Concern over underfunding of both public and corporate pension plans has Republican presidential candidate Mitt Romney, his party and other conservatives making a pre-emptive strike against the idea of federal government bailouts.
While the threat might not be imminent, the need to take steps to avoid it is, bailout opponents say. Political analysts see little political appetite for federal solutions to state budget problems, especially as Washington faces its own spending crisis, but “I wouldn't rule it out,” said Eileen Norcross, senior research fellow with the State and Local Policy Project at the Mercatus Center at George Mason University in Arlington, Va. “I don't think it'd be very popular if it was phrased (as a pension bailout), but it could come in the form of a soft bailout, like an education funding package. Illinois and New Jersey are pretty much out of time.”
A pension-related budget crisis in those states “is still a few years away, and I think it will come down to the last second, but I think Congress is right to pay attention,” Ms. Norcross said.
Fueling the debate over public pension underfunding is a report issued Sept. 26 by Republican members of the congressional Joint Economic Committee. They warned state pension bailout requests are inevitable, as state legislators fail to fully fund pension liabilities now totaling $2.5 trillion.
“It's only a matter of time before those same politicians ... put their own interests ahead of other people's constituents, too, by asking for a federal bailout of their unsustainable pension obligations,” said Sen. Jim DeMint, R-S.C., the senior Republican on the committee. He argues that members of Congress have to speak up now, because “reckless state and local politicians will not put pension reform on the table until Congress takes a pension bailout off the table.”
The JEC Republicans' report uses market-rate accounting methods — rather than public accounting methods that discount pension liabilities over a longer term period — to predict that states like Illinois and California will run out of pension assets in as few as five years. If that happens, other state spending goals would be reduced unless there were tax hikes. If it got to the point of federal bailouts, taxpayers in other states with better funded pension systems would have to help out, the report says.
One of the most vocal critics of public pension underfunding is the Illinois Policy Institute, a non-profit group based in Chicago that promotes free market principles and is a member of the conservative American Legislative Exchange Council. Ted Dabrowski, IPI vice president for policy, said in an interview that while there is no imminent bailout threat from a public plan, “we want to nip a bailout scenario in the bud. Our greatest concern is that states will run (their pension funds) into the ground. We felt the need to create a sense of urgency.”