Texas Comptroller Susan Combs

With states facing heavy budget crunches, California nearly bankrupt and the U.S. debt spiraling out of control, one lone star of a state stands out as a lesson in running government finances.

Texas is one of the only truly solvent states in the Union that has maintained a high level of public service while keeping costs down. Many attribute the success of Texas fiscal policy to the leadership of Texas Comptroller Susan Combs. If Texas can achieve a balanced budget during a recession, why can’t the federal government?

In the following interview, Susan Combs provides insight on her approach to the fiscal challenges facing Texas and the U.S.:

Your office recently released a report detailing the danger of growing municipal debt. How do state requirements in areas such as pensions affect such debt? What can be done at the state level to assist municipalities in reducing the debt burden?

My office has been working on a series of reports entitled “Texas, It’s Your Money.” In November, we will release the fourth and final report in that series and it will focus on pensions. … In each of these reports, we are recommending that transparency be improved. For example, taxpayers need to know what they’re on the hook for, whether it’s debt they’re obligated to pay or pension promises that have been made to public workers. And in the case of municipal debt, cities need to increase the amount of information presented to taxpayers regarding debt before they vote to take on more. In addition, cities should consider significantly narrowing the authority to use debt without voter approval.

Other states have faced cascading local bankruptcies and Chapter 9 filings as a result of union contracts and outdated pension concepts. Is Texas equally vulnerable to these problems, or are there differences? How would you define the fiscal challenges of Texas as opposed to those of other states, e.g., California?

Texas appears to be in better shape than many other states, including California. We’ve managed our finances much more conservatively over the last decade and do not seem to have the same state and local crises that you see in other places.

As I mentioned, we are working on a pension report right now, and some of the local problems in places like California and Illinois show us exactly why we need to pay attention to what is going on in these pension plans. Though we are, on the whole, better off right now, we need to make sure we remain prudent so that 10 or 20 years from now, we’re not facing the same kinds of problems you see in some other states.

Obamacare will not only impact the national fiscal posture, but also state solvency. If not amended or repealed, how will Obamacare impact Texas? What recourse does Texas have should Obamacare stay on the books?

According to the information we received from the Texas Health and Human Services Commission, if Texas implemented all of the provisions envisioned by the Affordable Care Act, Medicaid would grow to almost 35 percent of our state budget by 2023.

The recent U.S. Supreme Court ruling, however, gives us some flexibility. The court ruled that we do not have to expand our Medicaid program. Not expanding will slow that projected growth some, but we will still see growth in our Medicaid rolls, which will place increasing pressure on our state budget.

I have long supported Texas joining a Health Care Compact among states. This would require congressional approval, but would give us the flexibility to design our own health care system to meet our state’s needs.

Just how bad is the trajectory of current federal spending levels, and can selective cuts in defense and entitlements truly prevent a financial train wreck, especially when the debt-service ratio on existing debt already consumes such a large share of federal outlays?

The country’s debt limit is debatable, but there is economic research indicating that over the course of history, countries whose debt to GDP ratio exceeded 90 percent have great difficulty ever getting their debt back down to manageable levels. The current U.S. marketable debt to GDP ratio is approximately 70 percent. If social contracts (which are moral rather than legal obligations) are added to the equation, U.S. debt to GDP is closer to 100 percent, which could definitely be problematic.

We’ve been relatively prudent here in Texas. We are, of course, required to maintain balanced budgets, while the federal government can run annual deficits. Prudent and conservative fiscal policy in Texas has allowed us to thrive.

Some economists claim that the interdependence of the global financial system, i.e. the so-called “balance of financial terror,” supersedes normal principles of sound finance. In other words, these economists claim that China will still buy American debt even if it reaches astronomical levels, because China depends on U.S. consumers. To your knowledge, what is the actual point of no return?

In a global economy, what happens in China or Europe can have a significant impact on our state’s economy. So we closely monitor events around the world. It remains to be seen how some of the current global economic challenges will be resolved, but we’re keeping a close eye on them to determine how Texas might be affected.

That being said, China has a trade surplus with the U.S. that is driven by U.S. consumption of Chinese goods. Since we pay them in dollars, they have to buy dollar-denominated assets with their surplus and have historically invested mostly in U.S. Treasury securities. So the limit of China’s appetite for U.S. Treasuries will be driven largely by the level of trade between our two countries, the size of their trade surplus, and whether they feel they have better options for investing the large volume of dollars they need to put to work. However, they are diversifying in other foreign exchanges.

As Combs suggests, these issues carry potential repercussions not only for Texas and other states, but for the federal government as well. But Texas’ success may also offer hopeful solutions.

According to Combs and the Congressional Budget Office, entitlements (in the form of three major programs: Social Security, Medicare and Medicaid) are the biggest reason for the situation America faces. It is then inescapable that entitlements must be the focus of any action taken.

Severe cuts and/or reform are possibilities now under discussion. And with a presidential election fast approaching at the beginning of next month, these discussions have intensified, revealing distinct differences in approach and mindset.

The Obama Administration, for example, already proposes and has passed into law massive cuts to entitlement programs, in excess of $700 billion. Committees have been created to distribute and identify which groups will bear the brunt of these cuts. Failure to agree on future measures will result in “sequestration,” or drastic and massive cuts to all federal programs.

Others have suggested simply changing the structure of entitlements, rather than eliminating or cutting them, which will allegedly bring down U.S. debt to sustainable levels and simultaneously save Social Security, Medicare and Medicaid for future generations. Presidential candidate Mitt Romney advocates this approach.

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