State & Local Governments Have Bailout Fever

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State and local governments have caught bailout fever and are asking taxpayers to clean up their messes. And with trillions in underfunded public pensions, the messes are colossal.

Officials from state and local governments apparently feel left out of the $750 billion bailout package passed by Congress and signed by the president last month. Now they're angling for a share, complaining that the markets for government debt used to fund states, counties and municipalities are drying up.

Maybe they should regard the situation as a message from above. State and local governments are already drowning in debt, much of it in liabilities for public employee pensions that were underfunded to begin with, and are now even more so after losing tens of billions in market value during the recent economic slump.

To issue more debt when they know they don't have the money to pay future pension liabilities is foolish.

Analysts at the National Bureau of Economic Research have found that state pensions alone are expected to grow to about $7.9 trillion in 2005 dollars over the next 15 years. There's a 50% chance, they say, that the pensions will be underfunded by $750 billion by that time, and a 25% chance they will be underfunded by "at least $1.75 trillion," which will be about one-tenth the size of the economy.

To put this in perspective, consider that the NBER report says that underfunding in state pension plans is larger than the total magnitude of outstanding state bonds. Add in the underfunded pensions for which counties and cities are liable, and which runs the percentage of underfunded state and local pensions to 40% of all public pensions, and the mix is a toxic brew of debt.

So who is going to be responsible for the debt run up by reckless elected officials eager to provide luxury — and often outrageously early — retirements for civil servants?

Primarily the next generation's taxpayers, who will reap few if any benefits from services they'll be forced to pay for, as well as those who are not yet paying serious taxes but one day will be.

Unless they have no qualms about bankrupting future taxpayers, the elected officials who have overpromised, and those who have made no serious attempts to fix their predecessors' errors, need to muster the will to require their employees to contribute more to their own pensions.

Better, though, would be to move away from the traditional defined benefits system, in which a pension is a percentage of a worker's final salary paid from investments made by the employer, to a defined contributions system, in which workers pay into, and assume the risk of, individualized accounts.

Unless there are significant changes, American taxpayers will be burdened as never before and the economic strain on the nation could well be unprecedented when the bill for these pensions comes due. Retired public employees will be better off than most, but they will be living in a world where the standards are far below those we enjoy today. That doesn't sound like a retirement to look forward to.

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