Tag Archives: Boomergeddon

Caution: These Links Will Ruin Your Sleep

A campaign pitch for an incumbent member of Congress you will not hear:  You are getting $4 worth of government for every $3 you pay in taxes and fees, and the other buck is piled on as debt for your kids and grand kids to pay! You should vote me back in!

The Treasury Department’s own news release Monday, flagged by The Republican Standard,  attempted the spin that this is not the fault of President Donald Trump and the halcyon days coming thanks to his wise policies will soon begin to reverse this.  Hang with us!  Reading through the actual reports on income and spending, however, it is impossible to build up any hope.

This is another one of those cases where I indulged my own morbid curiosity and am now sharing the results.  I do not spend much time with the federal reports, compared to the state spreadsheets, but from time to time everybody should dig into the depressing details.  Stop reading my observations and dive into the actual reports – I won’t be offended.

The federal budget is broken into two big categories:  on budget and off budget.  This in no way correlates to the state’s system of splitting things into general fund and non-general fund.  The federal off-budget component is mainly Social Security pension and disability payments.   Other situations where specific taxes or fees pay for specific programs, including Medicare and the Post Office, are lumped into the on-budget categories.

When Social Security was collecting healthy receipts exceeding its annual outlays, it was producing surpluses.  These off-budget surpluses provided a nice way to hide the true size of the deficit in the on-budget category.  Well, for federal fiscal year 2018 (which ended September 30) that was a very small fig leaf indeed – about $6 billion, compared to $49 billion the year before.  Will the current fiscal year 2019 produce the first cash flow deficit for Social Security?  Will that wake up anybody?

When you back out that small off-budget surplus, the on-budget deficit was $785 billion, just under 25 percent of the $3.26 trillion in on-budget spending.  That on-budget deficit grew $70 billion, almost ten percent in a single year.  You can choose whether to blame higher spending or tax cuts.  Machts nichts.

The big federal tax cut went into effect three months into this past fiscal year and was in play for nine months, but individual income tax receipts grew 6 percent for that year.  Perhaps it’s too soon to judge the impact until people file next year.  But the impact of the corporate income tax changes did show up last year, with a $92 billion (31 percent) drop in CIT revenue.  There was a healthy boost in customs duties and that will really take off for 2019. (Is that the plan? Make tariffs the main source of federal income for the first time since President Polk?)

The federal officials quoted in the official release make much of slight decreases in a couple of social benefit programs, such as SNAP (a.k.a. food stamps), but reviewing the spending sheets really reveals the depth and breadth of income-based transfer programs, plus the political genius of sprinkling them through so many difference parts of the budget.

SNAP and other food programs are in the Agriculture Department ($91 billion).  Federal student aid ($46 billion) is in Education.  Medicaid ($389 billion), Temporary Assistance for Needy Families ($21 billion) and Children’s Health Insurance Program ($17 billion) are in Health and Human Services.

Housing gets its own programs for the economically challenged ($48 billion).  The Earned Income Tax Credit ($59 billion) is buried under the Treasury Department and the Social Security Administration handles the Supplemental Security Income payments of cash ($55 billion) that are not part of the regular disability coverage, which is (of course) off budget.  I’m sure I missed some.  I think the Veteran’s Administration still makes some pension payments based on poverty (maybe not.)

A single Department of Federal Need-Based Assistance which puts all those programs in one basket would approach $800 billion and would be larger than defense spending or the payments on the debt ($521 billion).  Which of course is why no politician of either party will ever, ever do that and make things that clear.

What is the choice on November 6?  There really is no reason to differentiate the parties on this issue any more, or to believe any candidate promising something else.  A bipartisan deal on Fiscal Year 2019 explodes spending and the projected deficit this year approaches $1 trillion. We are in this condition in a strong economy and looking at the deficits run coming out of the last recession indicates the deficits in the next one (inevitable) will approach $2 trillion.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!

Oops, Where Did that $3-4 Million Deficit Come From?

The idea behind the Commonwealth Center for Advanced Manufacturing (CCAM) is fantastic: Create a facility where Virginia manufacturers and universities can collaborate on advanced-manufacturing research projects that all participants can share. Research staff for the Prince George County-based facility are expert in everything from “vertical diffusion furnaces” and “robot arm-based automation cells” to “thermal spray coating” and “corrosion crack healing,” and they conduct about $7 million a year in research.

Just one problem: The program is operating at an annual deficit of between $3 million and $4 million a year. Debts include $2 million in unpaid rent to the University of Virginia Foundation and a tapped-out bank credit line, according to the Richmond Times-Dispatch.

Said Secretary of Finance Aubrey Layne: “They’ve got to put together a business plan that makes some sense.”

The Center has procured state and federal funding commitments to build a $12.6 million Advanced Manufacturing Apprentice Academy next door. But state officials, reports the T-D, say they won’t release $9 million in bond money planned for construction of the academy without an answer to the center’s financial questions. Said Layne: “That is not going to happen until this issue is solved.”

Bacon’s bottom line: As I have ranted and raved and inveighed and fulminated, Virginians have no idea how many fiscal land mines are out there. Yes, the Commonwealth has a AAA bond rating (although we have skirted on the edge of a downgrade), but no one has tallied up the long-term commitments, unfunded long-term liabilities, maintenance backlogs, and fiscal tricks of all the local governments and independent authorities set up to serve the interests of the Commonwealth.

After the Petersburg fiscal meltdown, the General Assembly began monitoring the health of local governments, looking for early warning sides of impending financial apocalypse — a big step forward. But no one is tracking dozens of non-governmental entities. Only a couple of months ago, for instance, was the public made aware of a $3.5 billion unfunded pension liability at the Washington Metro mass transit system serving Northern Virginia. Now we learn that CCAM is running a big budget deficit and racking up long-term debt.

The federal government has accumulated a $21 trillion national debt, and soon will be adding to it at a rate of $1 trillion a year — during an economic boom. The Medicare trust fund is projected to run out in 2026. The Social Security trust fund is expected to run out in 2034. Uncle Sam will never collect a big chunk of the $1.3 trillion in student loan debt outstanding, and taxpayers will have to pick up the tab. Meanwhile, states like Illinois and New Jersey are one sharp recession away from fiscal collapse.

As Boomergeddon looms, Virginia traipses merrily along, most recently creating a new Medicaid-expansion entitlement, with no clear idea of its overall fiscal condition. Our lawmakers look no more than two years ahead — the time horizon dictated by the biennial state budget. Although they are attuned to the necessity of maintaining a AAA state bond rating, the credit-worthiness of state bonds is just one piece of the whole. The credit-worthiness of Virginia’s counties, cities and towns is another piece. The credit-worthiness of our state universities is yet another. The credit-worthiness of a plethora of independent authorities is still another. No one, to my knowledge, has analyzed all the pieces as a whole and stress-tested the system. Until we do, we’re flying blind. It is foolhardy to pretend otherwise.

A Thoughtful Reminder of Another Pension Landmine

A recurring theme of Bacon’s Rebellion is that billions of dollars of liabilities lurk in the balance sheets of Virginia’s state/local government and quasi-governmental organizations — from the $20 billion unfunded pension liability of the Virginia Retirement System to the $3.5 billion unfunded pension liability of the Washington Metro system. Some don’t get the attention they deserve. As I come across new examples, I’ll bring them to your attention…

Like Fairfax County’s $5.6 billion pension liability. According to the Fairfax County Taxpayers Association (FCTA) Watchdog Report:

The Fairfax County pension liability is now $5.6 billion. … There are 400,000 homes in Fairfax County, so the liability amounts to $14,000 per household. To pay the liability will require an increase in the real estate tax of $1,000 for 14 years. The liability and the real estate tax will increase unless the retirement age is increased to 65 or 70 years of age — as compared to the current 55 to 60. Without such a change, the liability per household will get worse in the future because the number of county and school employees has been increasing 1.6% per year while the population has been increasing only 0.9% per year.

The debt bomb is worse than you think. Much worse.

Hurricanes, Risk, and Fiscal Collapse

Graphic source: Wall Street Journal

John Rubino, publisher of Dollarcollapse.com, and I think a lot alike when it comes to the inevitable fiscal collapse of the United States. The country (indeed the globe) is riding high today on a giant credit bubble right now, but sooner or later the bubble will pop and the economy will crash. If you buy into my Boomergeddon theory — that the U.S. will experience massive social upheaval when federal and state governments are unable to maintain their commitments to core services and the social safety net — you might want to check his website for your daily frisson of fear.

I, like John, have been writing about the dangers lurking in states’ unfunded pension liabilities and the exploding student loan liabilities that are undermining our institutions of higher education. I’d urge John to give more coverage to the issue of hidden deficit spending in the form of growing infrastructure-maintenance backlogs. (Read the Strong Towns blog for a primer on state/local governments’ growth Ponzi schemes.) Meanwhile, in a recent post, John drives home a point to which I have given insufficient attention: the future cost of hurricanes.

Unlike unfunded pensions, student loan defaults and maintenance backlogs, upon which we can put reasonable figures, there is no way for Virginia to budget for hurricanes. The incidence of hurricane hits is relatively infrequent and highly random and the damages are so variable from storm to storm, that budgetary forecasts are a total crap shoot. But I think we can safely say three things about Virginia:

  1. Sooner or later, another large hurricane will hit Virginia;
  2. Subsidence and sea-level rise, which will occur even in the absence of global-warming scare scenarios, will magnify the impact of major storms;
  3. Continued development along the shorelines of the Atlantic Ocean and Chesapeake Bay will lead to more storm-related damage.

John is concerned about the prospect of a monster storm hitting a big city like Miami or New York and giving us “a trillion-dollar summer” that bankrupts major insurance companies, roils insurance markets, depletes federal flood insurance reserves and forces the U.S. government into another massive bail-out “just as federal deficits are exploding, public sector pensions are imploding, and student loans are defaulting en masse.”

I, too, worry that the federal government is headed for disaster. But as I observe the proceedings in Washington, D.C., I have written off the federal government. Our political culture in Washington is so dysfunctional, so toxic, so addicted to short-term political gain, that the federal government is beyond salvation. I don’t waste a lot of intellectual bandwidth wondering what might save Washington. Nothing can. But I would like to ensure that the Commonwealth of Virginia survives the wreckage. Some government entity will have to carry on when the federal government melts down, and state government is the only alternative.

But I worry about Virginia, too. As I blogged recently, we have no idea what governments and quasi-state agencies — from the Washington Metro to local economic development authorities — have piled up in long-term debt, unfunded pension liabilities, and maintenance backlogs, much less how vulnerable they are to the next economic downturn. Now, add the risk of damage from hurricanes to roads, bridges, railroads, water and sewer facilities, coal ash ponds, the electric grid, pipelines, and other infrastructure. How prepared are our state agencies and utilities to cope with a major disaster? What would the impact be on taxpayers and rate payers, what have we set aside in reserves?

In a word: How fiscally resilient is Virginia in the face of natural disaster? Puerto Rico showed how a hurricane can push a corrupt and mismanaged polity over the edge. Surely we’d hold up much better. But that assumes Uncle Sam can continue handing out billions of dollars in disaster relief and that insurance markets are functioning. No one knows. We live in ignorance at our peril.

Virginia and the Next Global Debt Crisis

Ten years ago the Lehman Brothers debacle precipitated the financial meltdown we associate with the Great Recession, and the financial media are full of retrospectives. A key question is what lessons we learned from the epic failure. The main conclusion drawn, according to Daniel J. Arbess in the Wall Street Journal today, appears to be that the way to dig out of a debt-fueled financial crisis is to pile on more debt. But that doubles down on the original problem, he warns:

In the past decade, total global debt (sovereign, corporate and household) has spiked nearly 75%. This includes a doubling of sovereign debt, from $29 trillion to $60 trillion, according to a recent McKinsey report. Total corporate debt increased by 78% over the same decade, to $66 trillion. Bank loan volumes have been stable, although low-quality “covenant lite” loans have dominated. Bond markets have filled in, with nonfinancial bonds outstanding up 172%, from $4.3 trillion to $11.7 trillion. McKinsey says 40% of U.S. companies are rated one notch above “junk” or lower, and the Bank for International Settlements estimates 10% of legacy companies in the developed world are “zombies,” meaning earnings before interest and taxes don’t cover interest expenses.

This is what zero interest rates and quantitative easing have wrought — more debt and lower credit quality. … Higher rates are coming, possibly heralding a tsunami of credit defaults.

As the Federal Reserve and the European Central Bank slowly dial back quantitative easing, interest rates will rise, stressing debt-laden governments, corporations and households. We are already seeing the effects in Turkey, Venezuela, Argentina and other developing nations as higher U.S. interest rates push the value of the dollar higher. Defaults in developing countries will be transmitted to the developed world in ways foreseeable and unforeseeable. The financial media have remarked upon the massive exposure of Spanish banks to the Turkish economy, for instance, which could prove problematic for the larger Spanish economy, the 13th largest in the world. But global markets are so complex and intertwined that defaults can spread as unpredictably and explosively as the sub-prime mortgage loan crisis in the U.S. did ten years ago via financial innovations that have so far eluded the notice of media and regulators.

What’s it to us? That’s all fine and good for bond traders and hedge fund managers, you say, but what difference does it make to Virginia? It matters because Virginia is part of the global economy and global financial system, and what happens elsewhere will impact us. The policies we pursue at the level of state/local government can make us more vulnerable to, or more resilient in the face of, the next financial crisis.

To be sure, the Commonwealth is nowhere as vulnerable as, say, Puerto Rico was before it declared bankruptcy, or as Illinois and Chicago now are. We have a AAA credit rating, we balance our budget with only a modicum of chiseling, and we pay our bills on time. But the bond rating of the Commonwealth does not tell us anything about the indebtedness of our local governments, our universities, our hospitals, our quasi-government organizations, our economic development authorities, our housing authorities and all the other bond-issuing entities in the state. No one has toted up all those numbers.

We continually discover things we didn’t know before. While Virginia’s $20 billion or so in unfunded pension liabilities are well known, only recently has our attention been drawn to the $3.5 billion in pension liabilities at the Washington Metropolitan Area Transit Authority (WMATA), which operates Northern Virginia’s heavy rail mass transit system and much of its bus system. As the Government Accountability Organization concluded, “Due to their relative size, proportion of retirees compared to active members, and investment decisions, these pension plans pose significant risk to WMATA’s financial operations, yet WMATA has not fully assessed the risks.”

How many other WMATAs are out there?

The Metropolitan Washington Airports Authority (MWAA) comprehensive annual financial report indicates that the authority’s two pension plans were fully funded as of Dec. 21, 2017. The General Employees Retirement Plan was seemingly in great shape with assets amounting to 105% of pension liabilities. Great news! But dig into the assumptions, and we see that the pension plan projects a 7.5% annualized investment rate of return. Many actuaries are saying now that a 7% or 6.5% rate is more realistic.

Similarly, the Ports of Virginia reported an unfunded pension liability of only $8.9 million as of June 30, 2016, an improvement over the previous year. The pension was about 91% funded. The ports assumed a 7% investment rate of return, somewhat more conservative than MWAA’s assumption.

MWAA and the Ports of Virginia are two of the largest quasi-governmental business entities in Virginia, and it is reassuring to see that they have their pensions under reasonably good control. But there are dozens if not hundreds of other bond-issuing entities in the Commonwealth. After the Petersburg fiscal meltdown, the General Assembly began watching for early warning signs in Virginia’s local governments, but there are dozens if not hundreds of other entities that issue bonds and borrow money. The federal government conducts “stress” tests on too-big-to-fail banks to see how they would hold up under adverse economic circumstances. Is anyone conducting stress tests for Virginia’s public and quasi-public entities? Not very likely.

The bottom line: Another global debt crisis is inevitable, the only questions are when it happens and how the damage ricochets throughout the global economy. How vulnerable is Virginia? We really don’t know. To be forewarned, as the saying goes, is to be forearmed. We are neither.

Graph of the Day: Virginia’s Declining Fertility Rate

Source: StatChat blog

The number of births in Virginia continues declining, reaching the lowest level in years in 2017 — only 100,248. A decade before, births had numbered 108,884.

Demographers Savannah Quick and Shonel Sen at the Demographics Research Group at the University of Virginia attribute the overall dip in fertility decline to a dramatic decline for 15- to 19-year-olds and 20- to 24-year-olds and a slight increase for 30- to 24-year-olds and 35- to 39-year-olds. In other words, many women are postponing childbirth, not choosing not to have children.

This is a classic good news/bad news story. The good news is that more women are taking control of their fertility in order to pursue education and improve their job prospects before having a child. Modern-day child-raising is an exhausting, all-consuming activity. It is all but impossible for women to hold down a full-time job, raise a child (or children), and continue their education — especially if there’s no father in the picture. The persistence of poverty in a society characterized by abundant avenues for upward mobility is, at its heart, a demographic issue. If lower-income women are having fewer children, fewer children will be raised in poverty.

The bad news is that the United States needs more citizens to enter the workforce and pay payroll taxes to help support a Medicare and Social Security system that is careening toward fiscal insolvency. But incremental changes in fertility are unlikely to make much difference. The Medicare and Social Security trust funds will dissipate before children born today can enter the workforce.

Unfunded Pension Liabilities a Benefits Problem, Not Just a Funding Problem

Source: Wirepoints, based on Pew Charitable Trust

In the analysis of unfunded state pension liabilities, there are two main components: assets and liabilities. Here in Virginia, most attention is focused on the asset side of the equation — how much money have state and local governments set aside to pay for retiree benefits, and how well is the Virginia Retirement System managing the pension portfolio? Less attention is given to the benefit side — how rapidly are the liabilities increasing?

Wirepoints, a group that provides research and commentary on Illinois’ economy and government, has published a research paper arguing that the Prairie State’s massive pension liabilities are not the result of insufficient funding — asset growth has increased at an annualized rate of 5.9% from 2003 to 2015 — but of runaway increases in pension benefits of 7.5% annually. The difference: a 2.6% gap.

Many other states, including Virginia, have experienced the same problem of mismatched growth rates for assets and liabilities, though not to the same degree. Over the same 12-year period, Virginia’s pension benefits increased at a compounded annual rate of 6.3% while its assets increased by 4.2% annually. The difference: a 2.1% gap.

A few years ago, the increase in pension liabilities became a concern. Under pension reforms enacted during the McDonnell administration, state employees hired in 2014 or after were enrolled in hybrid pension plans, which combine a defined benefit plan with a defined contribution plan and an option for voluntary contributions. In essence the new package shifted some risk for funding retirement benefits from the state to the employees.

Thanks to the bull market in equities, Virginia’s asset performance has been stronger the past few years, and presumably the shift to a hybrid pension system has dampened the growth rate in pension benefits (and will continue to do so over time). Wirepoints’ numbers, based upon Pew Charitable Trusts data, goes only to 2015. More recent numbers might show more favorable trend lines.

Bacon’s bottom line: Growth in pension liabilities is one of the Virginia Retirement System metrics we should be watching. The onus for ensuring that the Commonwealth meets its pension obligations should not fall solely upon taxpayers and VRS portfolio managers. The state needs to keep pension costs under control, too. Legislators should check periodically to see if the hybrid pension plan is working as advertised.

Moody’s Reaffirms AAA Rating. Don’t Get Cocky, Virginia.

Storm clouds off the Virginia coast, circa February 2017. Photo credit: Strange Sounds.

Moody’s Investors Service, one of the nation’s three bond rating agencies, has reaffirmed Virginia’s AAA bond rating and stable financial outlook, the Richmond Times-Dispatch reports.

Moody’s had issued warnings that Virginia’s hallowed AAA status was looking fragile, due mainly to a sharp draw down in previous years of the Commonwealth’s budget reserves. The Revenue Stabilization Fund had shrunk to 1.5% of state general funds.

But the new budget, which awaits Governor Ralph Northam’s signature, appropriates an additional $90 million for the cash reserve, writes the T-D‘s Michael Martz, on top of the $156.4 million already pledged from excess revenues carried over from the fiscal year that ended June 30. The budget also will carry forward an expected $60 million in additional revenues from the current year into each year of the new biennium.

Moreover, said Secretary of Finance Aubrey Layne, a surge in income tax payments after the December tax cuts could produce $500 million in additional one-time payments of income taxes.

Bacon’s bottom line: Governor Northam has pulled off quite the trick, expanding Virginia’s Medicaid entitlement while shoring up state finances. While I am happy to see that Virginia remains one of the 14 states with the coveted bond rating, I regard AAA status as a minimal standard, not a mark of great fiscal probity.

Senate Majority Leader Tommy Norment, R-James City told Martz that the Moody’s report came as “no surprise.” He had characterized the warning about losing the AAA rating as “demogoguery and false assertion to try to scare legislators into voting for [Medicaid] expansion. Complete poppycock.”

I sympathize with Norment’s frustration over his inability to thwart the entitlement expansion, which will be paid for in part by a new tax on hospital revenue, which in turn, to an unknowable degree, will be passed on Virginians in the form of higher private health insurance premiums. I also resent that the public was not informed during the Medicaid-expansion debate of the full cost of the expansion, which will require additional revenues, as yet not identified, to increase reimbursement rates for physicians.

However, I also believe that numerous states and the U.S. government are building unsustainable mountains of debt that eventually will collapse during my lifetime with horrific consequences. The Medicare HI trust fund (for hospital payments) will run out in seven years, requiring Congress to come up with $52 billion (and more in future years) to maintain benefits. Social Security is dipping this year into its own trust fund for the first time since 1982; the trust fund will run out in 16 years, precipitating a 22% cuts to the program. Despite a tax-reform boost to revenues and a surge in economic growth, federal budget deficits are approaching $1 trillion a year. And an increasing number of states are one recession away from fiscal meltdown.

Incredibly, as the nation hurdles toward its rendezvous with Boomergeddon, national political leaders have abandoned any pretense of fiscal sanity. The Democratic Party is moving to the left, entertaining dreams of even greater entitlements. Trump-led Republicans fight increased deficit increases only fitfully, trading off increased domestic spending to pump up the military.

Yes, America is enjoying greater economic growth right now, but the jury is out whether the latest rounds of tax cuts will “pay for themselves.” (I remain dubious.) Global growth has been fueled since 2008 by unprecedented credit creation and debt accumulation, and massive structural vulnerabilities lie beneath the relatively placid surface of international finance. Sooner or later, a gasket will blow — Argentinian bonds, Italian banks, the Venezuelan economy, Chinese real estate markets, war in the Middle East, a cyber attack on the electric grid, or a black swan that no one can even imagine — and the shock will cascade in unpredictable ways through the global economy as one debt domino topples another. Sooner or later, the U.S. will experience a recession, and it will be a doozey.

So, yes, there is every reason to question the ability of the federal government to stick to its Medicaid-funding promises. There is every reason to fear that fiscally crippled states like Illinois, New Jersey, Connecticut and Kentucky will slide down the path to Puerto Rico-style insolvency and throw themselves upon the mercy of an already-overextended federal government, even while the threat of massive defaults roils financial markets and drives up the cost of government borrowing. And there is every reason to think that Virginia will experience a repeat of 2008-style fiscal stress, if not worse — even as it is forced to confront multibillion-dollar shortfalls in public-employee pensions that can no longer be deferred. 

Virginia needs to bullet-proof its budget, not with any old army-surplus vest but ceramic-plated Kevlar-backed body armor. We need a AAA+ bond rating. We need to restructure our economy, our land-use patterns, our transportation system, our health care system, our K-12 and higher-ed systems, our criminal justice system, and every other sphere of state and local government to be more fiscally sustainable during bitter times.

I know this gloom-and-doom talk sounds bizarrely unreal in a growing economy with a 3.4% unemployment rate. But the time to prepare for the storm is when it is far offshore, not when it is upon us.

Seven Years and Counting…

Medicare’s Hospital Insurance Trust Fund (HI) will be depleted in seven years — three years sooner than forecast previously, according to the 2018 Annual Report of the Medicare Boards of Trustees. By 2026, Medicare Part A, which covers hospital payments, will be running a $52 billion annual deficit, a gap that will increase rapidly in successive years.

The forecast is based upon implementation of current policy and makes a variety of assumptions regarding employment, growth of payroll tax receipts, and hospital costs that may or may not be on target. However, the trustees note, shorter-term projections are more likely to be accurate than longer-term projects — and seven years is not that far away.

The trustees’ report triggers a formal Medicare funding warning. President Trump must submit to Congress proposed legislation to respond to the warning within 15 days after submission of the FY 2020 budget. Congress is then required to consider the legislation on an expedited basis.

The political problem is that successive Congresses and presidential administrations have kicked the can down the road for so long that any fix will be politically painful. Rather than phasing in remedies over time, allowing a smoother glide path to solvency and making it easier for affected parties to adapt, Congress will have to enact dramatic remedies…. unless it decides to kick the can down the road again, perhaps by funding the Medicare HI  gap with general revenues.

According to the Congressional Budget Office’s most recent forecast, the federal government is on track to be running a $1.076 trillion budget deficit by 2026. Maybe Congress will say, what the heck, what’s another $52 billion, let’s fund the HI deficit with borrowed dollars. But maybe it won’t. If there’s another recession between now and then, the fiscal outlook could be a lot more alarming than it is today.

Winter is coming. Reforming the federal government is hopeless. Virginia’s only hope is maintaining a fiscally robust state and local government.