State & local gov'ts on hook for trillion$.

• Position: Debt

State and local governments have amassed large debts and unfunded obligations. Debt in the form of bonds has soared to 1.9 trillion dollars. State and local pension plans are underfunded by about $700,000,000,000. Underfunded retiree health plans for government workers represent another large fiscal hole. It is estimated that state and local retiree health benefits are underfunded by 1.4 trillion dollars nationwide. All these liabilities represent a looming threat to taxpayers and indicate the need for major reforms of government benefit plans and other spending activities, insist Chris Edwards and Jagadeesh Gokhale of the Cato Institute, Washington, D.C.

In the 1970s and 1980s, net borrowing by state and local governments averaged 0.2% of gross domestic product. During the 1990s, net borrowing increased to an average of 0.4% of GDP. As a result, the value of outstanding state and local government debt increased from 1.2 trillion dollars in 2000 to almost two trillion by 2005, as the economic slowdown earlier this decade prompted states to go on a borrowing binge that has yet to stop.

State and local liabilities include more than just bond debt. There also is the underfunded benefits of government employee defined-benefit pension plans. The shortfall for the nation's state and local workforce is estimated at about $700,000,000,000. By contrast, the pension funding shortfall in the U.S. private sector is about $450,000,000,000. However, the private workforce is seven times larger than the state and local workforce.

State and local governments put aside assets to prefund their pension plans, and thus the level of underfinancing can be eased if plan assets rise in value. By contrast, retiree health benefits generally...