Many economists and analysts are concerned that the next candidate for a federal bailout is not still-too-big-to-fail banks but financially irresponsible states. We have written about the threat that failed states such as California, Illinois, Connecticut, Maryland and New York pose to the fiscal health of the nation.
But the problem is bigger. In coming years, University of Chicago economics professor Brian Barry predicts, “Both parties are likely to clash over state-budget issues at the national level, no matter what happens to federal taxes or healthcare spending.”
Skyrocketing unfunded state pension liabilities, up to $4 trillion according to some estimates, are driving already financially troubled states down the path to insolvency, and there appears to be no political will to address the problem. States in the most dire fiscal situations are high-tax, left-leaning and Democratic-controlled, and according to Barry pose a “long-term threat to the permanent national majority that many Democrats believe they see emerging from the past two presidential elections.”
If the White House and Senate Democrats do decide to seek a bailout their buddies in the blue states, there are some reforms that Republicans could exact in exchange that could still improve the nation’s fiscal health and be a good deal for taxpayers.
It is clear that the House would justifiably have no interest in approving a bailout of fiscally reckless states. Two years ago forward-thinking members of Congress, including Representatives Devin Nunes (R-Calif.), Darrell Issa (R-Calif.) and Paul Ryan (R-Wis.), introduced a bill that would require states and cities to accurately lay out their pension liabilities, currently underreported by an estimated $2 trillion. The Public Employee Pension Transparency Act stipulates that Congress will not approve a bailout of failed states.