Governor Mike Pence’s proposal to lower Indiana’s income tax is projected to lower state revenue by a little over $500 million annually.
To some people, Pence’s 10 percent tax cut plan looks great. If the government does not need the money, then why not give it back to the taxpayers?
Not so fast. There is a $12.5 billion reason why the state should keep the money.
The problem has been growing in the shadows. Unreported, unfunded liabilities are silently eating away at the walls of the state’s fiscal condition and pose an alarming danger.
According to the Institute for Truth in Accounting, Indiana currently reports only $1.1 billion of retirement benefit obligations, which include pensions and health plans for retirees. Yet IFTA identifies total retirement benefit obligations to be upward of $13.6 billion, which leaves over $12.5 billion not accounted for. This $12.5 billion is not only unfunded, it is not even clearly disclosed as a liability.
Likewise, in 2012 the Pew Center calculated that Indiana had funded 65 percent of the public sector pension funds. And that’s the good news. For the state’s retiree health benefits only 23 percent of the required contribution had been paid, making the plan only 5 percent funded.
Our legislators cannot be held completely responsible. The massive, annual state financial statement stacked up at over 300 pages of data. In all of these pages, according to IFTA, the state does not clearly disclose $12.5 billion of the state’s financial obligations because the contracted future payments are not classified as “liabilities.”
Whether or not the liabilities are technically classified as state “liabilities,” the reality of the situation is that the state is going to have to pay the money someday. The day will come when unreported, unfunded liabilities need real funding. The effect on the state budget will be very real.
Let’s address the real government debts. Let’s squash the unfunded bug right now before it keeps eating away at the foundation of our finances. The whole house just might come crashing down, or it might require strict austerity measures such as those now devastating the Greek and Spanish economies.
If Pence believes the state can perform its duties on a smaller budget, great. But don’t cut taxes quite yet; we have a heavy debt burden to solve first.
Perhaps Pence could alter his proposal. Rather than cutting taxes, why not funnel the money into a plan to fund the state’s retirement obligations? Rather than piling more debt onto future taxpayers, properly funding these obligations would significantly reduce future financial burdens. We need a plan to strengthen the balance sheet and to keep taxes lower in the long run.