James Pethokoukis

Politics and policy from inside Washington

GOP to spendthrift states: The check will never be in the mail

January 7, 2011

Exactly a month ago, I wrote a piece on a  “secret GOP plan” to nudge fiscally troubled states in bankruptcy, giving their governors a chance to rewrite existing public employee union contracts and take other drastic measure to restore solvency. Step 1: Eliminate the Build American Bond subsidy to make it hard for states to borrow.  [DONE] Step 2: Force states to reveal the true extent of their pension liabilities. [COMING SOON] Step 3. Rewrite the federal bankruptcy code [COMING SOON]. Two recent events give me further confidence in my call:

1) Note that Rep. Paul Ryan yesterday reiterated that the GOP had no interest in a state bailout. Here his exact words:

We can’t do a bailout. If we bailed out one state, then all of the debt of all of the states is not just implied,  but almost explicitly put on the books of the federal government. Then the federal debt will go from here to here by the amount of state debt. There seems to be some kind of implicit belief that [state bonds] are federally backed — they’re not.  … I am a supporter of Devin Nunes’ bill which is asking just for a clearer accounting. If you want to enjoy the tax expenditure of tax-free bonds as a state or a municipality, give us a clear accounting of your liabilities. They use discounts rates of something like eight percent in many states to measure their pension liabilities, which is just not reality. We’re going to have lots of hearing on this. … We need to learn more about what states are in what situations, what are the timing of these things, and what’s the proper response. And I’ve been working on something myself on what I think would be the proper federal response … but we are not interested in a bailout. …   [Some states] are already telling us [about their dire circumstace]. But should taxpayers in frugal states be bailing out taxpayers in profligate states? …  Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t? No, that’s a moral hazard we are not interested in creating.

2) Also note today’s posting by Joe Weisenthal at Business Insider:

Ben Bernanke is speaking in front of the Senate today, and one of the big topics during the Q&A session is the state of muni finances. The Fed Chairman doesn’t expect any state to default, but he also says he doesn’t believe it’s within his mandate to bail out the states (e.g. by buying muni debate) should it come to that. The Senators keep hammering on this point, and there’s a reason for it. The GOP is hoping for states to collapse, and they want to be absolutely sure nothing gets in the way of that. … They’re also pushing for changes to accounting rules that would force states to present their finances in a manner that would look uglier. Also, part of it is endless talking about the issues, which has the effect of unnerving investors. There are various reasons the GOP wants this. One is that it would be disruptive to the economy ahead of the 2012 election. The medium term goal is to crush public sector unions. A longer term goal is to fundamentally alter the pension system.

Comments

I just don’t really understand your position or that the GOP seems to advocate. Do you really think that forcibly bankrupting every state in the union – thereby causing a major disruption in debt markets – would benefit America. It would actually probably lead to a US debt downgrade, and a necessary spike in interest rates. Which is to say that national debt financing will cost exponentially more (making it harder to pay the interest, let alone actually pay down the principal) and make govt have to pay out more to offer fewer services. Fiscal discipline is reasonable and a great place to start changing the debt culture of America, but this tough love/cold turkey solution is stunningly stupid and sounds more like ideological babbling than a workable idea, sir.

Posted by CDN_finance | Report as abusive
 

@ CDN_finance … Not every state is headed toward bankruptcy. Only about a one-third, most being red states where socialism is the state government’s business model and unions have bilked the taxpayers (notably New York and California).

Posted by jollypants | Report as abusive
 

@ CDN_finance … Not every state is headed toward bankruptcy. Only about a one-third, most being red states where socialism is the state government’s business model and unions have bilked the taxpayers (notably New York and California).

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Also could be because those states have been forced to subsidize the blue states. Check which states get the lowest return on money sent to the federal government and which states get the greatest return.

Posted by Think | Report as abusive
 

I am sick and tired of paying for these people that never contribute. Finally, let them get up out of bed and get a job and help there state get out of debt. In Calif., for instance, quit giving free college, free Wifi to the low income, regulate the foodstamps, the lonestar card. I work in a grocery store and there is so much of the abuse of the lonestar card and the foodstamps. They come in and buy steaks, 60 dollar birthday cakes, cokes, chips, donuts, etc. Is this stuff healthy? NO IT IS NOT! So then we pay for the free healthcare. I AM SICK OF IT!!!!!!!!!!!!!!!!

Posted by againstwelfare | Report as abusive
 

I think you’re smoking too much medicinal herb. The GOP doesn’t have enough unity to force all of the on-the-edge states to go bankrupt. You are thinking too much like a Leftist Wingnut to be taken seriously right now. Maybe the next phase of the moon will let you become a little more rational?

Posted by Damocles | Report as abusive
 

James has a valid point that states like California and New York should pay attention too. The fed is not your rainy day piggy bank that you can break open when ever you get into fiscal trouble.

I live in a state that will balance it’s budget (Texas). The fed has no business bailing out ANY state, unless it bails out ALL states. And concidering the Fed would have to borrow the money, the Fed need to clean it’s own house first before helping the states. It is not right, nor fair for the fed to bail out states like California with my money, when Texas has kept it’s budget balanced.

California needs to cut spending and raise taxes like any other state would do to balance their budget. California is certainly entitled to spend any way they want to do so. They can tax any way they want to do so. But don’t go begging to the fed when it hurts to much. You got yourself into it, you need to get yourself out of it.

And to CDN_finance, this is not a dooms day scenario. These states have the capability of dealing with their fiscal problems. We call it cutting spending and raising taxes. The politicians just don’t want to do it, so they want the Fed to borrow the money to bail them out. Kind of like going to daddy for a bailout..don’t you think? California and others need to grow up a little and face reality. If you want to spend the money, it has to come from somewhere.

Posted by neeros | Report as abusive
 

I don’t spend money I dont have and im not Bankrupt. I am not a College Grade and i can figure it out what the hell is wrong with our “Smart People” intellectualls. Im not Paying for your stupidity anymore.

Posted by SGTFugal | Report as abusive
 

Even if the GOP wanted to bail out the states, the money just isn’t there. California alone is several hundred billion dollars in the hole *that they know of*, and that’s a very optimistic figure that doesn’t include all the long-term commitments, investments that don’t really exist, etc. Add in the fact that most of these states are about to get worked over by massive real estate foreclosures and you have the makings of a catastro-fail of epic proportions.

Posted by CppThis | Report as abusive
 

To understand the motivation for the GOP’s approach, please see further Naomi Klein’s critical work, “The Shock Doctrine.” It is a study of how the Right uses disasters–both natural and man-made, to force change on society.

Posted by Owkrender | Report as abusive
 

To understand the motivation for the GOP’s approach, please see further Naomi Klein’s critical work, “The Shock Doctrine.” It is a study of how the Right uses disasters–both natural and man-made, to force change on society.

Posted by Owkrender | Report as abusive
 

There has been a concerted effort for years to demonize and deligitimize public employee unions, from both Republican politicians and the media in general. This has left a distorted impression about greedy union contracts and well-paid government functionaries. So the new class of Republican governors would certainly want to capitalize on that by pleasing the public, who now favor things like wage freezes and furloughs and bigger pension contributions, punishing those workers. And they are animated by a general hatred of unions, which have maintained their strength in the public sector while fading away in the private sector. We should recognize the attack on public sector workers for what it is, a case of scapegoating that is intended to divert people’s attention from the real villains in this economy, the Wall Street boys and the inept economic policymakers who took the economy to ruin and seem intent on leaving it there.

I have to laugh at the poster who suggests looking up which states pay more to the federal government and which states receive more–by all means do so. Obviously, he never has. By a large margin, blue states where unions are strongest, pay signficantly more into the federal system than they get back–and right-to-work states like Texas receive more than they pay in. Texas, for example, has had a Republican governor since 1995 and the Republicans have controlled the both houses of their state legislature for the past decade. The result has been one of the highest poverty rates in the United States to go with a massive budget deficit. Not to mention the nation’s most polluted air, the nation’s worst performing schools, and the nation’s highest percentage of people with no health insurance. Governor Perry balanced the budget in 2009 with $12 billion dollars of federal money–while bragging about how awesome the state economy was and threatening to secede from the Union. And he was still reelected. It goes to show how powerful false advertising and the conservative media is in swaying voters.

Posted by Yellow105 | Report as abusive
 

All the ingredients are in place for one the biggest political fights of our era. The players are the perfect set up for an Illinois showdown: corrupt Chicago city government, a new Mayor of Chicago, former Hopium Chief of Staff Rahm Emanuel, and the new Presidential Chief of Staff Daley, who is the son of one of the biggest political machines in American politics. Add to it a kick-the-can-down-the-road, neglectful, Democratic-run statehouse in Springfield; add a bloated and excessive bankrupt public employee pension system, part and partial of the Democrat machine; add the fact that it is Hopium’s home state.

Add to this volatile mix the Republicans, who would like nothing better than to point out, disrupt and create a national poster boy for the so-called differences between the political parties. Most special interests, whether financial banksters or the military-industrial complex, involve bipartisan political corruption. But, public workers (typically Democrats) are a clear-cut partisan battleground issue. Other states, like New Jersey, New York and California, are also targets; but the most political advantage and leverage can be gained from an Illinois maelstrom.

Posted by russwinter | Report as abusive
 

The main issue giving greatest grief to states is fed mandates with no funding. Obamacare did another whammy to the states. Feds will pay in 100% of newly insureds short-term, but expects long-term the states to pick up the tab. In the long-term, prices for health care are due to skyrocket. Health care insurance premiums are seen to make giant leaps. The states are looking at future grief, for sure, especially when their own books are shady and hide the truth. And especially when health care clocks along at double digit inflation rates.

I’m thinking that the GOP on the federal level just wants to know the straight score of what catastrophe is waiting underneath all those funny bookkeeping do-dads on the state’s books. And once the feds know, THEN they’ll be able to adjust the federal mandates to make life easier at the state level.

I see from some of the Republicans some honest and true interest in straightening out this whole fiscal mess that our whole country is in.

I am for repeal of Obamacare totally. This country cannot afford it. The future outlook is totally grim at its success. AND in a climate of hidden grimness at EVERY level of government….the whole picture is pretty scary.

Let’s get the facts…$ and cents, assets and liabilities, abundance and debt flat out in the open so that things can be analyzed and repaired .
If we as a nation fail to do this NOW, with the rising interest rates and our huge indebtedness to China, we are looking at practically EVERY tax dollar that is flowing toward US government thus being sent to China for debt payment on INTEREST alone…not any toward principle payment.

Economists worldwide have already laid out what 1%, 2%, 3% rise in interest rates means to the US economy…and let me tell you….it isn’t pretty one stinking bit.

Let Ryan push for open books and truth. Let him be blunt honest that the states can’t expect money from the feds.

Let’s get this house in order and get it done now.

Posted by limapie | Report as abusive
 

@Think – Also could be because those states have been forced to subsidize the blue states. Check which states get the lowest return on money sent to the federal government and which states get the greatest return.
========================================

Actually, the red states get more money from the Federal government than they pay in. Blue states get less. So, contrary to what you would like to believe, it’s the blue states that have been subsidizing the red ones. I have checked.. Here are a couple of links on the subject.
http://taxprof.typepad.com/taxprof_blog/ 2004/09
/red_states_feed.html
http://www.taxfoundation.org/press/show/ 22659.html

Posted by CarolynM | Report as abusive
 

‘To understand the motivation for the GOP’s approach, please see further Naomi Klein’s critical work, “The Shock Doctrine.” It is a study of how the Right uses disasters–both natural and man-made, to force change on society’

Oh really? What about the Russian Revolution or the Chinese Revolution? These guys were hard-core communists, not a right-winger in the lot, and they didn’t hesitate to use a crisis situation in their respective countries to ‘force change on society’. Or more recently: Mr. Obama’s chief of staff, Rahm Emanuel, and his remark about ‘Never let a good crisis go to waste’.

You really shouldn’t take Naomi Klein too seriously. Nobody in Canada, except the lefty elites in Toronto and aging, has-been American lefties, pays her any heed.

Posted by Gotthardbahn | Report as abusive
 

Forcing or encouraging states to be bankrupt? Really??
So, that’s how liberals try to be taken seriously, by making claims that will convince the entire country that our choices last November were right on target. Well, ok, whatever tactic you think works for you. Keep it up, it’s working out famously so far.

2012 is just a heartbeat away.

Posted by giveitthought | Report as abusive
 

I own lots of gold and silver. PLEASE GAWD! Let the fool’s bail out the states.

Posted by wisehiney | Report as abusive
 

Yellow105, Texas uses zero baseline budgeting. Not the gimmicks and BS that liberal states use. Texas has a 10 billion dollar rainy day fund. 1.78 million people moved into Texas during the last ten years. 847,000 people left New York. Why do you suppose that is?

Posted by wisehiney | Report as abusive
 

Whinyhiney–Zero baseline budgeting has nothing to do with it. Texas is on its way to bankruptcy because of the Texas legislature’s own gimmicks and BS. Back in September, Governor Perry guessed that his state was facing a $10-11 billion budget shortfall for its fiscal 2012-2013 budget, and refused to admit that his budget gap might be larger until he received the State Comptroller’s official report.

The Comptroller released its report today, and Perry had it wrong by about $17 billion. Texas is expected to collect $72.2 billion in taxes, fees and other general revenue during the 2012-13 budget, down from the $87 billion used in the current two-year budget. That puts the shortfall at $27 billion given that maintaining services would run $99 billion for biennium.

Whoops!

Posted by Yellow105 | Report as abusive
 

Good stuff, thanks! I get IN not wanting to sacrifice for CA but I don’t get the boat captain saying CA steered us into this mess. The only matter right now is who gets to be the hero doctor because you need the patient to provide the goods and services as well as the cures including the music, arts and general sustenance.

Posted by phyvyn | Report as abusive
 

A good pie chart would be tax revenue by state before we hit the bog.

Posted by phyvyn | Report as abusive
 

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