An Illinois Pension Bailout Will Open the Floodgates

Back in 2010, Robert Novy-Marx and Joshua Rauh released a paper on state employee pension liabilities that attracted much-deserved attention:

We calculate the present value of state employee pension liabilities as of June 2009 using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the present value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for projected salary growth and future service.

Though a large majority of states face expensive pension obligation, some are in much worse shape than others. Rhode Island, for example, is in particularly bad shape, for reasons Josh Barro and Ted Nesi have covered in detail.

So is Illinois, home state of President Obama and, thanks to the outsized influence of Chicago and its environs, a linchpin of the Democratic coalition. Gov. Pat Quinn has presided over dramatic tax increases designed to close a large budget shortfall, yet without pension reform of some kind, much larger tax increases will be necessary to meet pension obligations in the near future. As Dan Liljenquist, a former Utah state senator who spearheaded successful pension and benefit reform efforts in his state, observes, Illinois public employee unions have successfully blocked pension reform, thus leaving Gov. Quinn and the Illinois legislature with few attractive options.

Recognizing that further tax increases would be a disaster for Quinn and Illinois Democrats, the public employee unions are now calling for a federal bailout. And if Illinois gets a bailout, it is a safe bet that other states, including California, will be close behind. Taxpayers across the country, including in states like Utah and Michigan that have taken difficult states to reform their pension systems, will have to pay for deals brokered by politicians who profited from failing to press for reform.

(In the event of a bailout, perhaps we should strip the extended families of all current and former elected officials in the beneficiary states of all their worldly possessions, and place a large head tax that would apply against all future earnings. Granted, this proposal would probably not pass constitutional muster, but it would have the distinct virtue of reflecting the gravity of the matter at hand.)

There is one constructive thing Congress can do to address the challenges posed by state employee pension liabilities: pass the Public Employee Pension Transparency Act (PEPTA), which would subject state and local governments to more stringent reporting standards and ban federal bailouts of state pension funds.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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