America's state pension plans are only 36 percent funded. Forty-seven states have less than 50 percent of the funds needed to pay their current and future retirees. It's time for Congress to act — not by bailing out these states, but by empowering them to fix their own problems.
“America's state pension plans are only 36% funded. Forty-seven states have less than 50% of the funds needed to pay their current and future retirees.”
Even relatively well-off states such as Wisconsin, South Dakota and North Carolina have unfunded per-capita liabilities that stretch into the thousands of dollars. The picture is much bleaker in states such as Connecticut and Illinois, which have unfunded per capita liabilities that reach $24,000 or higher. The actuarial unfunded liabilities for Illinois's pension plans stood at $111 billion for fiscal year 2015, according to government estimates.
These problems have been building for decades, and, if left unaddressed, they will continue to grow.
Some states have tried to fix the problem. Former Illinois Governor Pat Quinn signed reforms to the pension funds into law in December 2013. These reforms were intended to place the fund on a path to solvency by 2042. However, the Illinois Supreme Court overturned the reforms as unconstitutional.
One promising alternative would be for the federal government to empower states to reform their own insolvent pension or health plans by preempting state laws that prohibit the state from making reforms to laws that they created in the first place. Under this system, the federal government would allow those laws passed by state assemblies to reform pensions to take effect.
I suggest that Congress create a "Proceeding to Protect Essential State Actions" as a new Section 113 of the U.S. Bankruptcy Code. This would not allow states to declare bankruptcy, as some have suggested. Rather, it would allow them to reform their pensions after the legislature has voted to do so.
Under such a law, states would have the opportunity to solve crises attributable to pensions, even if existing state laws prohibit changes to such obligations.
States could change pension benefits only after a serious analysis shows that funding for pensions impedes other state actions. States would publish their analysis after a public notice, and then file a proceeding in a federal court to identify suggested changes.
States would be allowed to enact pension benefit changes only after ascertaining that funding obligations prevent the performance of essential state services. States would publish the basis for their determination, conduct hearings, and file a proceeding in a bankruptcy court identifying the changes. Affected parties could seek judicial review of these changes by filing a challenge with the bankruptcy court.
Authority for such a federal law comes from the Constitution's Bankruptcy Clause, which gives Congress the specific power to enact "uniform laws on the subject of bankruptcies throughout the United States." The Supreme Court has deferred to Congress' exercises of its bankruptcy powers on numerous occasions.
This proposal gives states the tool they need to reform their own pension systems — without calling for a handout or a bailout from federal taxpayers. Neither does it infringe on states' rights.
The Proceeding to Protect Essential State Actions would only involve pension debt, and not the entire debt of the state. In the past, the Supreme Court has ruled that it is not necessary to have identical treatment for every class of creditor.
Furthermore, since each state would have to decide whether to opt in to the provisions of the new law, states would retain their sovereign powers, ensuring that states approved any plan to reduce pension debt.
Taxpayers are paying ever-growing shares of ever-growing state pension programs. Throughout America, pension plans' liabilities are growing, not shrinking. These programs already cost more than many state taxpayers can support. Congress needs to act now.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner