Now that Chicago's children have returned to not learning in school, we can all move on to the next crisis in Illinois public finance: unfunded public pensions. Readers who live in the other 49 states will be pleased to learn that Governor Pat Quinn's 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. Think Germany and eurobonds for Greece, Italy and Spain.
Thank you for sharing, Governor.
Sooner or later, we knew it would come to this since the Democrats who are running Illinois into the ground can't bring themselves to oppose union demands. Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers. By some estimates, the system could be the first in the nation to go broke, as early as 2018.
Liabilities are also spiralling nationwide, with some $2.5 trillion in unfunded state pension costs. According to a paper released Thursday by the Illinois Policy Institute, the crisis will end up pitting states against each other as taxpayers in places like Tennessee, Texas, Virginia and Utah will be asked to subsidize the undisciplined likes of Illinois and California.
For years, states have engaged in elaborate accounting tricks to improve appearances, including using an unrealistically high 8% "discount" rate to account for future liabilities. To make that fairy tale come true, state pension funds would have to average returns of 8% a year, which even the toothless Government Accounting Standards Board and Moody's have said are unrealistic.
It's no surprise that many of the states deepest in the red are public union strongholds. For decades, Democrats have bought union support in elections by using surplus revenue during good times to pad pension and retiree health-care benefits.
Look no further than the recent Chicago teachers strike. The city is already facing upwards of a $1 billion deficit next year with hundreds of millions of dollars in annual pension costs for retired teachers coming due. But despite the fiscal imperatives, the negotiation didn't even discuss pensions. The final deal gave unions a more than 17% raise over four years, while they keep benefits and pensions that workers in the wealth-creating private economy can only imagine.
As a political matter, public unions are pursuing a version of the GM strategy: Never make a concession at the state level, figuring that if things get really bad the federal government will have no political choice but to bail out the pensions if not the entire state. Mr. Quinn made that official by pointing out in his budget proposal that "significant long-term improvements" in the state pension debt will come from "seeking a federal guarantee of the debt."
Look for Democrats in Washington to take up that call, and for such an effort to get some traction if Democrats control one or both houses of Congress next year. Jim DeMint, the South Carolina Republican, has seen this future and is already warning against it. He and Illinois Senator Mark Kirk have proposed a resolution opposing a federal bailout of state pensions, and we hope more sign on. States need to clean up their own fiscal messes.