The case for Washington bailing out some states

By Reuters Staff
January 10, 2011

By Rob Cox and Richard Beales
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK — The newly-installed governors of Illinois, California, New York and Connecticut face huge budget gaps that are worrying financial markets. In extremis, federal government rescues might be called for. Breakingviews imagines how these Democrat governors from traditionally left-leaning states might justify a plea for help from the U.S. Congress.

Dear Esteemed Members of the 112th Congress:

Like many of you, the four of us have been elected with strong mandates. The voters of Illinois, California, New York and Connecticut have asked us to rectify past mistakes and set sustainable paths for the future. While we are Democrats and most of you are Republicans, we share your wish to address our financial challenges.

Over the next few weeks, we will take difficult decisions, requiring sacrifices from the people of our great states, to balance our budgets — as we are legally required to do. Our progress matters to the nation. Together, our four states account for about a quarter of America’s GDP and about the same proportion of its population. We plan to sort out our own problems. But let’s not forget that we have also, in less strained times, been among the most generous members of this great union in subsidizing weaker states.

In the 20 years leading up to 2005, the latest year for which the non-partisan Tax Foundation has crunched numbers, people and businesses in our four states have consistently paid more in taxes to Washington than the federal government has spent here. Less prosperous states have benefited from the reverse situation.

It adds up to a lot, too. Combined, we’ve paid nearly $500 billion more to Uncle Sam than successive administrations and your predecessors have chosen to return – and that’s before factoring in inflation. Believe it or not, tiny Connecticut paid a third of that, the highest proportion of the four. We don’t object: we know that when we are doing well it’s part of our national tradition and character to share some of the fruits for the greater good. It’s a lesson the European Union seems yet to have fully understood.

But the shoe is now on the other foot. And even if we completely fail to address our problems for ourselves — which is highly unlikely — our short-term needs would amount to only a fraction of what we have handed to other states in the past. Our signatory from the Land of Lincoln, Pat Quinn, is grappling with the annual $13 billion deficit he inherited. That seems a tiny amount compared with our historical generosity — not to mention the $700 billion turned over to wealthy bankers a couple of years back or the easy money policies of the Fed that benefited rich bond investors like Bill Gross, who has been badmouthing Illinois’ creditworthiness.

Our colleague in Albany, Andrew Cuomo, has to prepare the Empire State’s budget by Feb. 1. It looks as if New York’s $10 billion deficit today could nearly double to $17 billion in a couple of years if left unchecked. We’ve run his PowerPoint projections over our own states and feel his pain.

Indeed, though Connecticut may be the smallest member of our quartet, the state’s near $4 billion deficit looms larger than even California and New York’s relative to the state’s total budget. Dan Malloy’s showdown with the general assembly on Feb. 16 could be particularly tough — again for the sake of less than 1 percent of what we collectively handed to less fortunate states in the 20 years to 2005.

Meanwhile more of our efforts to solve our own money problems — dare we suggest, with greater discipline than seen at the federal level to date — will become clear when the second-timer among us, Jerry Brown, unveils California’s budget this week, something he’s been toiling away on from the statehouse in Sacramento. Even his annual deficit of more than $20 billion pales beside the money we’ve given away to other states — or rather, your august institution has given away on our behalf.

As we, along with the new Congress, tackle difficult fiscal challenges in the face of unrelenting market pressures, we felt it was our duty to our respective voters to recall our past selflessness. The federal government has transferred a lot of our states’ hard-earned wealth to those less fortunate in the past; you and your Washington advisers shouldn’t dismiss out of hand the possibility of a shift of cash in the other direction if one or more of us ends up having to ask you for help.

Sincerely,

Edmund G. Brown, Jr.
Pat Quinn
Andrew M. Cuomo
Dannel P. Malloy

(Disclosure: The authors happily pay Connecticut and New York taxes)

Comments

A bailout for these states would amount to a bailout of unions and nothing more. That is precisely what happened to New York City in 1975, and they learned nothing from it.

Posted by jaguar6cy | Report as abusive
 

The three largest – CA, NY and IL – are virtual poster children for how not to conduct finances, over many, many years. California would actually have a surplus, not continuing deficits, if it had not embarked on “drunken sailor” spending in the late ’90s. I am completely against any federal bailout of these states.
Jimvenice

Posted by jimvenice | Report as abusive
 

@Waldo313 why is bailout money going for wages, benefits and pensions so bad? From your tone I would think the money was going to terrorist?!? I bet that 90 cents on every dollar spent by the state on wages, benefits and pensions will go back into circulation. Here is an interesting fact you can dismiss; but only 67% of the GOP lead taxes on the top 2% will re-enter the economy this year. While 97% of UI benefits go back into the economy. Everyone likes to keep more of what they make. Everyone wants more of their own hard earned money in their pockets. But we are in a crisis and we are Americans. We are all on the same team. Its hypocritical to talk about TEA party rhetoric when you know that the government can’t afford the tax breaks even when they cut programs. Your lobbied tax break just got placed on your kids and grandkids back. If you think you understand the the situation I recommend watching a film called I.O.U.S.A. Its a non-partisan look at US debt and tax policy, The Heritage foundation (conservative think tank) is one of the contributing sponsors. In reality, if we had any generational courage; we’d need to both curb government spending and increase tax revenue to keep America American owned.

Posted by JulsMan | Report as abusive
 

Blaming States’ fiscal problems on workers’ unions alone is NONSENSE.
Take Texas -the poster child of conservatism- as illustratio. Less than 20 percent of the government labor force is unionized; regardless, and despite being “business-friendly” (does it mean the government has become a plutocracy?) the state has a fiscal hole of 25 bln. for the coming biannual budget.

Anyone with a firing neuron should realize that the problem is elsewhere -not in unions, not in taxes.

Posted by ecogabriel1 | Report as abusive
 

Why does everyone assume the unions are to blame for state debt? Why do americans treat unions like anti-american? Movie stars are in a union, so are baseball players, firemen and police have unions too. why the hostile attitudes?

Posted by BOBOswish | Report as abusive
 

Federally mandated spending and partial federal matching is the only reason many conservative states receive disproportionate federal funds. Keep your mandates and your money. We will be much better off. Also, how much of the federal bailout funds went to NY Wall Street, CT Hedge funds and CA banks? All of it. Not to mention the everyday robbery of the rest of the country by same.

Posted by wisehiney | Report as abusive
 

I’ll add two points… both of which are indisputable.

#1 Goverment spending cannot grow faster than GDP in perpatuity… this has been happening for years and must now reverse. Goverment spending is derived by the productive economy and irreguardless of how the law reads or “the will of the people” there are limits to what fraction of the productive economy can be reallocated via the goverment before private capital and successful citizens reallocate themselves to greener pastures. Those who would avocate for higher levels of wiser goverment spending can take comfort from norther europe where taxation is much higher and economies still function well. Still though there are limits.

#2 the idea that these 4 states are special in that they have produced a surplus of taxes is a fiction. The calculation excludes interest payments on the national debt and overseas military expendature by that measure nearly all states are “winners.”

Posted by y2kurtus | Report as abusive
 

Don’t bail them out! Gov’t pensions must be brought into line w/the marketplace.

Instead, lay off 9.6% of gov’t workers, in line w/private sector unemployment, and save $$ that way: it’s how business owners do it.

Posted by Lita7 | Report as abusive
 

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