Interest on the Debt and a Responsible Debt Ceiling

February 6, 2023 By Newt Gingrich 1 Comment

With the debt ceiling now reached, it is clear we must increase in the amount of money the United States government can legally borrow.

President Joe Biden and most Democrats have taken the position that we should increase the spending limit with no changes, modifications, or reforms.

Republicans—and Democratic Senator Joe Manchin—have said it would be irresponsible to simply extend the government’s ability to run up more debt without curbing spending. Any debt ceiling increase should be done in a responsible way, with serious reforms to the pattern of government spending, that will move us back toward a balanced budget by 2033.

The sheer weight of the interest on our growing national debt should convince anyone concerned about America’s future that the Republicans and Manchin are right.

According to the May 2022 Congressional Budget Office report, the United States is going to add $16 trillion to the national debt between now and 2033 (I’m sure that projection would be much higher now). That additional deficit spending will give the United States a debt as high as 109 percent of gross domestic product in 2027.

If the current uncontrolled spending pattern does not change, by 2030 paying interest on the national debt will cost more than the entire defense budget. By 2033, America will be spending nearly $200 billion more on interest payments than on our national security ($1.19 trillion in interest versus $998 billion in national security).

According to the CBO, all this spending will drive up interest rates—which will of course further drive up interest payments. It currently projects three-month U.S. bonds to jump nearly 400 percent (from 0.6 percent to 2.3 percent) and 10-year U.S. bonds will jump 80 percent (2.1 percent to 3.8 percent) over the next decade. This crushing interest will be borne by taxpayers.

This interaction between the debt and interest rate creates a vicious cycle. The more you borrow, the more pressure there is for inflation. The more inflation, the higher interest rates get. Higher interest rates mean bigger interest payments on the debt.

This cycle of government demanding money to cover its deficits also crowds out capital for the private sector—and ultimately weakens economic growth and job creation. We have watched the European welfare state system for 70 years. It has crowded out economic growth and increased unemployment and underemployment. We’ve seen downward cycles of bigger welfare states transferring more money from taxpayers to those who cannot find work—and thus increasing the number of unemployed. (In some cases, European countries have bailed out their neighbors and only made problems worse.)

I know it is possible to balance the budget because we have done it before. When I was Speaker of the House, we began negotiations with President Bill Clinton, a Democrat, which led to the only four consecutive balanced budgets in our lifetime.

The American people understand that the current deficit-spending machinery of big government is unsustainable. A new Rasmussen poll reports that only 24 percent of Americans favor raising the debt ceiling with no spending cuts.

By contrast, 73 percent believe it is reasonable to cut spending—and 62 percent favor modest cuts in all agencies. There are no sacred cows.

Every dollar we save is a deficit dollar we will not have to pay interest on in perpetuity.

The path forward is clear—and required for our survival.

First, we must get spending under control. Second, we must get to a balanced budget. Third, we must sustain the balance and start paying down the national debt.

Click here to read the full article in Newsweek

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Once again, CalPERS state worker rate is raised

April 14, 2016 By Ed Mendel 3 Comments

State PensionsCalPERS actuaries recommend that the annual state payment for state worker pensions increase $602 million in the new fiscal year to $5.35 billion, nearly doubling the $2.7 billion paid a decade ago before the recession and a huge investment loss.

It’s the largest annual state rate increase since CalPERS was fully funded in 2007. And it’s the third year in a row that the state rate increases have grown: up $459 million in 2014, $487 million in 2015, and now $602 million for the fiscal year beginning July 1.

The annual state actuarial valuation prepared for the CalPERS board next week also shows that the debt or “unfunded liability” for state worker pensions grew to $49.6 billion as of last June 30, up from $43.3 billion the previous year.

And as the debt went up, the funding level went down. The five state worker pension plans had 69.4 percent of the projected assets needed to pay future pension obligations last June, a small decline from 72.1 percent in the previous year.

The funding level of the California Public Employees Retirement System, with 1.8 million active and retired state and local government members, has not recovered from a huge loss during the financial crisis and recession.

The entire system (state workers are less than a third of the total members) was 102 percent funded with a $260 billion investment fund in 2007. By 2009 the investment fund had dropped to about $160 billion and the funding level to 62 percent.

Now the total investment fund, which was above $300 billion at one point last year, is valued at $290 billion this week, according to the CalPERS website, and the latest reported funding level is 73 percent.

In recent years, CalPERS has phased in three rate increases for lowering the earnings forecast from 7.75 to 7.5 percent, adopting a more conservative actuarial method intended to reach full funding in 30 years, and getting new estimates that retirees will live longer.

The CalPERS board clashed with Gov. Brown last November when adopting a “risk reduction” strategy that could slowly raise rates over several decades by lowering the pension fund investment earnings forecast to an annual average of 6.5 percent.

Gov. Brown said in a news release the CalPERS risk reduction plan is “irresponsible” and based on “unrealistic” investment earnings. His administration had urged the CalPERS board to phase in the big rate increase over the next five years.

The CalPERS board president, Rob Feckner, said the go-slow decision emerged from talks with consultants, staff, stakeholders and concern about putting more strain on cities “still recovering from the financial crisis.”

The 3,000 cities and local governments in CalPERS have a wide range of pension funding levels, some low and a few with a surplus. If they are able, CalPERS has encouraged them to contribute more than the annual rate to pay down their pension debt.

Brown could have proposed a new state budget in January that gives CalPERS more than the state rate, paying down state worker debt. But legislators may have more urgent priorities and powerful unions want to bargain pay raises.

Critics contending that California public pensions are “unsustainable” often point to a large retroactive state worker pension increase, SB 400 in 1999, that contained a generous Highway Patrol formula later widely adopted for local police and firefighters.

As the stock market boomed in the late 1990s, the CalPERS investment fund, expected to pay two-thirds of future pensions, bulged with a surplus and a funding level that reached 136 percent.

So, while sharply increasing pensions, the CalPERS board also contributed to later funding problems by sharply reducing state contributions from $1.2 billion in 1997 to $159 million in 1999 and $156 million in 2000.

STATE

Much of the $602 million state worker rate increase next fiscal year is for phasing in the third and final year of a rate increase, $266.7 million, to cover a longer average life span now expected for retirees.

The “normal progression” of debt payments added $176.4 million and “investment experience” $89.5 million. Payroll growth of 6 percent in the previous year, instead of 3 percent, added $109.4 million due to new hires and other factors.

All of the $602 million rate increase, if approved by the CalPERS board next week, would be paid by state employers. Usually, only the state, not the employee, pays for increased pension costs, particularly investment shortfalls that cause most of the debt.

But Brown’s pension reform that took effect three years ago is making a small but noticeable change.

Workers hired after Jan. 1, 2013, receive lower pensions, requiring them to work several years longer to receive the same benefit as workers hired before the reform. In the list of changes resulting in the $602 million state increase next year, lower pensions for new hires are a $33 million reduction.

State workers typically pay a CalPERS rate ranging from about 6 percent of pay to 11.5 percent, depending on the job and bargaining by labor unions. The new employer rates range from 26.1 percent of pay for miscellaneous workers to 48.7 percent of pay for the Highway Patrol.

Under the pension reform, some state workers (most are excluded) are expected
to pay half of the “normal” cost, the estimated cost of the pension earned during a year by a worker, excluding debt from previous years.

Because of an increase in the normal cost, employees hired under the reform by the Legislature, California State University, and the judicial branch would get a small rate increase next year, up from 6 percent of pay to 6.75 percent.

State savings from these and other increases in worker rates must be used to pay down the pension debt. So, even though the state payment under the new CalPERS rate is $5.35 billion, the savings from higher worker rates boosts the payment to $5.462 billion.

 

Article is originally published on Calpensions.com

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Voters Finally Starting to Grasp the Debt Crisis

December 1, 2015 By Jon Coupal 8 Comments

gun spending debt ceilingThe former head of the United States Government Accountability Office has estimated that the national debt is a staggering three times as much as usually publicized. Rather than $18 trillion, the actual number is around $66 trillion.

News reports about government debt at all levels are now more frequent and increasingly alarming. There is little doubt that this is due to the fact that the debt crisis is actually getting worse.

​But it might also be a reflection of a greater awareness on the part of citizens and the news media that debt is a real danger. For those of us who have been warning about government debt for decades, this greater awareness is long overdue.

Understanding all the ramifications of public debt isn’t easy. As to the magnitude of debt, former California legislator and now congressman Tom McClintock used to refer to “MEGO” numbers (My Eyes Glaze Over) meaning that citizens really can’t be expected to comprehend the vastness of numbers – like $66 trillion – with so many zeros behind them.

And it isn’t just the amount of debt that is confusing. In addition to voter approved bonds, normally referred to as “general obligation” bonds, there are a myriad of debt instruments pushed by powerful special interests including revenue bonds, “certificates of participation” and a host of other esoteric instruments created for the purpose of avoiding voter approval.

Other government debt isn’t even reflected by bonds or other instruments. The hundreds of billions of dollars of unfunded pension obligations in California are most certainly debt that ultimately will have to be repaid by taxpayers. And as columnist Dan Walters with the Sacramento Bee just noted, California had to borrow $10 billion from the federal government for the state’s Unemployment Insurance Fund which remains insolvent even though we are told by the political elites that California is in the midst of a vibrant economic recovery.

So why is it, given the complexity of issues related to government debt, that the public is starting to pay attention? First, high profile municipal bankruptcies in Vallejo, Stockton and other cities have wreaked havoc on both taxpayers’ wallets and on public services. There is widespread belief that even Los Angeles itself will be unable to avoid bankruptcy. Second, both the media and taxpayer advocacy groups like Howard Jarvis Taxpayers Association have successfully used the Public Record Act to secure far more detailed information than has been available in the past about employee pay and benefits, including lavish pension benefits. The disclosure of this information has spurred voters to start wondering why our services are second rate while public employee compensation is so high. Third, both private organizations and public entities have vastly improved data bases easily accessible on the internet making these complex issues a little easier to understand. For example, Controller John Chiang has just created a new website called Debt Watch to provide voters with more information about the various bond issuances.

But perhaps the biggest factor in the renewed attention of citizens on debt is personal experience. The 2008 recession left millions with underwater mortgages. Nothing focuses attention like a crisis that hits someone right between the eyes. Government debt in the trillions of dollars is difficult to understand. Not being able to pay one’s mortgage is a lot easier to grasp.

Jon Coupal is president of the Howard Jarvis  Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

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Cartoon: Indebted Class of 2015

May 16, 2015 By CPR Editors Leave a Comment

Student Loan cartoon

Steve Sack, The Minneapolis Star Tribune

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CA’s $12.3 Billion in Proposed School Bonds: Borrowing vs. Reform

October 29, 2014 By Ed Ring 5 Comments

“As the result of California Courts refusing to uphold the language of the High Speed Rail bonds, the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable.”

–  Jon Coupal, October 26, 2014, HJTA California Commentary

If that isn’t plain enough – here’s a restatement: California’s politicians can ask voters to approve bonds, announcing the funds will be used for a specific purpose, then they can turn around and do anything they want with the money. And while there’s been a lot of coverage and debate over big statewide bond votes, the real money is in the countless local bond issues that collectively now encumber California’s taxpayers with well over $250 billion in debt.

Over the past few weeks we’ve tried to point out that local tax increases – 166 of them on the November 4th ballot at last count, tend to be calibrated to raise an amount of new tax revenue that, in too many cases, are suspiciously equal to the amount that pension contributions are going to be raised over the next few years. For three detailed examples of how local tax increases will roughly equal the impending increases to required pension contributions, read about Stanton, Palo Alto and Watsonville‘s local tax proposals. It is impossible to analyze them all.

As taxes increase, money remains fungible. More money, more options. They can say it’s for anything they want. And apparently, bonds are no better.

At last count, there are 118 local bond measures on the November ballot. And not including three school districts in Fresno County for which the researchers at CalTax are “awaiting more information,” these bonds, collectively, propose $12.4 billion in new debt for California taxpayers. All but six of these bond proposals (representing $112 million) are for schools. Refer to the list from CalTax to read a summary of what each of these bonds are for – “school improvements,” “replace leaky roofs,” “repair restrooms,” “repair gas/sewer lines,” “upgrade wiring,” “renovate classrooms,” “make repairs.”

To be fair, there are plenty of examples of new capital investment, “construct a new high school,” for example, but they represent a small fraction of the stated intents. On November 4th, Californians are being asked to borrow another $12.3 billion to shore up their public school system. They are being asked to pile another $12.3 billion onto over $250 billion of existing local government debt, along with additional hundreds of billions in unfunded retirement obligations for state and local government workers. They are being asked to borrow another $12.3 billion in order to do deferred maintenance. We are borrowing money to fix leaky roofs and repair restrooms and sewers. This is a scandal, because for the past 2-3 decades, California’s educational system has been ran for the benefit of unionized educators and unionized construction contractors who work in league with financial firms whose sales tactics and terms of lending would make sharks on Wall Street blush. These special interests have wasted taxpayers money and wasted the educations of millions of children. Their solution? Ask for more money.

Nobody should suggest that California’s public schools don’t require investment and upgrades. But before borrowing more money on the shoulders of taxpayers, why aren’t alternatives considered? Why aren’t educators clamoring for reforms that would cut back on the ratio of administrators to teachers? Why aren’t they admitting that project labor agreements raise the cost to taxpayers for all capital investments and upgrades, and doing something about it? If their primary motivation is the interests of students, why aren’t they supporting the Vergara ruling that, if enforced, will improve the quality of teachers in the classroom at no additional cost? Why aren’t they embracing charter schools, institutions whose survival is tied to their ability to produce superior educational outcomes for far less money? Why don’t they question more of these “upgrade” projects? Is it absolutely necessary to carpet every field in artificial turf, a solution that is not only expensive but causes far more injuries to student athletes? Is it necessary to spend tens of millions per school on solar power systems? Does every high school really need a new theater, or science lab? Or do they just need fewer administrators, and better teachers?

And to acknowledge the biggest, sickest elephant in the room – that massive, teetering colossus called CalSTRS, should teachers, who only spend 180 days per year actually teaching, really be entitled to pensions that equal 75% of their final salary after only 30 years, in exchange for salary withholding that barely exceeds what private employees pay into Social Security? Thanks to unreformed pensions, how many billions in school maintenance money ended up getting invested by CalSTRS in Mumbai, Shanghai, Jakarta, or other business-friendly regions?

How much money would be saved if all these tough reforms were enacted? More importantly, how much would we improve the ability of our public schools to educate the next generation of Californians? Would we still have to borrow another $12.3 billion?

Here’s an excerpt from an online post promoting one of California’s local school bond measures: “It will help student academic performance, along with ensuring our property values. If you believe that strong schools and strong communities go hand in hand, please vote…”

Unfortunately, such promises are meaningless and unenforceable. The debt is forever.

*   *   *

Ed Ring is the executive director of the California Policy Center.

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