Government Dependency

Lending Federal Dollars to States Will Bankrupt Us All

July 9, 2010

EducationNext.org - University law professors have a knack for dreaming up ever-more-far-fetched ideas, so no one should pay any attention to the latest one – except for the fact that its potential political appeal makes it downright dangerous. Christopher Edley, dean of the law school at the University of California, Berkeley, has proposed that the U. S. government stimulate the economy by loaning money to near-bankrupt state governments.

Edley is concerned that states are “managing huge budget crises” by “cutting spending and raising taxes.” Edley, like all other Keynesian liberals, believes such responsible actions simply undermine “the federal stimulus.”

So in Edley’s world, any state that has gone on a financial bender — Illinois, California, New York, you name it — should be encouraged to borrow as much as it wants to cover those massive state bills state taxpayers don’t want to pay.

If the Edley law ever gets passed, it’ll be “happy hour” for the teachers, janitors and other school district employees collecting rising salaries and generous pensions — even while private sector workers are desperate to hang on to their jobs. Education expenditures can continue to rise unimpeded, because everyone will be reassured that they come with no additional taxes. The state government will simply borrow the money from their friends in Washington. Cities and towns can get in on the action as well, because nothing prevents states from passing on the borrowed money to lower levels of government.

But in the long run, Edley’s law would wreck the system of federalism we have had for the past two centuries and more. The American federal system — with states and localities playing a strong, independent role in the governance of the country — has always had a fiscal system that has kept states and cities responsible, so they do not spend beyond their means. For two centuries, the bond market has reminded states that interest rates rise when they, like the Greeks, the Spanish, and the Italians, spend many more dollars than they collect in tax revenues. When states and cities can’t keep their houses in order in good times, they suffer in bad ones. Because the discipline of the bond market works so effectively, states and localities have generally had both the autonomy and the responsibility that makes for good government.

Editor's Note: "President Nixon, on March 27, 1969, through the Government Reorganization Act, divided the United States into 10 Regions. To further implement this Regional Governance over the U.S.A., President Nixon signed Executive Order 11647 and entered it in the Federal Register February 12, 1972 (Vol .37, No.30). Through the authority vested in him as President of the United States, President Nixon established a Federal Regional Council for each of the 10 standard regions. It stated that, the President shall designate one member of each Council as Chairman of the Council and such Chairman shall serve at the pleasure of the President. The fact that State borders have been destroyed to create 10 REGIONS instead of 50 Union States is something your government doesn't want you to know... Grant making agencies of the 10 Federal Regions are in place to assure continuity of control by the central government over all Americans and their elected representatives. Federal grants to state government are the fuel which make the Regional engines 'go.' The individual Union States are blackmailed, through the withholding of federal funds, if federal legislation is not enacted into State law, thereby opening the door to a power base for the silent revolution of Federal Regionalism." - Federal Regionalism, The Abolishment of Local Government, Barefoot's World, August 14, 1997

Once the federal government promises to bail out irresponsible states with federal loans, there is nothing left at the state level to keep the spenders under control [See chart below]. It will be no longer “tax and spend” but “spend and no tax,” a vastly more popular political slogan.

What’s worse, Congress will have no incentive to keep “loans” to states and cities from accelerating in the same way Fannie Mae loans did. None of the Edley loans to states made by the federal government will count against the national deficit any more than Fannie Mae loans did—until the agency went belly up.

Indeed, under the Edley plan, Congress will have still another way to spend money without it ever contributing to the country’s vast annual deficits. Take Medicaid as an example of how this can work. Congress can ask states to pay more of the Medicaid bills, then “loan” the money to the states to cover the cost. Congress is spending the money, but none of that expenditure ever appears on the federal accounts—until, of course, things grow hopelessly out of control.

Edley, of course, creates some imaginary safeguards, such as requiring loans to be promptly paid when good times return. But, of course, any future Congress can extend repayment deadlines. In the meantime, everyone can pretend, as Edley already is, that the cost to the federal government is “nothing.”

He explains, blithely, “there would be zero risk of default, and a guarantee of full repayment plus interest.”

As States Cut Public Workers, Congress Is Reluctant to Act

June 29, 2010

Washington Independent -... As state and local governments prepare to begin their new fiscal year on July 1, they are frantically cutting not just teachers, but social workers, firefighters and police officers.

The reason? Last year, the federal government provided stimulus funds [see chart below] for states to make up their yawning budget gaps. (Every state save for Vermont is required to keep a balanced budget.) This year, Congress has declined to step in.

It looks like 2010 might be the annus horribilis for those state budgets, according to the Center on Budget and Policy Priorities.

“Even though state tax revenues are starting to rebound a little bit, the absence of the federal assistance from last year and the need to pass the [state Medicaid funding] and education assistance is huge,” Jon Shure, the deputy director of the CBPP’s state fiscal project, explains. “There’s reason to believe this year will be the worst.”

The teachers and other public-sector employees might be just the start. The CBPP has estimated that if states cut their spending from 2009 to 2010 the same level they did from 2008 to 2009, it might cost as many as 900,000 public- and private-sector jobs — swelling the ranks of the unemployed by five percent or more.

While the outlook this year is bad, it is hardly better down the road.

“Usually after a recession ends it takes a couple years for state revenues to rebound,” Shure says. “If it normally takes two to three, and this recession is among the worst ever, we’re really in uncharted territory.”

Now deep in that uncharted territory, states crafting their third straight recession-era budgets have no recourse but to slash services and jobs.

For schools, “the cuts are definitely going to hurt a lot more and deeper in poor urban districts,” says Elena Silva, senior policy analyst for the think tank Education Sector.

“The teachers there are much more important, much more urgent for those kids. If they lose a year or three months [of educational gains], it hurts a lot more for kids in struggling schools than suburban kids. It’s a double effect: In cities, there are more teachers laid off because of budget gaps, but the kids in those cities are most vulnerable and most likely to be hurt by budget cuts.”

Facing overstuffed classrooms and reduced police patrols, the Obama administration has led a furious charge to convince Congress to help the states meet their budget needs. In a letter to the majority and minority House and Senate leaders earlier this month, President Obama wrote,

“I am concerned … that the lingering economic damage left by the financial crisis we inherited has left a mounting employment crisis at the state and local level that could set back the pace of our economic recovery.”

He continued: “If we allow these layoffs to go forward, it will not only mean hundreds of thousands fewer teachers in our classrooms, firefighters on call and police officers on the beat, it will also mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services provided by other workers.”

But despite the efforts of individual members of Congress and the administration, the House and Senate have come up short on delivering aid to the states. Democrats cut extended stimulus funding for Medicaid through the end of this year — not, as many states had anticipated, through June 2011. On Thursday, centrist deficit hawks finally refused to vote for the trimmed-down jobs bill.

Update: On July 22, Congress approved legislation to restore unemployment benefits to people who have been out of work for six months or more. However, GOP opposition forced Democrats to drop $24 billion in aid to state governments to help them avoid layoffs and higher taxes, as well as a popular package of expired tax cuts and a health insurance subsidy for the unemployed. Most Republicans opposed the measure because it would add $34 billion to a national debt that has hit $13 trillion, arguing that it should have been paid for with cuts to other programs, such as unspent money from last year's economic stimulus bill. - The Associated Press

Take Alabama, for instance. The state’s legislature had already adjourned for the fiscal year, its budget set with an expected $197 million in federal Medicaid money. Much of that money is now gone.

California, too, is reeling.

“I support restraining federal spending, but cutting the only funding designed to help states maintain the very safety-net programs Congress mandates us to preserve will have devastating consequences,” Gov. Arnold Schwarzenegger (R-Calif.) wrote in a letter to his state’s congressional delegation in response to the funding drop.

The reduced Medicaid funding has not only meant the end of special programs, such as anti-domestic violence initiatives, daycare and mental health services. It will end up costing teachers and other public-sector workers too. States such as Pennsylvania are reacting to the Medicaid funding cut by rearranging their budgets — and sacking workers.

And other, bolder provisions to save local jobs are dead in the water. Rep. George Miller’s (D-Calif.) Local Jobs for America Act would have provided $75 billion to local governments to keep employees on the payroll. It is stuck in committee. Sen. Tom Harkin’s (D-Iowa) proposal to grant $23 billion to keep public-school teachers in their classrooms, the Keep Our Educators Working Act, one of several such edu-jobs proposals, has foundered despite support from Education Secretary Arne Duncan and the White House.

As of yet, the Senate has no plans to authorize any additional funds to help states close their budget gaps — and with teachers unions protesting and citizens starting to question the cuts, Silva, of Education Sector, sees a “huge political mess” fomenting for the fall.

“A lot of people running for office now are not going to be in really good shape,” she notes. “If you watch those districts where there have been significant teacher layoffs, unpopular layoffs, it will be interesting to see where the blame falls.”