Is another federal bailout coming?

Maryland stands to lose big if the government steps in to save state pension systems

August 21, 2012|By Christopher B. Summers

The past decade taught Americans of all political stripes an expensive lesson: When big institutions face financial crisis, the federal government bails them out. Wall Street? The federal government stepped in with the Troubled Asset Relief Program. General Motors? Uncle Sam again. Greece, Spain and Portugal? Germany will keep them afloat.

Now a new crisis looms, and, if past is precedent, Marylanders have reason to worry. State-run pension systems across the country are underfunded to the tune of $2.5 trillion — equivalent to one-sixth of the American economy. Maryland, for instance, does not have the money to pay for 60 percent of its actual pension liabilities, meaning that every household in Maryland would have to fork over $20,172 to the state government just to cover the shortfall.

Other states face even more dire straits. Pension systems in Illinois, Louisiana and Connecticut are on course to run out of money entirely by 2020.

All this prompts concerns that the era of big bailouts may not be over. As one congressional report put it this year, markets are predicting that pressure on the federal government to rescue insolvent pension systems "would be so great that a bailout could not be avoided."

Maryland would foot a big part of that bill, according to a new analysis by the nonpartisan Illinois Policy Institute. The institute has developed a model to illustrate the fiscal impact of a federal bailout for state pensions. In their model, the federal government would have to raise taxes and cut federal spending to finance a bailout. States such as Illinois would benefit tremendously while Maryland would be among the hardest hit. Maryland would pay a price as high as $18 billion, according to the institute's model, through higher taxes and severe cuts in federal support.

A swing that volatile could cause an acute case of economic vertigo in Maryland, where our economy relies heavily on federal research investments and defense contracts. Further, Marylanders have already had to bail out their own state government through increases in the sales tax and income tax under Gov. Martin O'Malley.

The solution to pension crises in Maryland, Illinois and elsewhere lies in reform, not a federal bailout. For instance, Maryland could save $220 million annually — and improve its investment returns — simply by cutting the indefensible fee its pays every year to Wall Street money managers. Further, embracing a defined contribution model for future government workers would save additional billions over the long term.

In Washington, crises seem to spring up overnight. Quick fixes that seem improbable today — such as a federal bailout of state pensions — suddenly become tomorrow's reality.

Taxpayers can't afford and don't want another bailout. They reward failure and penalize success. Bailing out the most precarious states would send the message that discipline doesn't matter; someone else will come along and take care of the bills.

The health of Maryland's pension system is too precarious for us to be picking up the tab for states like Illinois and California. As the Illinois Policy Institute's analysis reminds us, a federal pension bailout is not only bad economics — it's just plain wrong for Maryland. Let's hope our policy makers in Washington and Annapolis agree.

Christopher B. Summers (csummers@mdpolicy.org) is president of the Maryland Public Policy Institute, a nonpartisan think tank dedicated to limited government and free enterprise. Ted Dabrowksi (tdabrowski@illinoispolicy.org) is vice president of policy at the Illinois Policy Institute in Chicago.

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