buying their bonds at some point.
 

States must balance their budgets, unlike the federal government. But they’ve engaged in accounting tricks and other fiscal sleights-of-hand to plug short-term deficits at the expense of long-range obligations.
 

Both Pennsylvania and New Jersey face huge unfunded pension liabilities, although New Jersey’s debt per capita is far worse. Both states have made their pension problems worse by shortchanging their payment obligations in recent years. They’ve compounded the predicament by increasing promised benefits to retirees, even as they’ve put off decisions on how to pay for it.
 

Gov. Christie has taken steps to ease the crisis, getting the legislature in Trenton to approve a package of benefit cuts for future employees. It’s expected to save the state at least $8 billion over the next 15 years. But that’s only a fraction of the overall problem — New Jersey’s pension funds have a shortfall of $46 billion.
 

Gov. Rendell has proposed essentially to re-amortize Pennsylvania’s pension liabilities over 30 years and spread out the contributions, which would just postpone the day of reckoning. A needed long-term solution is a proposal by GOP legislators to change the formula for calculating public pensions, which would likely result in lower benefits for future employees.
 

The debt time bomb for the country and for states is ticking louder. Elected officials can’t ignore it any longer.
 

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