Director of Heath Policy and Pension Reform
President Barack Obama has won a second term, giving him what he described earlier this year as “more flexibility” in his policy choices. Will one of those choices be bailing out state pensions?
All across the country, states are grappling with pension systems that are massively underfunded. Under new accounting rules, Illinois’ unfunded pension debt stands at more than $200 billion. That’s not counting the billions owed for retiree health benefits, pension bonds or any of the retirement debt at the local level.
But while Illinois’ pension systems may be in the worst financial shape, we’re not alone. Recent calculations have put the total level of states’ unfunded pension debt at $2.5 trillion, and possibly as high as $4 trillion. To put that in perspective, that’s more than all taxes paid to the federal government last year.
The past few years have shown exactly what happens when large institutions face big problems: the federal government swoops in to bail out those institutions it deems “too big to fail.” The next big bailout request is on the horizon.
It’s only a matter of time until other governors, mayors and city council members with mismanaged finances follow suit, heading to Washington, D.C., with their hands out. Even if the federal government had the money to bail out state pensions, it would only punish responsible states and reward reckless ones. Sadly, as long as a federal bailout is on the table, state and local governments will continue to kick the can down the road, delaying the structural spending reforms that are so critical to their long-term fiscal health.
Worse yet, the Chicago Teachers Union set a clear precedent for government unions to bully state and local governments into meeting outrageous demands that will place further strain on busted budgets and bankrupt pension systems.
As more and more of these bailout requests roll in, will Obama have the good sense to say no? Or will he use his new “flexibility” to reward political allies in the most reckless states?