Bailouts punish successful states, help the foolish

August 29, 2012 1:58PM

Beacon CEO Justin Owen joins the Illinois Policy Institute’s Ted Dabrowski in calling for Congress to refuse a bailout of states like Illinois and California, outlining what this action would mean for Tennessee taxpayers. The article below originally appeared in today’s Tennessean. by Justin Owen and Ted Dabrowski The bailout craze is currently on a worldwide tour. After hitting Wall Street, Detroit and going abroad for a European swing, its next stop could be back in the U.S. for a tour of state capitals. These days, financial crises all are “solved” the same way: with bailouts. Fiscal discipline, accountability and responsibility are ideas of the past. Where will the bailout craze strike next? Just look at the disastrous state pension systems across the country. For years, states such as Illinois and California have failed to responsibly fund the pension systems used to pay for state worker retirements. Those unpaid bills are adding up: New research shows that without reforms, Tennessee could be on the hook for as much as $21 billion as those states cry out for federal funds. Already, total shortfalls in state pension funds across the nation are estimated to be anywhere from $2.5 trillion to $4 trillion, or more than one-sixth of the entire U.S. economy. With a problem of this magnitude, many states will want to pass the buck by asking for “federal aid.” Taxpayers know this means a bailout. The Volunteer State is fighting fiscal battles of its own, and as such it doesn’t need to be punished by the follies of other states. Hard-working Tennessee taxpayers can’t afford and don’t want another federal bailout. Washington, don’t bother polling this one. Bailing out irresponsible states would send the message that fiscal discipline is for fools. Why not “live large” when someone else will come along and take care of the bills? As such, bailouts actually reward failure. The opposite also is true: Bailouts punish success. States such as Tennessee are working hard to become economically competitive by reining in spending and fixing their fiscal problems. These states won’t benefit from a bailout; instead, they’ll be stuck paying for their profligate counterparts. Is it wise to tell states that if they act responsibly, they’ll end up on the hook for those that don’t? Removing these natural incentives to make sound financial decisions is hardly a plan for future economic success. The Illinois Policy Institute, a nonpartisan think tank in Chicago, has developed a model to illustrate the impact of a federal bailout of state pension debt. To finance a bailout of all state pension systems, the federal government would have to raise taxes and cut federal spending to the tune of $2.5 trillion. States with the biggest pension liabilities such as Illinois would benefit tremendously from a bailout, while most other states would suffer. Tennessee’s pension system has fared much better than that of most states, including Illinois. But if a federal bailout of all state pension systems were enacted tomorrow, Tennessee would be among the biggest fiscal “losers” in the nation. According to the model, Tennessee would incur a cost of $44 billion in the form of increased federal taxes or decreased federal funding. In return, the feds would give Tennessee more than $23 billion to fully fund its pension systems. Altogether, this amounts to a net cost of $21 billion to the residents of Tennessee; that’s more than $8,500 for every household. There’s no denying that many states’ pension funds are in trouble. But genuine, long-term solutions will come from state-led reforms, not federal aid. A bailout would make Tennesseans pay for the irresponsible decisions of California and Illinois. Tennesseans don’t want that, and the reckless states don’t deserve it. Justin Owen is president and CEO of the Beacon Center of Tennessee, the state’s free market think tank. Ted Dabrowski is vice president of policy at the Illinois Policy Institute in Chicago.