Pension Shortfall in Illinois - Implications for California

Sooner or later you run out of other people's money, Margaret Thatcher is quoted as saying about socialism.  In Illinois, the day is coming sooner than in other states.  The pension shortfall for state workers is at $95 billion and growing at $17 million per day.  The WSJ calculates that this works out to $7300 for every man woman and child in the state.  Governor Quinn called for an emergency panel that would come up with some recommendation that would become law unless the legislature vetoed it.  If that sounds un-democratic and un-republican, to you, you're not alone.  For once I agree with a labor leader on the issue:

Daniel Montgomery, president of the Illinois Federation of Teachers, said he and other public-sector union leaders were staunchly opposed to Mr. Quinn's last-minute plan. 

"They abdicate their responsibility. They're elected to solve the problems of the state. Now they're saying: Let's create a commission of people who don't even have to be elected, who aren't responsible to anyone, and who may not know anything about the issue—and whatever they say becomes law," Mr. Montgomery said.

Precisely.  But hey, the lame duck session that failed to produce any kind of solution had time to address that most pressing problem, driver's licenses for illegal immigrants.  That's right, can't deal with a pension crisis but you can deal with a subject better left to the incoming legislators.  Governor Quinn said he will be happy to sign it.

Meanwhile, California's population isn't growing like it used to, with far less growth in the 0 to 10 age range than before.  How is this related?  Demographic imbalance exacerbates pension problems, whether for state workers or social security recipients.  So I expect Californians having fewer children in school to eventually translate to fewer workers to support the same number of state employees.  Because the state isn't going to reduce its employee count in the face of declining population.

Declining migration and falling birthrates have led to a drop in the number of children in California just as baby boomers reach retirement, creating an economic and demographic challenge for the nation's most populous state. 

But what really scared me for the future of the state's economy was this bit:

With more than 90% of the state's children under age 10 born in the state, "the majority of the next generation of workers will have been shaped by California's health and education systems,"

Given California's infamous inability to educate our youth, we are in deep trouble.

Greek Default and Leaving the Euro

One of my favorite economists, John H. Cochrane writes in the Grumpy Economist:

Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so.

I would agree with him, except that the problem in Greece runs deeper than just a sovereign default. My response from the comments.

But the Greeks seem unwilling to vote for a government that would take the actions needed to stay in the euro zone. If the Greeks default on their euro debt, they will get no new infusion of capital, because they will have broken all trust with their neighbors. Their only way out would be real structural reform. Such reform would include reducing the wages of workers, payments to pensioners and hiving off state businesses. There is no political will to do so. The leftists actually think they can threaten/blackmail the Germans into giving them an endless supply of euros. That's not going to happen. Result, Greece leaves the euro; not because of the debt default, but the refusal to deal with its root causes.

So back to Illinois. What would happen if a state defaulted and did nothing about, continuing deficit spending? Is there a precedent? In the 1840s several states in America defaulted on their debts after investing heavily in canals and railroads. Why can't Jerry Brown learn any history? Arkansas, Florida, Michigan, Mississippi and Louisiana all defaulted on their debts to some extent. But life went on, the states were forced to retrench their spending, and most states passed reform measures that limited debt and gave priority to debt repayment. The difference today, is that states are in debt from high operating expenses. If they were to default, then only a reduction of operating expenses would save them. Even if the federal government were to bail out Illinois or California, such a bailout would be unsustainable without real reform, because the state governments of these two deep blue states have the Greek problem, an overpaid, burdensome state workforce. But a default would force real reform, because these states aren't leaving the dollar zone.