Senate
Resolution Cautions Against Federal Bailout of Fiscally Irresponsible States
(Rachel Greszler / Heritage Foundation)
Rachel Greszler, Research Fellow in Economics, Budget and
Entitlements July 9, 2019
The
following appeared in Pension
Tsunami which you might wish to consider checking daily or weekly!
Excerpt:
The five states with the greatest unfunded pension obligations Alaska,
Connecticut, California, Illinois, and Oregon have per-capita pension debts
ranging from $28,000 to nearly $47,000. That is two to five times as high as
the five states with the lowest pension debts, which range from $8,500 to
$10,000 per capita in Tennessee, Indiana, Nebraska, Florida, and Idaho.
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Most of the public was outraged when, during
the financial crisis of 2008, Congress provided a massive financial bailout,
including $70 billion of taxpayers money to insurance giant AIG and $80 billion
to U.S. automakers General Motors, Chrysler, and Ford.
Even most politicians who voted in favor of
the bailouts did so begrudgingly, in part because they considered it a way to
contain the damage from arguably unforeseen circumstances.
By contrast, state and local governments have
accumulated many trillions of dollars in debt with clearly foreseeable
consequences.
If states want to make good on their
obligations, many will have to drastically increase taxes, severely cut
services, or default on their debts and lose access to credit.
However, it is only a matter of time before
state policymakers, not wanting to face those consequences, seek a federal
bailout.
That is why Sen. Tom Cottons sense of the
Senate resolution (S. Res. 268), expressing the position that the federal
government should not bail out any state is so important.
Considering that states cannot declare
bankruptcy, many states failure to confront absolutely
unsustainable pension and other obligations shows that they are counting
on a federal bailout.
In fact, then-Illinois Gov. Pat Quinn included
a federal guarantee of Illinois pension bonds in his 2012
budget proposal.
Cottons succinct sense of the Senate
resolution says that the federal government should not take any action to
redeem, assume, or guarantee any debt of a State and that the secretary of the
Treasury should report to Congress any negotiations to engage in actions that
would result in an outlay of Federal funds on behalf of creditors of a State.
As the resolution points out, every state in
the U.S. is a sovereign entity with its own authority to collect taxes and to
issue debt, with a legal obligation to fully disclose its financial condition
to investors.
Moreover, Congress has already rejected past
requests for bailouts of defaulted state debt, and back in 1842, the Senate
requested that the Treasury report any negotiations that discussed federal
assumption of state debt to ensure that promises of Federal Government support
were not proffered.
Although nonbinding, the resolution from
Cotton, R-Ark., is important, because unless Congress takes a bailout off the
table, lawmakers in fiscally irresponsible states will have the incentive to
keep racking up more debt and taxpayers in fiscally responsible states would
pay the price.
While all states have sizable debt, primarily
from unfunded pensions and other public employee benefits, some have
dramatically more than others.
Take states estimated $6 trillion in unfunded pension promises. That works
out to about $18,300 for every man, woman, and child or $73,200 for a family of
four in America.
The five states with the greatest unfunded
pension obligations Alaska, Connecticut, California, Illinois, and Oregon have
per-capita pension debts ranging from $28,000 to nearly $47,000. That is two to
five times as high as the five states with the lowest pension debts which range
from $8,500 to $10,000 per capita in Tennessee, Indiana, Nebraska, Florida and
Idaho.
If Walmart were facing bankruptcy Congress
would not require Target to cover its payrolls. But that is what a federal
bailout would be like by unfairly forcing taxpayers in states such as Tennessee
and Florida to pay for pensions and other public sector workers benefits in
Illinois and California even though they do not live in or receive any services
from those states.
The fact that governments do not face bottom
lines is already problematic enough for workers, families, and businesses whose
incomes seem like an open spigot for politicians to tax.
Expanding lawmakers reach into the pockets of
people they do not represent would only exacerbate what economists call moral
hazard essentially the consequence of removing personal responsibility.
States that want to protect their current and
future residents by getting their fiscal houses in order have plenty of
options.
For starters they can look to the sensible pension
reforms enacted in states such as Michigan and Oklahoma that significantly
curbed costs and to fiscally responsible states such as Nebraska and Tennessee.
While the federal government had no role in
state and local governments debts it should make clear that it also has no role
in paying for them.
********************************
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