How Retirement Benefits May Sink the States

Illinois is a lesson in why companies are starting to pay more attention to the long-term fiscal prospects of governments.
By STEVEN MALANGA
April 27, 2012

Chicago Mayor Rahm Emanuel recently offered a stark assessment of the threat to his state's future that is posed by mounting pension and retiree health-care bills for government workers. Unless Illinois enacts reform quickly, he said, the costs of these programs will force taxes so high that, "You won't recruit a business, you won't recruit a family to live here."

We're likely to hear more such worries in coming years. That's because state and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public-sector workers, the costs of which will increasingly force taxes higher and crowd out other spending. Already businesses and residents are slowly starting to sit up and notice.

"Companies don't want to buy shares in a phenomenal tax burden that will unfold over the decades," the Chicago Tribune observed after Mr. Emanuel issued his warning on April 4. And neither will citizens.

Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place. the rest