Ben Bernanke is already bracing for the next crisis.
As commentators chew over the odds of a double-dip recession, the Fed chief is focusing on a bigger problem: the ticking time bomb of state pension and retiree healthcare obligations.
Bernanke's speech Monday revealed nothing we didn’t already know about the health of the U.S. economy. It has a “considerable way to go to achieve a full recovery,” he told members of the Southern Legislative Conference in Charleston, S.C.
But Bernanke (right) was much more emphatic in sketching out the troubles facing states whose finances have been hit hard by the recession. He cited recent studies that put unfunded state pension liabilities as high as $2 trillion and retiree health benefit liabilities at $600 billion.
The states are running up these huge tabs at a time when many of them are struggling to put together a budget for this year, let alone plan for next year or a decade from now.
“This daunting problem has no easy solution,” Bernanke said, referring to the pension shortfalls. “In particular, proposals that include modifications of benefits schedules must take into account that accrued pension benefits of state and local workers in many jurisdictions are accorded strong legal protection, including, in some states, constitutional protection.”
But the pressure on governors and state legislatures to take control of their financial futures is only building, Bernanke said. He urged state government officials to begin making hard choices now, because they are likely to get little help from a federal government hamstrung by a “structural budget gap that is both large relative to the size of the economy and increasing over time.”
As grim as this picture is, Bernanke sees a silver lining for those who find ways to solve this monstrous problem. “The states have the opportunity to serve as role models for effective long-term fiscal planning,” Bernanke said. It's a vacuum someone is going to have to fill one of these days.