A Blue State Problem

States have collectively racked up some $731 billion in unfunded liabilities for pensions and other retirement benefits, according to a study published last December by the Pew Charitable Trusts' Center on the States. In particular, the states have been promising their employees rich nonpension benefits -- such as retirement health and dental care -- and paying for virtually none of it. According to Pew estimates, states have put aside a mere $11 billion to fund $381 billion in future nonpension benefits. Illinois, which has the largest percentage of unfunded pension liabilities among the states, actually cut its contributions to pension funds by $2.3 billion in the flush years of 2006 and 2007 as stock market returns were rising.

Taxpayers are often erroneously told that there's plenty of money to finance new perks. In the late 1990s, to take one example, California's legislature approved a series of pension enhancements which the California Public Employees' Retirement System predicted could be funded almost entirely out of stock market gains. Today, of course, major stock market indices are lower than they were in 1999. California state and local governments are paying some $12.8 billion a year to finance public employee pensions, up from $4.8 billion in 1999, according to the U.S. Census Bureau's survey of government expenditures.

Who is going to be asking the federal government for a bailout next? The cities and states.