Christine Kuglin: Virginia Faces Nearly $1B of Unfunded Debt Obligations
Christine Kuglin, Director of Truth in Accounting's Daniels College of Business, explains how Virginia's constitutionally-required "balanced budget" can be reconciled with the Commonwealth's billion-dollar debt burden. While some debt can be good, it also carries risk, such as when worker pensions are leveraged and tied to stocks and bonds.
EPISODE TRANSCRIPT
Michael Pope
I'm Michael Pope.
Thomas Bowman
I'm Thomas Bowman.
Michael Pope
And this is Pod Virginia, a podcast where we've got more assets than liabilities, at least for now...
Thomas Bowman
People familiar with Virginia's government may know we have a constitutional amendment that requires a balanced budget. But we don't have one. To help us understand all the numbers. We're joined by Christine Kuglin, at Truth In Accounting. Christine, thanks for being on the show.
Christine Kuglin
Thank you for allowing me to speak to you and all of your listeners.
Michael Pope
So as Thomas just pointed out, there's this constitutional requirement to have a balanced budget. But that does not mean that there's not a debt burden. I think a lot of our listeners might have difficulty squaring that circle, explain to our listeners how it's possible to have a balanced budget and then also have a debt burden despite that.
Christine Kuglin
Right? It is confusing, isn't it? Well, the Balanced Budget really takes a look at an annual what is coming in as far as revenues for the state government or municipality, and what is going out. And it's only really looking at the current period, much like if you were to set up your finances as a family, and you looked at what is coming in this month, and you set up your budget so that you weren't spending anything over what you can anticipate to come in. If you can make that happen. That's called a balanced budget. But that doesn't mean that you're paying any prior debt that you had, it doesn't mean you're paying off your mortgage, it doesn't mean that you're paying off your credit cards, or your car alone. All it means is that you're able to that you're spending only what you have currently coming in. So it's just looking at a current situation and not what you might have in total amount of debt.
Thomas Bowman
Alright, so these numbers we're looking at today, they're from 2021. And I understand that your organization will release a newer version of this document next month. What can you tell us about that?
Christine Kuglin
So specifically to the document from 2021, and I'll talk about the one that we're going to be releasing at the end of October, Virginia had a basically a debt burden after... if you took out all of the assets that Virginia had, and you subtracted out all of the long term bills or liabilities, they basically had a shortfall of almost a billion dollars, it was $987 million. And if you took the citizens of Virginia and spread that debt around, it means that each one of Virginia's taxpayers--and again, this is last year--would have had to come up with $300 additional dollars, if all of that debt burden would have come due immediately. So while the budget was balanced, that could very well be true. The bottom line is that each Virginia taxpayer still would have had to come up with an additional $300 to pay off all of the debt that Virginia. Virginia couldn't sell all of its assets and pay off the debt it owes. You know, it'd be like if you sold your house and you paid off the remaining mortgage on the house. But let's say that you've taken out a second on it, you couldn't necessarily have the money to pay the second, or doesn't mean you couldn't necessarily pay off your credit cards, you would still have debt. And that was the situation Virginia was in last year.
Michael Pope
So that's last year's position. What about the document, your organization will soon release next month, you're going to release the 2022 version of this, which will have all the pandemic era money. I mean, so like the numbers that we're looking at today, and we'll continue to look at them in this podcast but just briefly, let's preview the next document which we don't have in our hands yet, but that's the document that's going to have all the pandemic era federal relief money in it right. So what kind of preview Can you give us to the next version of Virginia's report card that you'll be issuing next month?
Christine Kuglin
So I actually, I don't want to I don't want to ruin the surprise, it's coming out on October 25. So I encourage all you and your listeners to take a look at it when it comes out and see the specifics. But the good news at state levels is that the federal government gave the states quite a lot of money to help cover those pandemic related expenses. So of course, that has put our federal deficit in a much worse position. But our states have, mostly mostly I say, there was one state and there's there'll be a surprise, and that that actually even got worse, in spite of getting all of that pandemic related funding. But most of the states improved. And it wasn't just the pandemic related funding that assisted the states in this improvement, but also the fact that the stock market went up so much last year. So we had two very positive financial circumstances surrounding the status of state governments. And that was federal government's giving the state's money and stock market improvements so that investments, state investments also increased in valuation. But now, if we take a look moving forward, and I don't want to rain on anybody's parade, that's going to be on our report coming out in October. But let's think ahead and what it might look like in 2023, when pandemic related funding, obviously, has decreased substantially. And we all know what the stock markets are doing right now. It's not very pretty. And so while I want to say there's some good news coming, it may be short lived.
Thomas Bowman
Short lived... Okay, well, we'll have to keep an eye out. You said that's October 25. So we'll be sure to look for it. But let's get back to 2021. The largest amount of debt on here is from bonds, things like bridges, or university libraries. Virginia has got about $30 billion in bonds, and what are all those bonds paying for?
Christine Kuglin
Well, you you listed them. And I want to even put a caveat that says that all of the bonds that Virginia is involved in isn't even listed here. If you go into the state's annual comprehensive financial report, it's referred to as an aquifer, a CFR used to be called a Kaffir. But if you look at it, and you go in and look at the bonds, it does cover things like bridges and funding for universities or other things. But they also help in organizations with more bond raising funds. So you have to understand what is a bond. And I don't know if all your listeners understand that a lot of times people don't they hear it. But basically when whether it's a private company or state wants to raise money, and so rather than going out and looking for, you know, basically a big bank loan, they will issue what they call bonds, and these are for individual or organizational investors to lend the state money. And the state in turn says I will pay you a guaranteed interest payment. And I will guarantee I will pay you the original amount that you lend to me when the bond comes due at the end of the bonds life. So, the state of Virginia not only issues, these bonds or debt, and allows individuals to lend them this money, but they also help other institutions and organizations in Virginia raised these kinds of debts. But they say that they're not actually going to be backing the bonds, but through moral authority kind of will back the bonds, but those bonds aren't even listed in this in this bond debt. So it's a very complicated issue when it comes to these bonds. There's a lot of debt in Virginia's bonds.
Michael Pope
You know, it's complicated, but you're you're making this simple for us, which I really appreciate like you're taking this complicated subject and making it digestible for us and our listeners. So looking at this list here of money in and money out, the organization puts together, there's another line item here that I want to make sure we talk about because it's so important to Virginia's financial situation. And we see this with states all across the country haven't problem here with unfunded pension benefits. We've got $8.5 billion worth of unfunded pension benefits in Virginia. And I know this is a problem with states across the country. And isn't it true that we only have recently gained access to these kinds of numbers that had been obscured previously, right? So talk a little bit about the burden of unfunded pension benefits.
Christine Kuglin
You're exactly right. We the Governmental Accounting Standards Board didn't require the states to even report this until, I believe it was around 2015...and I may be off a bit. When the state promises pension benefits to its state employees, previous employees, current employees, previously, they didn't even have to report it because it was it was thought of as almost like a pay as you go, that will pay, we'll worry about this, when it comes around, we will make sure that we have enough money in the current period to pay those those pension benefits. And there's also the unfunded retiree health care benefits, as they call those post retirement benefits that states will guarantee to their employees that they'll help them out with their insurance once they retire and any other benefits. But it used to be that we didn't have to that states didn't have to report that they could just pay for it as they go. But then the Governmental Accounting Standards Board came around and now are requiring to, to report the total amount of these unfunded benefits. So think of it from the employees state employees perspective, you are working for a state government, lot of them their whole working life 2530 35 years. And they're assuming that the state is setting aside money, that when they retire, they will have their retirement is guaranteed, and it's funded, and they don't have to worry about it. But the truth of the matter is most of the states have not adequately funded the retirement plans, they put a portion away, maybe it's 40% 60% 80%. But it's not completely funded. And part of what they're relying on. Because just like we if I have, I have my own individual retirement plan, it's in a 401k, and I put it into the stock market, there's not a lot of places to put our our retirement plans. The states also invest in the stock market. And they assume a certain rate of return. They say, Okay, if I put this much away from the State Employees Retirement Plan, the stock market will have enough in gains to maybe help make up some of that difference.
Michael Pope
Can I ask you a quick question about that? So in preparing for this podcast, I called up a member of the House Appropriations Committee, and I asked him about these numbers. And he said, you know, just because there's debt out there, that's not necessarily a bad thing. Sometimes it's good to have debt, especially... In fact, sometimes it's responsible to have debt, if you've got a situation where you got really low interest rates, which of course we've had, and this debt actually helps Virginia get like a AAA bond rating. So I mean, isn't there a positive side to having some of this debt?
Christine Kuglin
Well, I asked you this. I think that's a very subjective proposition. I'm not going to dispute what this person said to you. Because there is there's truth to that if when we had during the pandemic, basically, the government was lending at 0%. And if you could get 0%, that's great. And you can leverage, they call it leverage, we can use that to get other things we need. But let's ask the retiree, let's ask this 52 year old 62 year old person who finds out that the pensions haven't been fully funded, do they think that it's a good thing to leverage debt when it potentially makes their retirement funds not fully funded? So some of that comes? You know, you can't dispute that, that what they said to you doesn't have validity? Of course it does. But do you want to play with older people's retirement pensions? Is that a place that we want there to be debt? I'm posing that as a question. And I guess it depends on to whom I'm posing the question to. But, to me, I mean, I'll be frank, I'm 62 years old, I'm not sure I want anybody playing around and with my pension funds. The difference is if I if I invest in a pension, my own private pension, I get to pick how the allocation of my investment goes, I can say, you know, I'm getting old, I think I want most of mine in just a savings account, or I want it in bonds, bonds tend to be more secure and give you guaranteed interest rates. But do I want it in a stock market with this assumption? I'm going to earn a 7% return which is the amount a lot of states have as as an estimated return amount. Do I want that kind of risk with my retirement? And so I think it's a it's a question. State employees don't get a choice, they don't get a choice of where it's there a lot of times where their pensions are being invested. And so to think that you want to use pensions for leverage, I think it's a risky proposition.
Thomas Bowman
I want to follow up on this thing, too, because I'm wondering since we're experiencing population decline, as far as new birth rates go, so younger generations are able to replace older generations, and that will eventually affect the revenue. Is there a risk of this being a time bomb for Virginia?
Christine Kuglin
I think it's a time bomb for everybody. Right? I mean, you're exactly right, you've just hit on such a critical point. When you have a pay as you go system, and in reality, Social Security is really a pay as you go system, right? Anytime you have a pay as you go, and the people paying are lesser in numbers than the people to whom those payments go, you're always at the risk of where is that point where there aren't enough people to pay those who are expecting it? And so it is a ticking time bomb on so many levels, not just at state levels, but Social Security levels. When we say that, like the Social Security fund is going to run out if there's no magical fund of which you're going to man run out, but the number of people paying in is going to be far lesser than those withdrawing at some point in time. And then what happens? Where do we come up with that money? Either taxes are going to go up substantially, or you're going to have the other things which are not going to get paid. Or, the government's you know, if they print more money at the federal level, well, then we have inflation. And so, you know, there's all kinds of issues which we have to face on that ticking time bomb question.
Thomas Bowman
Well, one other potential ticking time bomb could be Virginia's unfunded health care benefits. So in addition to the unfunded pension benefits, there's also unfunded retiree health care benefits, of which Virginia has more than $2 billion in unfunded retiree health care benefits. Christine, can you put this in the context that we were just putting the pension benefits and the time bomb, and what this could mean for retirees health care.
Christine Kuglin
So this is, in many ways even more critical if you can believe it. Even though the dollar amount you said that the unfunded pension benefits are $8 billion and the unfunded retiree health care benefits are $2 billion. I always like to put things in the context of my own life and my own family, because then it makes sense to me. Healthcare is going up at an astronomical rate, right? And when you look at to whom these unfunded retiree health care benefits will ultimately be do their due to old people. I'm an old person, right? I mean, we're not typically the healthiest of the American population. So you're talking about a benefit that's going up at far above the rate of inflation, right? I mean, to pay medical bills is going up above the rate of inflation. I can't quote you numbers. But you're looking at an unfunded benefit for a population of people who tend to have some of the highest amount of health issues with a with a service needed, that's going up above the rate of inflation. So that number is not going to be one that decreases. It is a number that's only going to increase and in most likely add a an amount that far exceeds any of these other numbers that we're seeing.
Thomas Bowman
Yeah, I just did a quick search. And it looks like the health care spending for the country, on average, is going up between five and almost 10% a year, over the last several years projected to be into the well into the trillions of dollars just by 2028. So whatever Virginia's portion is going to be of that. Yeah, this could get bad very quickly. When you layer on population changes.
Christine Kuglin
Exactly. And let's not forget also, that we're just coming out of a pandemic, where we're still looking at what are the implications of all the individuals who did get COVID. There's the long haul COVID issues, a COVID is continuing to go and while while people aren't maybe dying as quickly, they there are still a lot of hospitalizations or severe medical issues. So we may not have even seen the implications for those types of benefits, they may not even appear for the next five or 10 years based on, on this pandemic we just all experienced.
Michael Pope
Alright, so before we end this discussion, I want to make sure that our listeners understand all these, we've been throwing around a lot of numbers here. So I'm gonna put all these numbers in context, there's the $30 billion of bonds, that's debt spending for things like highways and university libraries, and that sort of thing. $8.5 billion in unfunded pension benefits, $2.2 billion worth of unfunded retiree health care benefits, then you have to offset all of that debt with the capital assets and the restricted assets. And so at the end of the day, after all is said and done, the debt burden is $1 billion. at the end of all that calculation. That's how we got to the $1 billion that we lead with. So Christine, put that $1 billion number in context with other states. It seems to me like Virginia is typically viewed as being a more responsible state than other states. I mean, there's a $1 billion debt burden that we've got, but like compared, what how does that compare to other states?
Christine Kuglin
Well, I'm gonna give you a couple pieces of good news as we come to the end, one, this number is changing. So Virginia is one of the states that we at Truth In Accounting, we call a switcheroo state. And it just funny little terms, we come up when we're spending hours and hours looking at data.
Michael Pope
I like it... switcheroo.
Christine Kuglin
Switcheroo. Your listeners and you will be happy with the next year's report. I think I don't want to I don't want to ruin the surprise I I'm not going to you know get into the whether or not there's an Easter Bunny or not. But I think there might be an Easter Bunny. And the other thing that is good news--
Michael Pope
Easter Bunny, by the way is Uncle Sam that's thrown around federal money that's pandemic related. That's also temporary. I mean, I I hear what you're saying, and I appreciate you previewing and your next report. But isn't that next report going to be a reflect a one time change in the financial situation based on one-time dollars from the federal government?
Christine Kuglin
Mostly yes. And also how well the stock market did last year. So we I mean, that's that's the flip side. I mean, it's this pleasant surprise that you're going to get in and most states are going to get it is a one time thing. And that's one of the things that concerns us, is it I'm so glad you brought that up because you cannot your listeners you and certainly not legislators can assume that if things look better, in the report, we're putting out that that is something of which you go out and create more debt. You have to put it into the context of those unique things that happened record gains in the stock market, which made investments look great. And in this year, they look really awful. And the federal government went into deep debt in order to help bail states and municipalities out. So yes, it looks better. It really does. But it is most likely. And we put the caveat in our reports, it says take this with a grain of salt, it looks better and feel good about it. But don't spend it right. Don't go out and spend it thinking you're rich because it's most likely going to change. So a switcheroo that happened this year could be a different switcheroo next year. So good point. The other point of why Virginia should feel somewhat good is Virginia is in far better fiscal health than many states. There are many states and far worse of fiscal health, where as much as close to $60,000 taxpayer each have a burden of up to $60,000 each. So even in this report where you have $300 taxpayer burden, there are states that have $56,000 or higher. So relatively speaking, Virginia is doing okay, you can you certainly can do better. But you are nowhere near we call the bottom states sinkhole states and you're not in that category of where you are in in the sinkhole.
Thomas Bowman
What's the best category that you guys use?
Christine Kuglin
We have sunshine states...
Thomas Bowman
Sunshine states, okay.
Christine Kuglin
And, you know, there's different reasons why there are states that get into Sunshine State status. Alaska is generally in first place, but we all know that Alaska has a very small population and has a lot of natural resources, of which to give them a lot of flexibility. And so states like Virginia that face any number of complex societal and fiscal issues if a state like Virginia can get near that sunshine state status near the top 10 status, then then you can be looking at a good sense of governance. But again, you have to also take it into consideration whether it's a temporary or a potentially ongoing fiscal solvent situation.
Thomas Bowman
So the 2021 numbers are what we're talking about today. We're planning for really good numbers for 2022. But I'm getting the sense that based off the one time spend, and also the S&P return, which is down 21% year-to-date, and almost 30%, from this point last year...
Christine Kuglin
Yes,
Thomas Bowman
...that 2023 is going to look really bad. I guess, the silver lining is that in other states, it's going to be even worse, potentially.
Christine Kuglin
Yes. Yes. If you if we, if we are wanting to look at our neighbor and say, you know, you're worse off than we are, and that makes us feel good, then that's what potentially Virginia Citizens can do.
Michael Pope
Schadenfreude works sometimes.
Thomas Bowman
All right, well, Christine, what would you say the bottom line is for people trying to analyze this document you've put out?
Christine Kuglin
Well, the bottom line is, is that I'm looking at, you know, in Virginia in 2021, that is probably a very good reflection of generally of where Virginia falls. 2022 is going to look much better. 2023 is going to look much worse. And you know, you have to look at basically trend lines. And when you look at these kinds of documents. One individual report can give you a snapshot in time. But you want to look at the previous years before and be looking forward in order to get a good idea of where your state lands for its fiscal health, because it's going to be those trends overall over time trend setter is going to give you the best indication of how your state is doing.
Michael Pope
All right, let's leave it there. Christine Kuglin at truth and accounting. Thanks for the fascinating discussion.
Christine Kuglin
You are welcome. Thank you so much for having me.
