A Federal Bailout of the States Won't Fix Anything

Senate Majority Leader Mitch McConnell has been taking a lot of flak for saying that states should look at declaring bankruptcy rather than expect the federal government to bail them out. Illinois has already asked for $41 billion while New York City and state are both asking for tens of billions more.

And that’s just two states. The fact is, almost all states are in dire straits because the lockdown of the economy has resulted in massive losses of revenue while the emergency has caused health care costs to skyrocket.

What would a bailout of state and local governments cost? Certainly trillions of dollars.

But there’s a better question to ask. Just who is it we’re bailing out? Governments or irresponsible politicians who have ignored warnings about underfunding their pension systems while building up massive debts?

Illinois is the poster child for bad government. Not only is it corrupt, but politicians from both parties have underfunded the public pension system by a whopping $137 billion. Coupled with past deficit spending, the state is in dire fiscal straits.

But most of that funding shortfall has nothing to do with the pandemic. It’s institutional, not situational.

National Review:

If you doubt that the pension issue is central here, consider Illinois’s request for a federal bailout, which proposes $10 billion in pension aid but only $1 billion to help provide health care to poor people. It also seeks $15 billion in unrestricted assistance to the state and $9.6 billion in direct aid for the cities. This proposal was put together by the Democratic state-senate leader in Illinois, Don Harmon, who knows that current and retired employees are 35 times more important to him and his party than are poor people who need health care — and he did the numbers accordingly.

Congress cannot solve the problems in Springfield or in any other state capital — even if it knew how, and even if it wanted to. If Washington were to dump a few billion dollars into the lap of the feckless cartwheeling goobers who run Illinois, the underlying problem of chronic underfunding of future pension liabilities would remain, and Illinois would be right back where it is today in a year or two. A bailout would not solve the problem — it would keep the problem from being solved.

Democrats in Illinois are demanding Congress give one of the most corrupt and irresponsible states in the nation $15 billion to spend as they see fit, not to mention $10 billion to keep the public pension funds solvent. Even if Congress wanted to, they’d be unable to even begin to address Illinois’ problems.

Under our Constitution, Congress cannot simply dictate to Illinois how it organizes its own affairs, and those affairs are going to have to be reorganized. Specifically, Illinois is at some point going to have to enter into negotiations with its pensioners and current employees and get them to agree to accept substantially reduced benefits. The state cannot tax its way out of this hole. Illinois’s unfunded liabilities right now are $137 billion. Another way of saying that is that Illinois has about 15 years’ worth of pension contributions to make up for. Given that making up this deficit would cost Illinois 100 percent of its tax revenues for about four years, it is unlikely to be able to make up the shortfall even if it wanted to. The state already is running chronic deficits as it is.

Congress is going to vote for another bailout bill and it will almost certainly contain bailout money for states. But it won’t be trillions of dollars. Governors, Republican and Democratic, are going to have to get used to the idea that they are responsible for their own states — not the U.S. Congress.

The job of Congress is to differentiate between short-term and long-term problems. Shoring up state budgets over the short term is probably inevitable, although that aid should come with strings about what the governors and state legislators can do with it. But an absolute line should be drawn at fixing pension systems and other fiscal problems caused by greedy politicians and not the coronavirus.

We have an epidemic in the United States and it’s not the coronavirus. The epidemic is of irresponsible government. And the cure is likely to be very painful.