Despite historically low borrowing costs, state and local investment in infrastructure is flagging as governments struggle to manage massive pension shortfalls (upwards of $3 trillion, according to some estimates). The Wall Street Journal reports:
Plunging global interest rates have made borrowing cheaper than ever. But instead of spending on aging roads, bridges and buildings, many state and local governments are scaling back.
New government-bond issues have dropped to levels not seen in the past 20 years. Municipal borrowers issued about $140 billion in bonds for new projects last year. Adjusted for inflation, that is 53% lower than in 2006 and 21% lower than in 1996. So far this year, municipalities have borrowed $95.1 billion, about $10 billion more than at this time last year. […]
Many struggling legislatures and city halls are instead focusing on underfunded employee pensions and rising Medicaid costs. Some cash-strapped areas, such as Puerto Rico and the city of Chicago, face high annual debt payments.
One way of thinking about the dilemma facing state and local governments: On paper, they should be borrowing more. Total debt levels are manageable, interest rates are low, and roads and bridges need repairs. But here’s the rub: Off the books, they face massive hidden debts in the form of unfunded pension liabilities, accumulated over decades.
Most states allocate money to their public worker pension funds as if those funds could expect eight percent annual returns. In reality, as we have seen, returns are far lower, and are likely to stay that way for the foreseeable future. That means that in order for their future pension obligations to be fully funded, states would need to be putting aside a far larger share of their budget than they currently are. In that sense, a good chunk of state and local discretionary spending is already being borrowed. And the interest payments will start coming due in the not-so-distant future.
The story is a reminder that the state and local pension crisis isn’t just about bankruptcy. More likely, the vise will tighten gradually, choking off infrastructure and education along the way. Those who care about productive public investments in the future should not just be agitating for more debt. They should also be focused on putting pensions on a path to solvency.