Are fears of state budget meltdowns overblown?

If you've turned on the TV, picked up a newspaper or gone online in the last few months, you've almost certainly heard the dire warnings: Many states, weighed down by debt obligations -- including lavish pensions promised to retired workers -- face fiscal crisis.

Gov. Chris Christie of New Jersey (pictured) has lately become a rising GOP star for his willingness to take on his state's labor unions over the issue. States' situation is said to be so grave that there's even talk of finding a way for them to declare bankruptcy and restructure their obligations with the help of a judge -- something they're currently barred from doing. The idea -- given prominent placement on the front page of Friday's New York Times -- gained steam when it was raised by Newt Gingrich in a November speech.

But not everyone agrees that such drastic solutions are called for. Nick Johnson, director of state fiscal projects for the Center on Budget and Policy Priorities, a progressive Washington think tank, described the bankruptcy idea in an interview with The Lookout as "neither helpful nor necessary."

"States have sufficient tools already" to address their unfunded obligations, he said. "And even just extending the option [of bankruptcy] would increase their borrowing costs."

Johnson described the attention that the bankruptcy idea has gained lately as "another sign of the confusion and misinformation about state budget problems."

A Center on Budget and Policy Priorities report released Thursday makes that case in more detail, challenging the notion that states face imminent budget meltdowns. It contends that much of the alarm conflates two separate problems: states' current budget shortfalls and their longer-term challenges.

The daunting current budget gaps -- California's was $24 billion in 2010, for instance -- have been caused primarily by decreased tax revenue, thanks to the Great Recession and the halting recovery that followed. Because states can't run deficits, they've already taken steps to make up their shortfalls, by cutting spending and sometimes raising taxes -- though they'll need to do much more again this year. Ultimately, though, only a rise in tax revenue close to pre-recession levels can fix the problem. That will only happen when the economy grows for a sustained period.

The states' longer-term challenges, stemming from bond debts as well as from pension and health-care obligations to retired workers, are a separate issue and can be dealt with over decades, the report's authors argue.

The report notes that, despite one recent high-profile prediction that numerous states and cities will default on their bond debts this year, such defaults are extremely rare.

The threat from states' pension and health care obligations is similarly exaggerated, the report claims. It calculates states' unfunded pension liabilities at $700 billion -- a big number, but more manageable than the $3 trillion figure often cited. As a result, it concludes, "a modest increase in funding and/or changes to pension eligibility and benefits should be sufficient to remedy underfunding." And the threat is hardly imminent: "States and localities have the next 30 years in which to remedy any pension shortfalls."

"We are light-years away from the prospect of states defaulting on their obligations," Johnson told The Lookout.

In some ways, the debate echoes the one over the federal deficit. Some argue that the problem is so serious that immediate spending cuts are necessary. Others -- less well represented in mainstream coverage -- say we've got years to make up the gap, and cutting spending now, while the economy is still weak, will only stifle growth and cause needless pain.

In the end, both arguments are as much about ideology as they are about economics or finance. Those who tend to favor smaller government see an impending fiscal catastrophe -- on both a federal and state level -- as another reason to cut spending, or to find a way to reduce workers' benefits. Those who believe in a strong social safety net and oppose such cuts argue that the problem is less urgent, and that cuts would do more harm than good.

Where you stand on that depends, as much as anything, on your political priorities.

(Photo of Christie: ABC/Ida Mae Astute, via AP)