Canary in a coal mine



Puerto Rico slid into a form of bankruptcy two weeks ago with $73 billion owed to creditors and bondholders. For an island with only 3.5 million residents, that’s about $20,900 for every man, woman and child. More than $45 billion of the debt is the pension liability for government employees.

Puerto Rico is only the latest government entity unable to manage its debt obligations and forced to seek bankruptcy protection. San Bernardino, Calif., in 2012 — $1 billion; Stockton, Calif., in 2012 — $1 billion; Jefferson County, Ala., in 2011 — $4 billion and Detroit, Mich., in 2013 — $18 billion.

Closer to home, the state of Connecticut, one of the highest income states in the country, is close to defaulting on many commitments. Connecticut already has increased its top income tax rate by 29 percent over the last few years. (Sound familiar?) The results are predictable. Income tax revenue has fallen; high-income earners are fleeing the state. Long-term corporate employers like General Electric also are leaving.

Right behind Connecticut on the debt-watch list are New Jersey, Illinois and Kentucky. Fortunately, states cannot declare bankruptcy. But legislatures have become adept at kicking the can down the road by overstating expected results and underfunding long-term commitments.

The primary drivers of excessive government debt are widely known: creation of bureaucracy, excessive government program expansion, falling tax revenues that frequently result from these spending sprees, plus generous salary, pension and benefit programs for government employees at all levels. Ironically, most of their politicians, who survived for decades over-promising and under-taxing, now are retired on generous pensions and lifetime health insurance coverage.

The front page of our sister newspaper, The Ellsworth American, reports weekly on the debt owed by the United States government. And this staggering total, nearing $20 trillion, does not include the unfunded liabilities for the Affordable Care Act, Medicare, Medicaid or Social Security — billions of dollars committed but not yet spent. For example, economists widely predict that America’s Social Security program will be fully funded only for 12 more years. Then, benefits will need to drop almost 30 percent without a huge annual funding increase.

Puerto Rico’s economic canary is no longer chirping. Has Washington or any of the 50 states learned anything from two weeks of eerie silence in our most populous territory?

 

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