As the federal government hurdles headlong towards a fiscal cliff, it might be easy to forget that Congress isn't alone in its inability to decide on a budget or whether it's a good idea to honor past financial obligations.
On Wednesday, the Illinois lottery announced that anyone who won prizes worth more than $600 wouldn't get paid until the legislature and governor passed a budget, something it hasn't been able to do for months. The state has been issuing IOUs to winners of prizes worth more than $25,000 since August, with the Comptroller's office arguing that it wasn't legally allowed to make payments without a budget. Since it's not usually kosher to sell tickets for a lottery that you're unable to pay promised prizes for, aggrieved winners have brought the state government to federal court, hoping to make them pay, or at least stop selling tickets in the meantime.
Illinois' budgetary problems were labeled the worst in the nation in a July study by George Mason University's Mercatus Center, which looks at state cash flow, budgetary solvency, long-term liabilities, state assets, and the ability to raise additional funds to form its ranking. Illinois fared poorly by many measures, but they are having a particularly difficult time funding pensions for state workers. In May, credit rating agency Moody's downgraded Chicago's credit rating to junk status, reflecting the city's large pension obligations. That follows the state's downgrade for similar reasons just two years earlier.
Illinois isn't the only state facing gaps in its pension funding. A report from the Pew Charitable Trusts estimates that American states had a nearly $1 trillion funding shortfall within its retirement systems in 2013, up $54 billion from the year before. Other states having trouble meeting their funding obligations include New Jersey, New York, and Pennsylvania.
The states having the most trouble funding their pensions tend to be in blue America—places with strong labor movements, where politicians often bought the support of labor with generous pension promises that they didn't properly fund. Now that these workers are nearing retirement age, the bill is coming due. But red states too are having their own budget problems. States like Kansas and Wisconsin are struggling with the results of deep tax cuts their governors thought would boost economic growth but have left lasting holes that need to be continually patched.
Finally, the most tragic local-government debt failure is that of Puerto Rico. The economy on the U.S. mainland has recovered, which has helped improve most states' fiscal situations, but Puerto Rico has been mired in a nearly decade-long economic depression. Though Puerto Rican politicians can be blamed for mismanaging the commonwealth's budget, its economic woes can also be attributed to the United States' decades-long refusal to either fully incorporate the territory into the union, or to grant it independence. This indecision has resulted in quirky tax laws that have caused excessive demand for Puerto Rico's debt, and it was also the major impetus for its almost 10-year-old recession.
While the Treasury Department is now scrambling to bail out the territory without calling it a bailout, a better solution would be to once and for all decide whether Puerto Rico should fully join the U.S., and do so based on what's best for the territory and not mainland political parties.