An Update on Germany (Sort of), and on Yet More Debt

In yesterday’s Bavarian state election, the conservative CSU regained an absolute majority. My earlier post on the national election this coming Sunday neglected to mention the event because, in accord with the vast majority of Bavarians, I don’t think they’re really part of Germany. Still, the Bavaria outcome does bear on the national outcome:

  • In Berlin, the CSU is in a coalition with the rest-of- or truly-German CDU, and CSU boss Horst “The Sun King” Seehofer will now make a yet-more royal pest of himself. His proposal for a foreigners-only highway toll will be a flashpoint. On the one hand, it promises to fix the country’s chronic under-investment in a crumbling infrastructure (they need every nickel for the welfare state). On the other, it’s a flagrant violation of the EU Treaties’ non-discrimination clauses. Watch this space.
  • The (nominally) free-market FDP didn’t make it back into Bavaria’s Landtag. Should that happen nationwide, Frau Merkel will have to govern with the Social Democrats instead. For all the difference that might make.

In another theater, I’ve come across a recent report on state pension obligations. Old subject (I know) but two new items:

  • Ratings and accounting agencies have attempted to get a more accurate assessment of unfunded pension obligations. Based on their new and improved measures, we’re at $4.1 trillion unfunded liabilities, and counting.
  • The report compares unfunded pension obligations to state GDP (“GSP”). The “winner” in this department is Ohio, where unfunded obligations click in at 56% of GSP. Runners-up: New Mexico (53%), Mississippi (48%), Alaska (46%), Kentucky (41%).

This is a useful exercise because the absolute debt level is less interesting than the question of whether states can service it.

By way of comparison, there’s something like $3.7 trillion in municipal bond debt rattling around in the markets. That sounds almost as scary as the pension obligations. However, while the debt includes state bonds, it’s for the most part truly municipal. State bond debts come nowhere near the unfunded pension obligations. (The biggest debtor states, according to this 2012 report and excluding Puerto Rico, which is off the charts on any account and margin, are Massachusetts (8.1%), Hawaii (8% of GSP), Connecticut (7.9%), New Jersey (7.2%), and New York (5.4%).) The pension obligations, then, are much higher in relation to GSP. The big debtor states are in uncharted territory.

No: they’re nowhere near the 120-plus percent of debt-to-GDP that the feds have racked up. But there are two key differences. First, the feds can “service” debt by printing their own money. Second, they have a much higher tax capacity. For quite some time, state and local own-source revenues have been stuck at about 15% of GDP, and non-tax revenues (from tuition to speeding tickets) have replaced more and more tax revenue. There appears to be a limit, and many states are rapidly approaching it.

When they hit it, what?