The nation’s top banker is watching Illinois and California with a keen eye on their unfunded obligations and unpaid debts.

By Benjamin Yount

The nation’s top banker is watching Illinois and California with a keen eye on their unfunded obligations and unpaid debts.

“We watch those (states) very carefully,” said Ben Bernanke, chairman of the Board of Governors of the Federal Reserve. “We also look at exposures of banks and other institutions to those states. We don’t see any immediate risk there.”

Bernanke spoke Thursday in Washington, D.C., during a State Banking Committee hearing on the U.S. debt ceiling and Europe’s shaky economies. He was answering questions from U.S. Sen. Mark Kirk, R-Ill., who said he wanted to know that the federal government was not just watching potential problems abroad.

“As Greece has ruined the bond market of Europe, so could Illinois and California ruin the bond market of the United States,” Kirk said.

Bernanke said no U.S. states are quite in the desperate financial situation of some European countries, at least not yet.

“A number of states do need to be thinking about their longer-term sustainability, given the unfunded liabilities they may have in state pensions and in some cases health-care programs,” said Bernanke.

A 2010 study from the Pew Center says that Illinois’ five public pension programs are short by more than $54 billion. But the government watchdog website, Sunshine Review, puts Illinois’ unfunded pension liability closer to $80 billion.

But Illinois debt is more than just underfunded pension programs. Illinois’ Comptroller, Judy Baar Topinka, estimates the state owes more than $4 billion in unpaid bills to state vendors, mainly for Medicaid. Topinka has said as recently as May that Illinois’ unpaid bills could grow to as much as $8 billion by the end of 2011.

Kirk said most people in Illinois were misled into believing that the revenue from the higher income taxes has put the state on track to pay its bills and get out of debt. Lawmakers in January hiked the personal income tax rate more than 67 percent. The state’s corporate income tax rate rose 45.9 percent.

“It’s the unfunded liability that … increasingly looks like it will cripple the state’s economic future,” Kirk said. “And I’m worried that state leaders are not being clear, concise and fully transparent on the bleak future that faces Illinois because its leaders will not cut spending.”

Kirk’s alarm echoed Illinois Treasurer Dan Rutherford, who threatened in May to go to the bonding houses and stop Illinois from taking on more debt. Rutherford said he wanted to drive up the state’s interest rate to make it prohibitively expensive to obtain more money. That didn’t happen, but Rutherford said Bernanke’s comments prove he was on the right path.

“When the state’s past borrowing is combined with unpaid bills and unfunded pension and retiree health-care benefits, every Illinois household shoulders more than $40,000 of debt,” said Rutherford.

Rutherford said that he will continue to compel Illinois to live within its means and not borrow money that “has become dramatically more expensive.”

But Kirk said it’s too late.

“Even credit-worthy communities inside the state of Illinois have to pay more to borrow money than other communities in other states that are better run,” Kirk said. “This is a drag on all municipal finances in Illinois, not just out poorly run state.

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