Fiscal Responsibility Demands Transparency in Future Government Liabilities

San Diego City Councilman Carl DeMaio has an excellent op-ed in the Voice of San Diego that should be a must-read for policymakers everywhere. In a nutshell, DeMaio is asking for something simple—and something you’d think policymakers would have a grip on but unfortunately don’t in most places: an accurate forecast of future long-term financial liabilities, as well as a realistic plan to fund them.

As DeMaio points out, the city is currently in the position of having the equivalent of a ton of credit card debt and no plan to actually get rid of it:

Suppose a friend, Louise, is facing severe financial problems and asks for advice on handling her household budget. She lays out a list of her liabilities — from mortgage payments to multiple credit card balances.

Louise goes on to provide her forecasted monthly payments for each of these liabilities — $25 per month for Credit Card A, $50 per month for Credit Card B, $2,500 per month for a mortgage payment, and so on.

While Louise should be credited with outlining a spending plan, her approach is ultimately inadequate. Her forecast lacks any indication of whether her monthly payments will result in eliminating or even reducing the sizeable debt she faces.

A closer look at Louise’s financial condition over a five-year span from a liability standpoint reveals her dire predicament. Her mortgage is an interest-only loan, and her payment is expected to double in the coming years. Worse, she is planning to only make minimum payments on each credit card — meaning she will end the five year period in deeper credit card debt than when she started.

After constructing a true financial forecast showing all of Louise’s liabilities and incorporating her intended efforts to pay them off, a clear conclusion emerges. Louise has to find a way to cut expenses and renegotiate her liabilities. Anything short of such decisive action will perpetuate, or even make worse, Louise’s financial quandary.

Like Louise, the city of San Diego faces its own financial crisis stemming from not one, but several growing financial obligations and liabilities. Although unlike the case of Louise, the taxpayer is ultimately responsible for paying off the city’s liabilities.

DeMaio goes on to offer a laundry list of future obligations that aren’t currently packaged together in a financial forecast format in a way that offers policymakers and the public a true sense of scale—and hence, no sense of what spending re-prioritization would have to occur to realistically fund them.

Policymakers elsewhere would likely be surprised by the results if they were to undertake a similar exercise as DeMaio for their own jurisdictions. Everything he lists are common liability categories—retiree pension and health care obligations (the big kahuna), labor contracts, pending litigation, debt service, deferred maintenance, environmental compliance and the like—and while other communities will certainly have different levels of obligation in each category, the mere exercise of putting it all on paper in one spot, so to speak, would be extremely informative for policymakers.

Addressing large budget deficits are rightfully a current preoccupation of many officials, but you can’t take the necessary steps towards long-term fiscal health if you don’t have an eye on what’s lying just around the bend. Pension and retiree health care obligations alone present a massive funding problem, and that’s just one slice of a larger liability pie.

Once the full range of future costs are fully transparent, then so will be the folly of tinkering around the edges with spending cuts here and tax hikes there to get a budget passed, avoiding the needed streamlining in government that has to occur to right the fiscal ship.

Reason Foundation’s Tax and Budget Policy Research and Commentary
Reason Foundation’s Annual Privatization Report 2009