by James A. Bacon
Two weeks ago, the U.S. House of Representatives passed a $3 trillion coronavirus-relief bill that would direct nearly $1 trillion to state, local and tribal governments. This massive bail-out would come on top of massive assistance to states and localities in previous legislation: $150 for a Coronavirus Relief Fund, $30 billion for an Education Stabilization Fund, $45 billion for the disaster Relief Fund, $25 billion for public transit systems, an increase in the federal government share of Medicaid spending, and billions more for miscellaneous programs. Also the Federal Reserve Bank has set up a $500 billion program to facilitate short-term state and local borrowing.
The ball is now in the U.S. Senate’s court. What, if anything, will the Senate propose in the way of a second wave of fiscal assistance? Judging from their press releases, Virginia Senators Mark Warner and Tim Kaine have so far refrained from committing themselves to a Pelosi-style bail-out of the states. Their statements have focused on narrow-bore initiatives for water improvement projects, National Guard benefits, and a restaurant meals program for Americans struggling with food security.
Sooner or later, however, they may be called upon to either support or oppose a second-wave bailout. They will receive intense pressure from their Democratic Party colleagues representing the states — Illinois, New Jersey, New York, Connecticut — in most desperate need of fiscal rescue. When they do so, I hope that that the two former governors will remember the hard choices they made to keep Virginia’s fiscal house in order, and, similarly, how the McAuliffe administration forced the City of Petersburg, when faced with fiscal collapse, to make hard, hard choices to put its finances in order.
In a recent policy brief, Mercatus Center scholars Veronique de Rugy and Tad DeHaven note that the COVID-19 epidemic has severely stressed state and local finances. But the fiscal stress reflects poor policies during a decade of growing economies and tax revenues: (1) steering subsidies and tax breaks to favored businesses in the name of economic development, (2) allowing unfunded pension liabilities to accumulate, and (3) the failure to set aside rainy day funds.
“Bailing out the states would be the wrong choice,” they write. “The states should use their sovereign fiscal powers to address revenue shortfalls while undertaking much needed reform.”
Through a combination of direct handouts and loans, targeted tax breaks, and debt issuance, de Rugy and DeHaven argue, state and local governments collectively direct $50 billion yearly to favored businesses and industries in the name of economic development. Some states have been far more profligate in handing out these subsidies than others.
Even before the pandemic, the states were facing a collective pension funding gap of between $1 trillion and $3 trillion, depending upon whose estimates are used. States vary widely in the generosity of their public pension benefits and their willingness to set aside funds for future liabilities.
Finally, states differ in their willingness to put money in “rainy day funds” during good times to help offset revenue shortfalls during bad times. “For example, “write the Mercatus scholars, “Illinois, Kansas, New Jersey, and Pennsylvania have little or nothing socked away while Alaska, New Mexico, North Dakota and Wyoming have reserves in excess of 20 percent of general fund spending.”
Virginia has been more fiscally responsible than some states, less than others. The commonwealth will rely upon its rainy day fund to get it through this fiscal year’s revenue shortfalls. It remains to be seen how Governor Ralph Northam and the General Assembly respond to longer-term fiscal challenges. The Pelosi bailout certainly would make it easier for Virginia’s Democratic-dominated political establishment to maintain its massive spending increases in the next biennial budget.
Surely, it must be tempting for the tax-and-spend party to offload responsibility for raising revenue from the state/local level to the federal government. Most state and local governments are required by their state constitutions to balance their budgets, which puts a huge political constraint on the ability of the political class to increase public spending. Conversely, the federal government has no effective borrowing limits, and Republicans and Democrats alike have demonstrated a high tolerance for running up the national debt (by roughly $4 trillion this calendar year, without counting the Pelosi bailout). Bailouts for the states would extend the deficit-spending prerogative to the states, creating a huge new moral hazard for the nation.
But let us remember the case of Petersburg, Virginia, which discovered a revenue shortfall equivalent to about 20% of its annual budget a few years back. The predicament was due to the colossal incompetence of city administrators and feeble oversight of its City Council. If any locality in Virginia would be a justifiable candidate for rescue, it would have been Petersburg, whose predominantly poor, minority population has been afflicted by all manner of economic misfortune. But the McAuliffe administration rightly showed no mercy. While McAuliffe was willing to lend technical assistance from the state, he was never willing to contemplate a bailout. Hiring an outside fiscal-rescue team for guidance, City Council slashed spending for schools, public safety, for administrative salaries.
If Petersburg could make those sacrifices, so can Illinois, New Jersey, New York and any other state that thinks it can weasel out of its obligations by seeking succor from Uncle Sam. If Virginia congresspersons choose to hold the profligate spenders to a different, lower standard than Petersburg, they will have a lot of explaining to do!There are currently no comments highlighted.