Stopping State Bailouts, Before They Start

First it was Wall Street, then it was General Motors, and now some expect that individual states will also seek a financial bailout from the federal government. Today, the Joint Economic Committee (JEC) released a report on The Pending State Pension Crisis. Evidence from the report reveals that fiscally reckless states will inevitably turn to federal taxpayers to bail them out once assets run dry. Unfortunately, fiscally sound states will disproportionately bear most of the burden.

According to a recent report by State Budget Solutions, total unfunded liability is estimated at $4.6 trillion. Unfunded liabilities comprise the largest portion of total state debt, a burden that has led to several municipal bankruptcies. This ever-growing mountain of unfunded pension liability has encouraged even very liberal cities and states to enact reforms.

The growing concern, however, is from states that have not addressed their unfunded liability. The Illinois Policy Institute developed an interactive map that allows the user to set the parameters of a potential bailout. The model displays clear winners and losers of a taxpayer bailout. The JEC study utilized the model to identify “winners” and “losers.” “Winners” are considered states that would see an increase in the federal spending they receive, while the “losers” are states that would see a decrease in the federal spending they receive. In essence, the winners would ultimately gain from a federal bailout and the losers would be left to pick up the tab.

Last Thursday at the Cato Institute, Sen. Jim DeMint pledged his opposition to federal bailouts of underfunded state pension systems. Sen. DeMint remarked: “The only way to force recalcitrant states to put fiscal reform on the table is for Congress to take state bailouts off of it. Congress must make plain that the taxpayers will not protect reckless state policymakers from the consequences of their policies.”

Rather than tackling the problem head-on, states often plead ignorance or use gimmicks to make their unfunded obligation appear smaller. The Wall Street Journal illustrated a recent example of this inaction when Governor Pat Quinn of Illinois announced that he is planning to seek a federal guarantee for the state’s bankrupt pension system.

The new JEC study emphasizes the need to remove the option of a federal bailout so that states accept responsibility and take steps to address their unfunded liability. There are several solutions for states: one is to switch from the standard defined benefit plan to a defined contribution (401 k style) plan, as outlined in ALEC’s State Budget Reform Toolkit. Ultimately, with federal bailouts eliminated as an option, states will be forced to address their unfunded liabilities in a responsible manner. Elected officials will ultimately realize that the issue is not a partisan problem—but a numbers problem.