$2.8 Trillion in Unfunded State Pension Debts: Congressional Republicans Look to Block Federal Bailout

South Carolina GOP Sen. Jim DeMint is crafting a preemptive strike against states inevitably turning to the federal government for pension bailouts.

The Republicans of the Joint Economic Committee (of which DeMint is a member) have released a report, titled “The Pending State Pensions Crisis,” illustrating the extent to which state pensions are underfunded and the negative consequences should the federal government get involved in fixing it. DeMint is taking the lead in attempting to publicize its contents:

When the states with the worst pension systems come knocking at Washington’s door for a bailout, it will ultimately be taxpayers in more prudent states who will pay for the recklessness of the negligent states.

Despite the fact that 49 states have balanced budget requirements the report calculates $4.2 trillion of state debt, $2.8 trillion of which is unfunded pension benefits. It’s by far the dominant source of debt for state governments across the country.

The percentage of unfunded liability varies from state to state. North Carolina has the lowest at 37.1 percent (if having a third of your pension debt unfunded can truly be called low). Illinois has the highest at 71.8 percent. Something else to keep in mind when thinking about all those raises the teachers in Chicago just received.

It’s obviously not a sustainable model, and the report points out that little is actually being done to fix it even as the economy stagnates for the private sector:

Out of political self-interest, state and local politicians have given public sector unions much higher wages and more generous benefits than their private sector counterparts, all at the expense of current and future taxpayers. In the first quarter of 2012, state and local employees received 43% more in total compensation compared to their private sector counterparts. It is not sustainable to have public servants making more money than the public paying their salaries.

In the event of a federal bailout of state pensions, the report explored who would be the winners and losers, considering the possibility of financing either through federal tax increases or through spending cuts. Whose taxpayers would either pay more or lose more in order to close the gap? In both cases many of the winners were the same states who had the highest unfunded liabilities. They would siphon the money off of the other states that were more responsible.

The goal of the report’s authors is to try to take the possibility of a federal bailout of pensions of the table. They don’t predict any real reform will happen on the state level unless there’s no chance the federal government will come clean up the mess for them:

Until a federal bailout is taken off the table, states that enact prudent policies and take the often painful actions required to live within their means will risk being penalized, while states that are unrestrained and irresponsible in their spending and promises will hold out for a federal recompense. Washington policymakers must act now to make it abundantly clear to states that they will not benefit from a federal bailout of state pensions.

But simply passing legislation today stating there will be no federal bailout of state pensions is not enough – we have seen how many times Washington policymakers have waived or found a way around such rules in the past. Instead, policymakers must begin today by laying out the principles of what constitutes a sound pension plan and setting forth the penalties that would be applied to states seeking a federal bailout.

To preemptively deter states from seeking bailouts, the federal government could conditionally reduce federal aid to states in proportion to their unfunded liabilities until their pension fund becomes solvent over a specified future time frame. Alternatively, the federal government could revoke states’ tax free bond status if conventional, private-sector accounting standards show that their pension funds are expected to go broke within 10 years or less.

Read the whole report here (pdf).

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  • ||

    Oh man, I bet the Reason staff are giving each other mega high fives on this one, since you called this crisis about five damn years ago.

  • Calidissident||

    Wow, I would have expected California to be higher up in the rankings

  • Scott S.||

    We make up for it in sheer volume rather than percentages.

  • Contrarian P||

    Does anyone really believe there won't be a federal bailout? The sackcloth rending over those poor retired teachers, cops, firefighters, etc. who will be homeless, dying in the streets, and eternally damned to the fires of hell because Uncle Sam failed to act...throw in market failure and Tony pretty much has all of his arguments in one pile on this one.

  • ||

    I don't know. Since this buttrapes everyone in the country to bailout a much smaller population of state employees, it wouldn't exactly be great for many politicians' reelection chances. This isn't idiots in Wisconsin arguing over reforming unions, this is taking from everyone to give overpaid state workers every overpromised dime they were overgifted. And the fact the it buttrapes people from completely different states makes it even more egregious.

  • Tman||

    This seems relevant-from todays WSJ Letters to the Editor-

    Each State Must Take Responsibility

    I don't believe it is possible to read your editorial "An Illinois Pension Bailout?" (Sept. 21) without screaming: "No taxation without representation!" The states exist as 50 policy laboratories, and it's clear from migration patterns and economic performance that low-tax, low-regulation, right-to-work states drastically outperform their antigrowth counterparts. For people with no vote on the policies in Illinois, California, Massachusetts and the like to subsidize the wayward economic policies of those states would be flat out wrong—in addition to being bad economics.

    I hope our representatives in Washington will realize that too and avoid calls for state pension guarantees. In the midst of that moment of sanity, they should also do away with the deduction of state income taxes against federal income taxes as one part of true tax reform, broadening the tax base and lowering marginal tax rates. All such a deduction does is subsidize the high-tax-rate states at the expense of all other taxpayers.

    People deserve the governments they get. Those who don't like the policies in Illinois don't deserve to be forced to pay for the results.

    Ford M. Scudder

    Nashville, Tenn.

    I'll be damned if I'm paying for California's stupid pension madness whilst they piss away another $100 billion on a choo choo train.

  • ||

    Let's hope enough people agree with you that it frightens the federal politicians sufficiently.

  • Tman||

    HA! We're totally boned. Maybe I should go get a job as one o dem riot policemen. Those dudes in Greece seem to be working 24/7.

    Get paid for thwacking trustafarians all day? Sounds good to me.

    Probably decent OT too.

  • Paul.||

    don't believe it is possible to read your editorial "An Illinois Pension Bailout?" (Sept. 21) without screaming: "No taxation without representation!" The states exist as 50 policy laboratories,

    Yeah whoah whoah whoah there, cowboy. Sounds like one o' them racist originalists. No one pays any attention to that old document written by dead white men.

  • Tulpa Doom||

    Pay no attention to Kansas, Oklahoma, Louisiana, Mississippi, Alabama, and South Carolina on that map!

  • Calidissident||

    Yeah, I will readily admit our government sucks, but it does get kind of annoying listening to all the holier-than-thou types get on their high horses when their states, not to mention the country, isn't too far behind

  • Lisa||

    I live in Kansas. It's mind-boggling how fiscally retarded the liberals are here. The way they protested the cuts to art funding you'd think we were in the most prosperous time in America history with extra money coming out of our ears, as opposed to dire economic straits.

  • Marshall Gill||

    this is taking from everyone to give overpaid state workers every overpromised dime they were overgifted.

    While I agree 1000% how many other people in the country see our Noble teachers and LEO's as "overpaid"? Teachers salaries are more than full time pay for part time work, yet people still believe that they are underpaid.

    I wish you were right but don't think you are. Too many people on the tit, and they are not going to let go without a serious fight.

  • Alien Invader||

    it wouldn't exactly be great for many politicians' reelection chances

    ObamaCare. Big Bank Bailouts. GM.

    It has now been proven that nothing the animals in DC does, is going to seriously hurt their re-election chances.

    Consider for example the fact that Obama stands a decent chance of getting a second term.

  • ||

    No, but Obama can honestly claim he ran on the awesomeness of teachers, cops, and firefighters. So he has a mandate to do it.

  • ||

    this buttrapes everyone in the country to bailout a much smaller population of state employees

    Tell that to the 47% of the country that doesn't pay any federal income taxes. Why should they give a fuck? It's not coming out of their pocket?

    Then add the (undefined percentage) who are public sector workers that pay taxes. I'm pretty sure you have 50% of the vote right there.

  • entropy||

    Then add the (undefined percentage) who are public sector workers that pay get payed slightly less in lieu of paying taxes.

  • Enjoy Every Sandwich||

    That's what governments are for, to get in a man's way. And to buttrape him.

  • NotSure||

    Tony can simply copy and paste the same arguments being made in Europe right now about bailouts to other countries, "we need to show solidarity with the poorer parts", "if we do nothing we will face unprecedented economic collapse", "this is an emergency measure and will soon no longer be required...".

    Yes it is inevitable, it will mostly like be going to the places that can gain votes for the government.

  • ||

    It will be an awesome way to ensure that Wisconsin gets absolutely not benefit from actually reforming it's pension obligations and reducing the power of public sector unions. If they hadn't elected Walker, they would have gotten a bailout anyway.

  • SIV||

    God Bless Jim DeMint.

  • Paul.||

    I'm noticing a lot of red states requiring some significant budget gap-closing.

  • R C Dean||

    So? Do you have a point?

  • Tulpa Doom||

    Did you notice which party released this report decrying grasshopper states demanding bailouts from ant states?

  • Marshall Gill||

    Again, your point? Was there some part in the study where they indicated that the RED grasshopper states would be allowed bailouts?

    Jim Imhoff is a Senator from Oklahoma and one of the co-sponsors. What was your point again?

  • PapayaSF||

    But-but-but... didn't unions give us the weekend??

  • Sevo||

    Seems they sold it to us under the ol' bait-and-switch.

  • Fist of Etiquette||

    If DeMint doesn't want to help them out of their little situation, then Illinois will just have to get the money from Ban Ki-moon.

  • Tulpa Doom||

    Er, DeMint's state, South Carolina, is almost as bad as Illinois in the unfunded pension percentage! So he's really going against the interests of his own constituency.

  • Marshall Gill||

    DeMint's state, South Carolina, is almost as bad as Illinois in the unfunded pension percentage! So he's really going against the interests of his own constituency.

    Science, here I think that perhaps you are not a complete idiot and unfairly treated on this site and then you go and definitively prove me wrong.

    How is the funding of the parasite class his "constituents interests"? Because pub sec people elected him to office?!

    Derp.

  • R C Dean||

    And what's wrong with DeMint telling the pubsec minority of his constituents they won't be getting a fed bailout, and the state government had better stop kicking this can?

    How does that hurt the vast majority of his constituents who aren't pubsecs?

  • ||

    Well, that explain a lot about Obama's pro-public-sector-union rhetoric recently. All the talk about cops and firefighters and teachers: it's all to build support for bailing out state pension funds for those public-sector union workers.

    Get ready for some big speeches about what meanies Republicans are for wanting teachers to spend their elder years in penury.

  • Alien Invader||

    Yeah. And they just ran some articles recently in the MSM about how, if we'd only pass a carbon tax, we'd do away with the deficit in 10 years. It'd be great!

  • Red Rocks Rockin||

    It’s obviously not a sustainable model, and the report points out that little is actually being done to fix it even as the economy stagnates for the private sector:

    Well, yeah, no shit. They're all expecting some deus ex machina to come down and save them. About the closest they'll get is Bernanke bailing them out via government debt purchases.

    Don't expect Mittens to hold the line on this if he gets elected, either. I guarantee he'd knuckle under due to pressure from Dems in Congress.

    That's okay, though--the more these people and institutions pretend that basic math doesn't matter, the more they'll be delegitmized when the crash comes and make the backlash that much stronger.

  • Tulpa Doom||

    You think the Dems will control Congress?

  • ||

    Would it matter?
    Obama could get Ben Bernanke to buy State-issued bonds. Same difference.

  • R C Dean||

    Fuck, the Fed is already hinting it will bail out Europe.

    Its been bailing out the Treasury by buying 75%+ of new debt for the last few years.

    Bail out the states? Why the hell not? The beautiful thing, those pensions are mostly inflation-indexed, so the more the Fed bails them out, the more inflation we have, the more of a bailout they need. And round and round we go.

  • Red Rocks Rockin||

    Bail out the states? Why the hell not? The beautiful thing, those pensions are mostly inflation-indexed, so the more the Fed bails them out, the more inflation we have, the more of a bailout they need. And round and round we go.

    Exactly--the Fed pretty much began the feedback loop once it began back-door purchases of government debt via the primary dealers. Once it starts doing the same thing for the states, the final collapse of the fiat monetary system will be just a matter of time.

  • Alien Invader||

    I'm sure their replacements will be vastly superior.

  • Proprietist||

    Vermont has less debt than New Hampshire. Who would've thought?

  • Scott S.||

    Keep in mind they're percentages though, not flat numbers. South Carolina has a higher percentage of unfunded liability than California, but no doubt California owes more in flat dollars.

  • Lisa||

    I live in Kansas, one of the states with severe unfunded liability. I moved here from Minnesota about 6 years ago and I have to say, I have not seen that it is much "redder" here. They may say they vote conservative, but they love unions...they think public schools need more money and are doing God's work...they love social programs of any kind. They are conservative until you actually ask them what they would cut to balance the budget.

  • Restoras||

    So actually not conservative at all, except perhaps in a socon sense.

  • Red Rocks Rockin||

    This is why Thomas Frank didn't know what the fuck he was talking about. Kansas' conservatism (the proxy for small-town/suburban conservatives nationwide), to the extent that it exists, is mostly defensive in nature. If they are "conservative," it's because their infrastructures don't exist on a scale that can accomodate an underclass or general deviance. These types would place too much strain on their economies and undermine the trust bonds necessary to keep the communities socially stable, hence why they tend to be fairly homogenous across the board.

    The support for unions and public schools that you see is likely due to the fact that, at least in the smaller towns, these people are all fairly familiar with one another and they see these institutions as integral to keeping those social bonds strong.

    I have a feeling that if you started bringing in a large number of outsiders (particularly of an opposing racial makeup) to live in their towns, they'd change their tune on the effectiveness of unions and public schools pretty quick.

  • ant1sthenes||

    I'd just like to see the precedent of forcing government entities to use GAAP. If it's forced on states, maybe they'll eventually get pissed enough to force it on feds as well.

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