How to fix state pensions without a federal bailout

If the November elections sent one clear message to Washington on what it should do in 2011, it is this: no more bailouts.

The federal rescue of Wall Street, General Motors, Fannie Mae, and sundry other entities drowning in red ink did not go down well with voters – even if a few bailouts did have a decent payback.

But the voters’ message could get lost if Congress is forced to deal with a likely crisis in the new year: states and cities that can’t pay their bills, especially the retirement benefits of state workers.

By this spring, many states will run out of the $217 billion in stimulus money from Washington. (Illinois is already a deadbeat in paying bills.) Their budget woes will only mount as joblessness persists and politics prevents solutions in state houses.

Most of all, they face an estimated shortfall of $3.23 trillion owed to pension plans for current and retired state workers. Municipalities have an estimated $557 billion in pension liabilities. That adds up to about a quarter of the yearly US economic output.

California, where the cost of state workers eats up about 80 percent of the budget, already asked Congress for an $8 billion bailout. Lawmakers wisely said no. Rewarding states for irresponsible promises of spending made during good times would only invite more irresponsible behavior in the future. And Washington can’t be a cash machine for local governments at a time when its own debts are reaching poor-nation status and jeopardizing an economic recovery.

Still, allowing one or more states – say, an Illinois or a California – to default on its debt would shock the US economy. The biggest hit would be on the $2.8 trillion market in municipal and state bonds, a source of financial security for many retirees.

Washington should not allow itself to be faced with a choice between bailing out a few defaulting states and letting such defaults send the economy into a downward spiral.

The first task is for states with high unfunded pension liabilities to act now.

The one state leading the way is New Jersey, where Gov. Chris Christie (R) is trying to cut a pension deficit of at least $46 billion (and another $76 billion in health benefits). He proposes rolling back a previous raise in retirement benefits while also requiring state employees to pay higher copays and 30 percent of their health-care premiums.

1 | 2

Next