St. Louis Post Dispatch

Prof says state pensions may need $1 trillion bailout

Wednesday, May 26, 2010

We’ve mentioned before that Joshua Rauh, of Northwestern University, is worried about his home state’s public pension liabilities. While Illinois may be one of the states closest to insolvency, it’s certainly not alone in having promised more benefits than it can afford. Now, Rauh is looking at the problem on a national scale, and he sees some scary things ahead:
While Illinois is currently at the highest risk, pension funds in other troubled states — Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii — could dry up by the end of 2020. And by 2030, as many as 31 states could be affected.
If the states turn to the federal government for help, Rauh says a public pension bailout could cost more than $1 trillion. And he has some suggestions for how the feds should handle the crisis.
Rauh suggests that Uncle Sam should extend help only if a state is willing to close its defined-benefit plan to new employees; make annual contributions that are sufficient to close the plans’ deficits; and enroll all new state workers in Social Security. Once those conditions are met, he suggests, the states could issue federally subsidized bonds, similar to Build America bonds, that would have to be repaid over 15 years.
Rauh says his plan is similar to the tough-love approach that the European Union and the International Monetary Fund are taking with Greece. He paints his plan as a win-win-win, especially since states seem unwilling to tackle the problem on their own:
Specifically, pension promises made by states to their existing workers become more secure, since the funding of these obligations will greatly improve. New state workers will get a retirement plan that is more than an empty promise. Taxpayers will avoid massive future tax increases and loss of public services. And critically, state politicians will no longer be able to use pensions as a vehicle for borrowing off the books at horizons that extend beyond their political careers.