Walker: States May Shoulder Unfunded Mandates Without Intervention

The nation’s entitlement programs are not fiscally sustainable without intervention from federal leaders, and states are in danger of being saddled with trillions of dollars in unfunded mandates, said David Walker, founder and CEO of the Comeback America Initiative and former Comptroller of the United States on Tuesday.
January 31, 2012

The nation’s entitlement programs are not fiscally sustainable without intervention from federal leaders, and states are in danger of being saddled with trillions of dollars in unfunded mandates, said David Walker, founder and CEO of the Comeback America Initiative (CAI) and former Comptroller of the United States on Tuesday.

Walker, speaking at the Governing Outlook in the States and Localities conference at the National Press Club in Washington, detailed his plan for fixing a deteriorating fiscal landscape for the United States and his recommendations for heading off what could become a severe national debt crisis -– much like what Greece is facing. He placed the blame for the nation’s financial woes squarely on the shoulders of Congress.

“The problem is Washington is dysfunction. Living for today and not enough tough choices,” he said. Walker said that congressional leaders wait for a crisis to happen before reacting, adding that they lag in their fiduciary responsibilities.

He said that leaders in Washington need to address tough financial management issues facing America including the burgeoning federal debt load, tax reform, and carving back massive spending on entitlement programs -– all of which have impacted the United States” global economic position, currently ranked as 28th out of 34 in sovereign fiscal responsibility index. Greece ranked last, while Australia was first.

He also said that the Affordable Care Act will cost $12 trillion more than the federal lawmakers have stated. In his report, “Restoring Fiscal Sanity: The Tough Choices We Face and Two Possible Paths Forward,” released in June, Walker stressed that a debt crisis would appear as a loss of confidence by investors in the ability of the federal government to put its finances in order would likely result in a significant increase in interest rates and a potential dramatic decline in the value of the dollar.

He said that 42 percent of state revenue comes from the federal government. “If the feds can’t do it, you will see a proliferation of unfunded mandates,” Walker said. “States better get their own finances in order so that…they can take care of them.” Walker said that the entitlement programs, Social Security, Medicare and Medicaid, are underfunded by approximately $46 trillion, according to the 2011 Social Security and Medicare Trustee’s Report. “These obligations grow faster than inflation and our economy. In addition, due to our delay in acting, the power of compounding is now working against us rather than for us,” he said.

The Social Security program is underfunded by $9 trillion, of which about $2.6 trillion is backed by government bonds, Walker said. The CAI report states that the negative cash flow position for Social Security means that the program in 2010 began adding to the federal deficit. The Disability Insurance Trust Fund, a component of the Social Security program, is expected to be fully depleted by 2018. Medicare is underfunded by more than $24 trillion and also backed by government bonds, his report said.

On tax reform, Walker said constraints should be placed on how much the federal government has to spend. He said that the United States cannot grow, inflate or tax its way out of trouble.

“Cap how much revenue the government can have. Limit on how much revenue so they can focus on what they’re getting for what they are doing,” Walker said, adding that Social Security should be taken off the budget.

Walker says the current federal tax system need to be scraped and replaced by a simpler, fairer version by the end of 2013. He recommended Tuesday getting the top marginal tax rate to 25 percent and ensuring that everyone pays their fair share. He said that total federal revenues should not exceed current law baseline projected levels and should be capped at 21.5 percent of the gross domestic product.

And he recommended allowing the Bush tax cuts to expire and providing a temporary fix to the Alternative Minimum Tax through 2013. He suggests fewer tax brackets and phasing out the special income and payroll tax exclusion for employer provided and paid health care benefits by 2028.

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