‘No Federal Bailout’ bill killed in Assembly Banking Committee

May 8, 2013

By Katy Grimes

SACRAMENTO — As the self-help movements say, taking responsibility is crucial to recovery. That’s why Assemblywoman Shannon Grove, R-Bakersfield, wants California to take responsibility for its pension addiction.

Her bill, Assembly Joint Resolution 10, called on President Barack Obama and and the U.S. Congress to practice tough love with California and other states with debt habits. Specifically, it called on the president and Congress not bail out state pension debts, which in California alone could be as high as $500 billion.

But the Legislature remains in denial. On May 6, her bill was refused adoption in the Assembly Banking Committee.

“This AJR seems circuitous or convoluted, with a lot of unwanted consequences,” said Assemblyman Bob Blumenfield, D-Los Angeles. “Assuming debt is one of the tools in the tool shed.”

Blumenfield’s comments came after Grove explained the California Public Policy Center released a study estimating California state and local government debt to be over $800 billion dollars, or even more than $1 trillion, when using more conservative investment return projections.

Grove said the Legislative Analyst’s Office told a joint Assembly and Senate committee recently  California’s pension debt may be the state’s most difficult challenge.

Grove also repeated the Little Hoover Commission’s warning that California’s broken pension system “will crush government” and drastic action must be taken.

California sovereignty

“Residents of Florida or Arizona should not have to bail out the uncontrolled spending of California any more than Californians should be forced to cover the reckless fiscal ways of Illinois,” Grove said.

“Rewarding careless fiscal behavior at the expense of responsible state governments will open the floodgates to redistribution of debt and remove all incentives for states to prudently manage their budgets,” Grove said.

“Our federalist system has made the United States strong, free and prosperous. This unique relationship of sovereign states will only remain if the federal government refuses to bail out some at the expense of others,” said Grove. “Our leaders in Washington D.C. must make it clear to the states that they themselves are responsible for their own fiscal decisions and subsequent outcomes.”

What does a bailout look like?

A bailout could come in the form of state debt being sold to the Federal Reserve, which would then print more money to cover that debt, Grove explained.

The federal government could issue low-interest-rate pension obligation bonds, or use fiscal policy to transfer resources from the federal government to states.

“Any way the bailout is administered, whether directly or indirectly, the resulting effect would be the removal of incentives for states to prudently manage their budgets,” Grove said.

Adam Summers, a senior policy at the Reason Foundation, testified with Grove at the hearing. Summers has authored many studies on state and local budget reform in California since 2004, including two public pension studies.

“Regardless of your political or ideological leanings — whether you would like to devote more time spending to social programs or other priorities, or whether you would like to shrink the size and scope of government and return more of the taxpayers’ money through tax cuts or tax rebates — the fact is that pension and retiree health care costs will eat up more and more of state and local budgets, leaving less and less for those government services, tax cuts, or other spending priorities,” Summers said.

Summers explained there is public concern about the pension debt as well. He shared the results of an October 2012 Reason-Rupe poll in California, which found 69 percent of Californians said they would favor enrolling new government employees in 401(k)-style defined-contribution retirement plans instead of the current defined-benefit plans.

And the poll found 74 percent said the public should get to vote to approve increases in government employees’ pension benefits. Such laws already exist in San Francisco, San Diego, Orange County and San Jose.

Summers said implementing statewide pension reform is possible and has happened not only in heavily Republican Utah, but in Rhode Island, which is even more Democratic than California.

Awareness

This resolution is part of a nationwide effort initiated by the Illinois Policy Institute to bring awareness to the severe financial liabilities, due mostly to underfunded pension obligations, threatening many states.

“This resolution is breathtakingly broad,” Assemblyman Roger Dickinson, D-Sacramento, said, “and covers any kind of debt.”

“If states get a bailout, it jeopardizes our sovereignty,” Grove said. “I thought it was the responsibility for us as a Legislature to say we are responsible for our own financial problems, that we created.”