RALEIGH – I am all for encouraging active imaginations, believe me. My boys have a wide assortment of hats, weapons, cooking utensils, and toys with which they are encouraged to pretend. We make up stories together using household items visible from our story chair. And being a bit of a sci fi/fantasy nut myself, I fear that I may have passed along to the next generation of Hoodlums an inordinate fascination with hobbits, Klingon birds-of-prey, junior members of the Justice League of America, Martian fliers, sandworms, talking pigs, and Sith lords. (The new Narnia film, viewed yesterday, gets the highest rating of three Hoods flipped way up, I should mention.)
But there are times when having an active imagination, a less-than-firm grasp on reality, is not a plus. For example – and let me know if you think I’m going too far out on an Ent’s arm with this – I submit that imagination should have little place in fashioning North Carolina’s state budget.
Apparently, lawmakers have been making decisions about the state’s finances and debt load based on the fantasy that adequate reserves exist to pay for the health expenses for retired and soon-to-be retired state employees. According to a report in Triangle Business Journal, North Carolina state government is preparing to comply with a directive from the Government Accounting Standards Board to report more accurately its financial liabilities. Other states are in the same boat, or perhaps even a less-imbalanced one. That doesn’t change the fact that North Carolina’s liability could end up swamping the ship of state.
The dollar amounts are daunting. Reporter Michael Wagner says that the state is estimating a cost of $10.4 billion over 30 years to pay the bill for retiree health care. A higher estimate will probably materialize in another year.
This is a state debt indistinguishable in some ways from that of bonded debts for state buildings. It is an obligation that state government, meaning all of us as taxpayers, will have to satisfy unless we want to accept severe financial, social, and political consequences. It is a debt that should have been reported clearly years ago so that taxpayers could better evaluate proposals to issue billions of bonds for university construction, water and sewer projects, natural-gas lines, and other functions.
Will the listing of the debt change the rating agencies’ assessment of North Carolina investment risk? Some budget officials fear it might. “Obviously, we can’t fully fund that kind of liability on an annual basis,” says State Controller Robert Powell. “How will they look at it in terms of the overall financial rating?”
I agree that this is an important question, but it isn’t the most important one. As I have written many times before, the political class has a fascination with debt ratings that has never made much sense to me. Yes, differences in interest rates matter, but the size of the principal matters more. Given the existence of this liability for current employees, should we adjust the benefit package for new employees so that taxpayers aren’t paying the entire cost of the retiree-health benefit? Or, alternatively, should the state divest itself of other responsibilities so as to satisfy its current ones without massive new tax hikes now or in the future?
Policymakers can be as imaginative as they like, but they can’t wish these issues away.
Hood is president of John Locke Foundation.