Did Wisconsin Senate choose nuclear option in collective-bargaining fight?
Republicans in the Wisconsin Senate vote to strip key public-sector unions of collective bargaining rights, despite the fact that no Democrats were present. The vote is a bid to protect core budget cuts to public-employee benefits, Republicans say. But is that necessary?
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Federal Reserve Chairman Ben Bernanke, for one, said recently that states could be on the hook for as much as $3 trillion in unfunded pension commitments and $600 billion in retiree health benefits.Skip to next paragraph
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The short-term view
Yet when economists speak in such terms, they are describing a long-term problem as opposed to a short-term crisis.
The current budget trouble in statehouses has more to do with the aftermath of the deep recession that ended in 2009 than with pensions. The steep declines in tax revenues that accompanied the recession meant that, collectively, all 50 states faced a shortfall of 18 percent of their 2011 budgets, according to a recent report by the liberal Center on Budget and Policy Priorities (CBPP). Wisconsin's shortfall for 2012 is 13 percent of its 2011 budget.
Those shortfalls have led to significant budget cuts. While tax revenues have begun to climb upward again, states are still scrambling to close gaps between revenues and planned spending in the next fiscal year.
By contrast, pensions are a relatively minor concern for near-term budgeteers. As of 2008, state and local governments devoted an average of only 3.8 percent of their operating budgets to pension funding, according to the CBPP report.
"In most states," the report concludes, "a modest increase in funding and/or sensible changes to pension eligibility and benefits should be sufficient to remedy underfunding."
The long-term view
Without action, however, employee-benefit costs would be a significant part of the long-term financial challenge facing states. The problem is not confined to unionized employees, who make up about 4 in 10 state and local government employees. But it's important for unionized employees to share in the belt-tightening, say proponents of cutbacks.
Since laws generally guarantee pension benefits that have already been accrued, "state and local governments may face very significant financing problems in years ahead," says Andrew Biggs, a scholar at the conservative American Enterprise Institute, in a recent analysis for the group Free Enterprise Nation.
Some states have other long-term problems, such as falling short on Medicaid funding or relying or issuing debt to fund operations. And some states including California and Illinois need to make sharp course corrections. But taken as a whole, the state finance challenges are not yet cataclysmic, some experts say.
Amid the challenges, some credit analysts have raised the prospect that some states could default on debt. But most state-finance experts say that's unlikely, and that there's no need for legislation (proposed by some) to allow states to shed debt by entering bankruptcy.
For their part, state officials say the talk of bankruptcy legislation is harming their reputation with investors, by raising groundless fears about the quality of state bonds.