Credible estimates of the total amount of unfunded state pension liabilities range from $2.5 trillion to more than $3 trillion. Part of the problem in coming up with an accurate estimate is that budget transparency requirements vary greatly by state, and many governments have become adept at hiding the problem with questionable accounting rules that wouldn’t pass muster in the private sector. As a businessman, I know that a necessary first step in running a successful organization is to be honest in your bookkeeping.
That’s because according to Professor Joshua Rauh of the Kellogg School of Management, even using states’ excessive investment return assumptions, 17 states will run out of pension funds over the next ten years. Over 40 states will run out within the next 20 years. Inevitably, bankrupt states with huge pension obligations will look to the federal government to make up the difference. Are we prepared to offer a rescue to these states that will make the bailouts of the last few years look insignificant by comparison?
And who, exactly, will be coming to the rescue? The answer is clear: taxpayers in states that don’t have a pension deficit will be on the hook for the irresponsibility of states that unwisely promised overly-generous retirement benefits—promises they now find impossible to keep.
Talk about too big to fail: the pressure to “save the states” will be enormous, and unless protections are set in place now, it will simply amount to a transfer of wealth from more responsible states like New York to reckless states like Illinois.
The best approach is to implement safeguards now that will improve the future solvency of these pension plans. For example, perhaps a condition for receiving federal funds should be a thorough reform of state accounting practices and a requirement that states meet their constitutional balanced budget requirements by including pension obligations on their current balance sheets. This kind of positive reform will help ensure that the era of federal government bailouts has truly ended and not just begun.
Hanna, a Republican, represents the 24th Congressional District of New York.