GOP and the blue state budget time bomb

By Grover G. Norquist and Patrick Gleason
January 16, 2013

Many economists and analysts are concerned that the next candidate for a federal bailout is not still-too-big-to-fail banks but financially irresponsible states. We have written about the threat that failed states such as California, Illinois, Connecticut, Maryland and New York pose to the fiscal health of the nation.

But the problem is bigger. In coming years, University of Chicago economics professor Brian Barry predicts, “Both parties are likely to clash over state-budget issues at the national level, no matter what happens to federal taxes or healthcare spending.”

Skyrocketing unfunded state pension liabilities, up to $4 trillion according to some estimates, are driving already financially troubled states down the path to insolvency,  and there appears to be no political will to address the problem. States in the most dire fiscal situations are high-tax, left-leaning and Democratic-controlled, and according to Barry pose a “long-term threat to the permanent national majority that many Democrats believe they see emerging from the past two presidential elections.”

If the White House and Senate Democrats do decide to seek a bailout their buddies in the blue states, there are some reforms that Republicans could exact in exchange that could still improve the nation’s fiscal health and be a good deal for taxpayers.

It is clear that the House would justifiably have no interest in approving a bailout of fiscally reckless states. Two years ago forward-thinking members of Congress, including Representatives Devin Nunes (R-Calif.), Darrell Issa (R-Calif.) and Paul Ryan (R-Wis.), introduced a bill that would require states and cities to accurately lay out their pension liabilities, currently underreported by an estimated $2 trillion. The Public Employee Pension Transparency Act stipulates that Congress will not approve a bailout of failed states.

However, with the White House focused on finding ways to advance its agenda without congressional approval, such legislative safeguards are no longer sufficient to prevent a deadbeat-state bailout. Indeed, concern is growing that Democrats may pursue a backdoor monetary bailout of failed states by the Federal Reserve.

Joseph A. Grundfest, Mark A. Lemley and George G. Triantis – a trio of professors from Stanford Law School – recently described in The New York Times how it could work:

“Instead of a third round of so-called ‘quantitative easing,’ known in the financial markets as QE3, maybe it’s time for a QE-Muni. Here’s why. … State and municipal bonds help finance new infrastructure projects … as well as pay for some government salaries and services, by borrowing against future tax receipts. With about $3.7 trillion in debt outstanding, it’s a big and sprawling marketplace for bonds.”

Roosevelt Institute research fellow Mike Konczal, in a  blog post, wondered if the Fed should buy up short-term state and local debt. He cited the union-backed advocacy group Change to Win’s claim that a Fed purchase of state and local debt could net $75 billion for state and local governments.

However, the Federal Reserve Act limits the Fed’s ability to purchase state and local bonds to those with a maturity of six months or less. The benefits predicted by Grundfest, Lemley and Triantis from a “QE-Muni” will not occur “unless the Fed is able to buy longer-dated muni paper” – which requires an act of Congress.

Now House Republicans are all but guaranteed to oppose a proposal to expand the Fed’s ability to purchase state and local debt – and they would be right to do so as a stand-alone bill. That’s not to say there isn’t anything Republicans could get in return that would make for a worthwhile deal.

If congressional Democrats would, for example, agree to block grant Medicaid and other means-tested entitlement programs to the states in exchange for allowing the Fed to buy longer-term state and local bonds, it would make for a deal that even the most conservative House member should seriously consider – and not be faulted for accepting.

Block-granting Medicaid would improve the fiscal condition of the federal government. As the Ryan budget explains, it would also help states by ending “the misguided one-size-fits-all approach that has tied the hands of so many state governments,” since states “will no longer be shackled by federally determined program requirements and enrollment criteria.”

Rather, they will have the freedom and flexibility to craft Medicaid programs to fit the needs of their unique constituencies. Rising Medicaid costs are now squeezing state budgets far more than any other program. Block-granting Medicaid, as was done in the House-passed FY 2012 budget, would reduce the growth in Medicaid spending by $800 billion over the next decade.

If all this sounds familiar, it should. In 1996 President Bill Clinton signed sweeping welfare reform, which block-granted that federal program to the states. Welfare rolls fell by 37 percent between 1995 and 1998, according to a study by the Heritage Foundation’s Robert Rector. By 2006, welfare caseloads had fallen by 56 percent since the reform’s enactment.

In fact, Clinton had vetoed earlier iterations of welfare reform twice before signing it in order to secure his re-election. The first version vetoed by Clinton would have block-granted Medicaid to the states.

Chicago Mayor Rahm Emanuel, the former White House chief of staff, famously advised President Barack Obama to never let serious a crisis go to waste. Unsustainable state and local budgeting is one of the most serious problems facing the U.S.’s economic outlook, and one that Congress will likely have to contend with sooner rather than later. Reform-minded lawmakers would do well to find ways to use this fiscal reality to advance long-sought and much-needed free-market reforms.


PHOTO (Top): California Governor Jerry Brown speaks at a news conference to announce the Public Employee Pension Reform Act of 2012 in Los Angeles, California August 28, 2012. REUTERS/Mario Anzuoni

PHOTO (Insert Middle): Federal Reserve Chairman Ben Bernanke during a news conference in Washington December 12, 2012. REUTERS/Kevin Lamarque

PHOTO (Insert Bottom): Representative Paul Ryan (R-Wis.) attends a campaign event in Mansfield, Ohio November 4, 2012. REUTERS/Eric Thayer


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We must be very careful in bailing out the states. I would fight with everything I have to NOT pay some union state employees grossly oversized retirement when I receive NOTHING. I can’t stand the though of it, but I will admit it most likely will have to be done. Just please hide it well, lot’s and lot’s of spin, so it won’t hurt quite so bad. If this becomes public you will see union houses burning. I don’t think anyone wants that.
Of course Mr. Norquist knows this. I just hope he has enough humility not to use it for spite.

Posted by tmc | Report as abusive

We should also be carefull of pitting states against each other. As their debts come out, local state level politicians will be enticing businesses to move to other states. We the people of the United States loose when they do this. The state that is enticing looses tax revenue, the other state lost tax revenue too. Jobs move from state to state and only Business wins as we subsidize our own jobs. Mr. Norquist is also smart enough to figure that out. I’m just curiose as to wheather he will again use it for political and person gain, or if he will actually help his country.

Posted by tmc | Report as abusive

Why are you giving these two bomb throwers a forum? Just because there are at least two sides to every argument doesn’t mean one is ultimately the best answer.

Posted by borisjimbo | Report as abusive

Not sure i have ever read a more biased and unfactual piece…
Currently, red states (like mine) receive way more in government hand outs than any of the northeatern states, who are net contributors… how about a chart around the amount of tax revenue vs the amount received from the feds in each state?

Posted by GA_Chris | Report as abusive

But it does lie somewhere in-between. So you have to give him a forum to hear his side. Just because I don’t agree with someone, I will not judge them lesser than I. I respect intelligence and wisdom be it mine or not.

Posted by tmc | Report as abusive

could patrick be grover’s illegitimate son? or does grove just like to hire guys that look like him?

Posted by jcfl | Report as abusive

Now that’s just funny…

Posted by tmc | Report as abusive

You mean the fact that Red States get back far more in federal revenue then they send to Washington in taxes is not a bail out to Red States?

But I think it is no secret that a number of the Red State Governors who want to eliminate income and corporate taxes and shift to sales taxes for revenue want to wage war against the poorer citizens, who do have to spend everything to survive.

Now kick unionized government workers, and that can be a trifecta for the wealthy.

But how much of the pension gap has been the result of a more then decade long pattern of very low interest rates, that prevent pension funds from growing at the expected rate if interest rates were more in line with historical trends?

Yes, there needs to be reforms in government pensions, so that a person doesn’t retire with hundreds of thousands of dollars in unused sick pay, etc. But reforms cannot hit prior agreed to benefits, and many States are moving forward in curbing those excesses for future employees.

But how about reforms in the extremely generous retirement packages the elected officials vote for themselves? Yes, even in red states. Greed is greed.

Posted by pavoter1946 | Report as abusive

@pavoter1946 if you were refering to me, then I was just say’in that @jcfl was quite funny. If you look at the pictures it’s even spooky. Oh, and yeah, we should get the politians pensions back too. Just say’in.

Posted by tmc | Report as abusive

States with the largest budget shortfall:
California $21,300
Illinois 17,000
New Jersey 10,500
Texas 10,000
New York 8,200
Connecticut 3,800
Minnesota 3,800
North Carolina 3,000
Ohio 3,000
Florida (tie) 2,500
Oregon (tie) 2,500

I don’t see the trend by govorning party affiliation. While I agree something needs to be done and I support this plan, the partisan tone is misguided. I can’t stand the blame game that has been going on for the past 5 years. Lets agree that its everyones fault and actually do something to fix it!

Posted by x23evets | Report as abusive

Democratic Hustler Politicians + Corrupt Greedy Unions = BANKRUPTCY BABY!

Posted by eatingdogfood | Report as abusive

This article is worse than their last.

I have no problem with lower taxes, especially my own. As a Republican, I have issue with Messrs Norquist and Gleason (which I gather is now two heads on one body) telling that Rep Issa is foward-thinking when he proposes law that any constitutional lawyer would tell you is a piece of garbage.

Is there any reason we cannot go back to Eisenhower rates? Can you just imagine how he would be treated these days? I imagine not enough of my fellow Republicans understand what real sacrifice is about. I hear it preached often, practiced little.

Posted by krimsonpage | Report as abusive

the red states need to focus on education and health care where they are severely lagging.

(For example, of the top ten public universities half are in California)

Posted by Leftcoastrocky | Report as abusive

“a deal that even the most conservative House member should seriously consider – and not be faulted for accepting.”

So the stinking democrats create two stinking messes and then THEY hold out fixing one of the messes as a bargaining chip for making the other mess worse.

And we should seriously consider this. Yeah, right.

Posted by VenturaCaptalst | Report as abusive

Having residents in states that demonstrate fiscal responsibility bail out those who are irresponsible? Help me with that. That’s tantamount of me covering my neighbors mortgage because he made commitments he cannot fulfill. Bail out a pension program in states where the employees get compensation, benefits and retirement significantly better than those doing the same job in the private sector? Probably not.

For those preaching the “red state” welfare, I have a proposition for you. Let’s reduce the taxes my state provides and receives to/from the federal government “dollar for dollar”. But t the federal government must rescind all mandates with the funding they currently provide. Get out of our schools, health care, highways, public transportation, welfare….etc. and let us manage and fund it on our own.

That also means that I don’t pay to rebuild the Atlantic City Boardwalk, water proof the NYC subways, and all the other local “benefits” in the $60 billion Hurricane Sandy bailout. I don’t have a problem helping the people in NY and NJ getting back on their feet, but the Boardwalk should have been insured, and the NY Subway folks have known for years that the subway system was exposed and did nothing about it. That’s not a crisis, it’s irresponsibility.

If the folks in NY, NJ and IL want to fund massive benefit programs for their citizens, let them fund it. If not, they would have that choice also. But don’t ask someone living outside your boundaries to fund irresponsibility where I don’t even get to vote on it.

Posted by COindependent | Report as abusive

We already got our blue-state bailout from Republicans, of all people. Thank you Governor Christie

Posted by auger | Report as abusive