8/26/2012
While Virginia Gov. Bob McDonnell and the General Assembly have worked
hard to stabilize our state's retirement system — which is relied upon
by those who work and have worked for our state and local governments —
other states have not done as well. And there seems to be growing
efforts by those states, which have allowed their retirement systems to
truly become anchors on their fiscal health, to hope for a federal
bailout.
States
such as California and Illinois truly face huge financial problems due
to what seems to be irresponsible inaction to stop their retirement
systems from becoming enormous liabilities. And the financial meltdown
of the past decade by various groups has taught America an expensive
lesson: When big institutions face financial crisis, the federal
government is all too eager to bail them out.
Wall Street: The federal government
stepped in with the Troubled Asset Relief Program. General Motors: Uncle
Sam bought into the company instead of allowing the legal bankruptcy
system to resolve that problem in a more equitable manner. The housing
collapse: The feds are still messing around and costing us billions.
A commercial loan collapse could be
right in front of us, and Washington will likely move to bail out that
problem, with the taxpayers left on the hook once again.
* * * * *
Now, a growing crisis
is coming to a head, and it could significantly add to our economic
problems. State-run pension systems across the country are grossly
underfunded, to the tune of $2.5 trillion. Those pension systems — and
the states that run them — could be the next target of a federal
bailout.
If that happens, Virginia taxpayers should be worried, because we could be forced to foot a big part of that bill.
For
years, states such as Illinois and California have created incredibly
generous retirement programs and then failed to responsibly fund those
pension systems. Those unpaid bills are adding up, and without reform
some states may collapse under the weight of this debt. Already, the
conservative estimate of $2.5 trillion in pension shortfalls represents
more than one-sixth of the entire U.S. economy.
It's alarming how long it took politicians to acknowledge this massive
problem. Just as with Social Security, the financial inability of the
state systems to fund their promises was clearly sitting there for
anyone to see.
In Washington, crises seem to spring up overnight, and quick fixes that
seem absurd today — such as a state pension bailout — suddenly become
"reasonable" answers.
But it seems pretty clear that most
taxpayers don't want another bailout. Not only do the taxpayers feel
that we can't afford it, but it has become clear over the past few years
that bailouts reward failure. Bailing out irresponsible states would
send the message that fiscal discipline doesn't matter because someone
else will come along and take care of the bills.
And bailouts punish success. States such as Virginia are working hard to
become economically competitive by reining in spending and prioritizing
their efforts. These states won't benefit from a bailout; instead,
they'll be stuck paying for other states' mismanagement.
Is it really good policy to tell states that if they act responsibly, they'll end up on the hook for those that don't?
* * * * *The Illinois Policy
Institute, a nonpartisan think tank in Chicago, has developed a model to
illustrate the impact of a federal bailout of state pension debt.
In a bailout scenario, the federal
government would have to raise taxes and cut federal spending to finance
a bailout. States with the biggest pension liabilities — such as
Illinois — would benefit tremendously from a bailout, while most other
states would only suffer.
Virginia's pension system, for example, has fared much better than
Illinois'. But if a federal bailout were enacted, Virginia would be
among the states hit the hardest. The commonwealth would pay a price as
high as $29 billion, which would need to be paid for by higher taxes
levied on Virginia residents or severe cuts in services. In this
situation, fiscally prudent Virginia would lose.
There's
no denying that states' pension funds are in trouble. But what they
need are state-based reforms — not a federal bailout.
A bailout would make states like Virginia pay for mistakes made in
California and Illinois. That's not only bad economics — it's just plain
wrong.
Michael
W. Thompson is chairman and president of the Virginia-based Thomas
Jefferson Institute. Ted Dabrowski is the vice president of policy at
the Illinois Policy Institute.
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