Column: Crisis remains after 'fiscal cliff'

• The debt of state-run retirement systems is at nearly $3.5 trillion.
• At the municipal level, public pension shortfalls have forced cities into tough spots.
• Obama must understand that a bailout of states would destroy federalism.

If Republicans and Democrats ever get around to fixing the "fiscal cliff," President Obama won't be done dealing with potential budget calamities. There's a new bailout on the horizon: this time, for cash-strapped state pension systems.

A recent report by the U.S. Congress Joint Economic Committee pegged the debt of state-run retirement systems at nearly $3.5 trillion.

That amount, which is nearly one-quarter of the entire federal debt, is decimating state budgets and pushing some toward the brink. Despite this looming crisis, states continue to avoid necessary reforms. The usual culprits, California and Illinois, lead a long list of states that continue to accrue more and more debt.

States avoid reforms

California faces more than $370 billion in unfunded pension liabilities and continues to live under the perennial risk of bankruptcy. The Golden State first laid the groundwork for a bailout in 2009, during the peak of the financial crisis.

At the time, a spokesman for California State Treasurer Bill Lockyer rationalized the call for federal relief as this: "We think California taxpayers stack up pretty well compared with Wall Street firms." Since this plea, California has enacted cosmetic reforms but failed to enact changes that would turn around its troubled finances — leaving the door wide open for federal relief.

Obama's home state of Illinois is in even worse shape. It has on hand less than 30% of the money needed to fund its pension obligations. Many experts say Illinois' funds already are insolvent.

Since 2009, Illinois Gov. Pat Quinn has floated the idea of federal pension relief both at the White House and in his 2012 budget proposal. Illinois has yet to enact or even consider any major reforms, and the governor has refused to rule out accepting a federal bailout for pensions.

Cities in trouble, too

At the municipal level, public pension shortfalls have forced cities into tough spots. Some are nearing crisis; others already are there.

Rep. Hansen Clarke, D-Mich., recently sought $1 billion in emergency federal aid for Detroit, stating he wanted "relief to be sizable enough" to save the city from its emergency status. The cry for help fell on deaf ears in Washington, but how long until more voices join and the cry gets loud enough that Washington has to pay attention?

The truth is, state and local politicians would rather be rescued by Washington than take on the structural reforms while fighting the resistant special interests that stand in the way.

One bailout already

A precedent was set with the American Recovery and Reinvestment Act, which was a bailout in all but name. Nearly a quarter of the $787 billion stimulus went to states and local governments. Governors used this money not to enact long-lasting reforms but to continue their spendthrift ways.

Though he is a champion of government and government unions, Obama must understand that a bailout of states would destroy federalism. In order to force states to face their own problems and enact reform, both Obama and the new Congress have to make it clear that state bailouts — whether direct or disguised under another name — are off the table.

Ted Dabrowski is the vice president of policy at the Illinois Policy Institute and contributed to the creation of NoPensionBailout.com

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