The financial meltdown of the past decade has taught America an expensive lesson: When big institutions face a 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 and Chrysler? Uncle Sam again. Now a new crisis is coming to light. All across the country, many of the pension systems for government employees are grossly underfunded. Those pension systems — and the states that run them — could be the next target of a federal bailout. If that happens, Florida taxpayers should be worried because they'll foot a big part of the bills amassed by states in which the overseers of the pension systems were far less prudent than Florida's. For years, states such as Illinois and California have failed to set aside adequate funds for government workers' retirements. Those unpaid bills are adding up and coming due. Without reform, some states may face financial collapse under the weight of this debt. Already, a conservative estimate of the states' pension shortfalls — $2.5 trillion — represents more than one-sixth of the entire U.S. economy. Illinois Gov. Pat Quinn recently released a report showing how his state's five pension systems have shortfalls totaling $83 billion. This study also made an unimaginable projection that total state pension spending was projected to surpass education spending by 2016. It's alarming how long it took politicians to acknowledge this massive problem. Perhaps just as alarming will be how quickly they could seek a "solution" to the problem by turning to Congress for a bailout. In Washington, crises seem to spring up overnight. Quick fixes that seem absurd today — such as a pension bailout — suddenly become tomorrow's answers. Taxpayers can't afford and don't want more bailouts. Bailouts reward failure. Bailing out irresponsible states would send a message that fiscal discipline doesn't matter, that someone else will come along and take care of the bills.
Conversely, in addition to rewarding irresponsible behavior, bailouts also punish success. That is, states such as Florida that are successfully reining in spending and fixing their problems will lose if Floridians' federal tax dollars are diverted to pay for their profligate counterparts. Is it really good 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 based 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, cut spending and/or borrow even more money. States with the biggest pension liabilities — such as Illinois and California — would benefit tremendously from a bailout, while most other states would suffer. Consider Florida. Its state pension system has fared much better than those in Illinois. If a federal bailout were enacted, however, Florida would be among the states hit the hardest. The Sunshine State could pay a price as high as $50 billion through higher federal taxes or severe cuts in services and federal aid to state and local governments. In this situation, fiscally prudent Florida would lose. There's no denying that many states' pension funds are in trouble. But what they need are state-based reforms, not a federal bailout. A bailout would make states such as Florida pay for mistakes made in California and Illinois. That's not only bad economics; it's just plain wrong. Thomas M. Perrin is the director of public affairs at The James Madison Institute, a nonpartisan public policy research center based in Tallahassee. Contact him at thomas@jamesmadison.org. Ted Dabrowski is vice president of policy at the Illinois Policy Institute in Chicago. Contact him at tdabrowski@illinoispolicy.org.
