Dropping the debt bomb

Not long ago, when Gov. John Baldacci announced that Maine had a “budget surplus” of about $150 million, newspapers splashed the story on the front page. One can only imagine the spirit of self-congratulation at the Blaine House. Unfortunately for the governor, the jubilation was cut short by the news that we will go into the next budget cycle with a “structural gap” of $570 million, even worse than expected.

Despite lavish media coverage of these financial developments, no reporter saw fit to mention the 800-pound gorilla in the room – Maine’s mountain of debt in the form of “unfunded liabilities.” No amount of political spin can make this gorilla vanish. Instead, under a major new accounting rule governing states and cities, Maine’s massive debt is about to become a whole lot more visible. The impact on the state budget could be severe.

The largest unfunded liability is a debt owed to the Maine State Retirement System, which pays pensions to retired teachers and state workers. A smaller but fast-growing debt is in the account that pays health insurance premiums for retired teachers and state workers, and now, under a new law, also for municipal police officers and fire fighters.

It’s no mystery how we got into this mess. Politicians love to shower benefits on people to win their votes. They know that when it comes time to pay the bill, they will be long gone from the scene. Future taxpayers are left to “pick up the check.” The true masters of this technique are in Congress, but Maine’s current political leaders are coming on strong.

To get an idea of the trouble we face, consider the pension fund. The unfunded actuarial liability (UAL) is currently $3 billion – the amount needed to fund existing promises. Under a state constitutional amendment passed in 1995, this debt must be paid off by June 30, 2028.

Gov. Angus King set the state on track to retire this debt by 2019, at a total cost, including interest, of about $5.5 billion. But during its first two years in office, the Baldacci administration switched to the longest allowable repayment schedule, stretching the debt out to 2029.

The intent, of course, was to reduce the annual payment, similar to taking a 30-year mortgage on your house instead of a 15-year mortgage. In the current two-year budget cycle, for example, the state is “saving” about $178 million by making smaller payments to the pension fund. Instead of paying in $540 million during 2006 and 2007, as the old plan called for, it is paying in $362 million.

This sounds great until you examine the real costs. In extending the repayment schedule by 10 years, the Baldacci plan adds $2.4 billion to the total expense. Instead of costing the state about $5.5 billion, it will now cost us $7.9 billion. In a cash-strapped state like Maine, an additional $2.4 billion is serious money. Imagine the schools that could be built with that kind of money, or the college scholarships that could be awarded to Maine kids. Instead,

we will get nothing.

Boasting about a $150 million “budget surplus” sounds rather absurd in the context of this huge obligation.

The Retiree Health Insurance Fund is a trickier matter. The unfunded liability here is $1.2 billion, but that number is four years old. Health care costs have increased sharply since then. According to state Sen. Peter Mills, who has explored the situation, the figure is now much higher, possibly more than $2 billion. The latest estimate will be revealed by the state controller when he appears before the Legislature’s Appropriations Committee in November, safely after the election.

Gov. King established a reserve fund to chip away at this debt. By 2004, it had a balance of $88 million. The administration of John Baldacci “swept” the reserve clean in 2004 and spent the entire amount in “supplemental” budgets.

If that were not bad enough, this year the Legislature added municipal police officers and firefighters to the Retiree Health Insurance Fund. They will add an estimated $80 million to the unfunded liability. That’s the amount that should be on deposit now to guarantee that they can collect their benefits. Yet no money was provided to cover that cost, and there is no plan to pay off this debt, which has the potential to explode.

But a reckoning is coming. A new accounting rule – Government Accounting Standards Board statement number 45 – will kick in on July 1, 2007, the start of the next state budget. While the rule cannot force the state to pay off these liabilities, it does require that the full amount be listed in Maine’s financial statement, starting with the next fiscal year. Hiding these enormous state debts will be impossible.

The “teeth” in the new get-tough regime will come from the bond houses that set Maine’s credit rating, and they will make one thing crystal clear – Maine had better have a plan in place to pay down these liabilities. If not, our credit rating will sink, jacking up interest rates on bonds. Such is the grim reality that will confront the next governor and the next Legislature. Cut other parts of the budget substantially to pay down these obligations, or face the music on Wall Street.

Promising benefits to teachers, state workers, firefighters and police is easy when you leave the job of paying for it to someone else. But those folks should not have to wonder if those benefits will actually be there when they need them.

Rep. John Churchill, a second-term legislator from Washburn, is retired from the Maine State Police. Rep. Everett McLeod, a first-term legislator from Lee, is a regional sales manager.