California Misses Opportunity to Oppose State Pension Bailouts

California had an opportunity this year to take a stand against irresponsible fiscal policies and warn the federal government against any bailouts of state pension systems. This opportunity came in the form of a very simple and common-sense measure, but, like most such measures in California, it was rejected by the politicians in Sacramento.

The measure, Assembly Joint Resolution 10, sponsored by Assemblywoman Shannon Grove (R-Bakersfield), would have urged the federal government “not to take any action to redeem, assume, or guarantee state debt, and would [have urged] the Secretary of State to report to Congress any negotiations to engage in an action that would result in an outlay of federal funds on behalf of state creditors.” While the resolution denounces bailouts of all kinds of state debt, it is pension debt with which it is primarily concerned, and for good reason: California’s unfunded state pension and retiree health care liabilities are estimated at anywhere from $224 billion (official state estimates) to $400 billion or $500 billion (based on several academic studies).

Sadly, members of the Assembly Committee on Banking and Finance apparently did not seem interested in taking a stand against a possible—some might say likely—future federal bailout of state pensions, and the measure failed on a party-line 8-3 vote.

As explained in a CalWatchdog article about the measure and the hearing, the “No Pension Bailout” measure was inspired by the Illinois Policy Institute’s Pension Project. In terms of public pension liabilities, Illinois is one of the few places that is actually worse off than California. In his 2012 budget proposal, Illinois Governor Pat Quinn called for a federal guarantee of state pension debt. Measures such as AJR 10 are intended to prevent states and the federal government alike from even thinking about pushing such an irresponsible policy in the future.

Aside from the specifics related to pubic pensions, federal bailouts of state debts are simply a bad idea. I was asked to testify on AJR 10 at the Assembly committee hearing to address such concerns. The following is an excerpt of my remarks.

Other states are dealing with similar pension and other debt problems. The concern is that a terrible precedent would be set if the federal government were to start bailing out state governments. This would be detrimental for several reasons.

1. It would undermine our federalist system, effectively turning sovereign states into wards of the national government.
   
2. It would create a serious moral hazard. Just as the federal bailout of the so-called “Too-Big-to-Fail” banks only rewarded irresponsible and risky financial behavior, a federal backstop for state debts would only encourage irresponsible and risky fiscal policies.
   
3. This would force citizens of states that do manage their finances well to pay for states that do not. Californians certainly would not want to pay the debts of Illinois or other states any more than residents of the other 49 states would want to pay for ours.
   
4. It could cause the Legislature to lose control over its own budget decisions. Federal funds already make up over one-third of the total annual budget. As I’m sure you all know better than anyone, federal funds often come with strings attached, and the strings that might be imposed by the current or future administrations and Congresses for a bailout might be very different from the ways the Legislature would want to spend the money.

AJR 10 represents a chance for California to take a stand to reinforce the state’s sovereignty and oppose a policy that would have many serious negative effects across the nation. I fear that failure to adopt a measure such as AJR 10 would not only be a missed opportunity to take a leading role in asserting California’s strength and fiscal responsibility, but would also indicate that the state is not even capable of taking a symbolic step to ensure that its own fiscal house is in order.

See the full text of my testimony on AJR 10 here.

Related Research and Commentary:

” Testimony to the California Assembly Committee on Banking and Finance on AJR 10

” “No Bailout for State Pensions” (Orange County Register)