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

Sen. Jim DeMint leads effort to force states to clean up their own messes

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).