The State and Local Government Meltdown

I have written before that the government story of the next decade will be the financial meltdown that will ensue as state and local governments are forced to face up to the enormous unfunded pension and medical liabilities they have assumed for their state employees.  Largely, these liabilities are currently well-hidden and off the books, a trick even Jeff Skilling was unable to pull off at Enron. 

My previous prediction that the liabilities probably total over a trillion dollars now seems way low.  Just one state, Illinois, may have over $100 billion in such off-the-books liabilities, and this does not even include liabilities of local authorities like the city of Chicago:

The study puts the state's pension debt at $10 billion, its unfunded
pension costs at $46 billion, its unfunded employee health care costs
at $48 billion, and its unpaid Medicaid bills at $2 billion. The total
costs that will be pushed onto tomorrow's taxpayers without reforms is
an enormous $106 billion, or $8,800 per every person in the state of


  1. Dan:

    Talking to a financial advisor once, he suggested municipal bonds as very-low-risk investments. If cities are driven bankrupt by unfunded pensions, will their bonds go down with them? What does that mean for investors?

  2. ko:

    It's therefore no surprise that true accrual accounting and capital budgeting is unpopular with lawmakers and bureaucrats. It may be a good time for said official to buy pension insurance--in the event that we younger voters determine that the government doesn't have the right to obligate future taxes--for past labor.