The November election sent a message of no more bailouts. Yet many states could default on debts in 2012, forcing a crisis. What can be done now?
If the November elections sent one clear message to Washington on what it should do in 2011, it is this: no more bailouts.
But the voters’ message could get lost if Congress is forced to deal with a likely crisis in the new year: states and cities that can’t pay their bills, especially the retirement benefits of state workers.
By this spring, many states will run out of the $217 billion in stimulus money from Washington. (Illinois is already a deadbeat in paying bills.) Their budget woes will only mount as joblessness persists and politics prevents solutions in state houses.
Most of all, they face an estimated shortfall of $3.23 trillion owed to pension plans for current and retired state workers. Municipalities have an estimated $557 billion in pension liabilities. That adds up to about a quarter of the yearly US economic output.
California, where the cost of state workers eats up about 80 percent of the budget, already asked Congress for an $8 billion bailout. Lawmakers wisely said no. Rewarding states for irresponsible promises of spending made during good times would only invite more irresponsible behavior in the future. And Washington can’t be a cash machine for local governments at a time when its own debts are reaching poor-nation status and jeopardizing an economic recovery.