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Con: States must fix soaring budget deficits rather than rely on Uncle Sam

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Lynndee Kemmet
February 19, 2011
EDITOR’S NOTE: The writer is addressing the question, Should Congress consider bailing out large debt-ridden states?

Several years of huge and persistent state budget deficits have led some politicians to argue that the federal government should either continue or even increase aid to states as it has done since 2009 through stimulus funds. Others suggest that the matter could be solved simply by granting states the right to file for bankruptcy.


Neither is an acceptable option.


There is little doubt that most states’ finances are a mess. A survey conducted by the Center on Budget and Policy Priorities indicates that 44 states and the District of Columbia are likely to start their 2012 fiscal years with a combined shortfall of $125 billion.


California leads the way with a projected fiscal 2012 deficit of $25.4 billion, followed by Illinois with $15 billion, New Jersey with $10.5 billion and New York with $9 billion. Even tiny Rhode Island is facing an estimated $290 million deficit.


Yet with the Congressional Budget Office putting this year’s federal budget deficit at $1.6 trillion, Washington is hardly in a position to bail out the states.


So, some want Congress to pass legislation that would allow states to declare bankruptcy under certain conditions as a viable “last resort.” The National Governors Association opposes such legislation, fearing that bankruptcy talk would spook the bond markets and raise borrowing costs.


It also raises the issue of “moral hazard.” In the world of finance, moral hazard is a term used to imply that when risks are subsidized, people take more risks.


For example, if banks and businesses know that Washington considers them “too big to fail” and will bail them out if they run into trouble, the managers of these institutions might take risks they would avoid if they had no government safety net.


There are really only three ways for the states to solve their fiscal dilemma: cut spending, increase revenue, or both.


States are facing structural budget deficits in which expenses continually outpace revenues. States and their citizens must join forces to resolve this situation. They cannot place responsibility for fixing the problem in the hands of others, whether Congress or a bankruptcy court.


A growing number of governors seem willing to accept this responsibility, and that’s a hopeful sign.


For example, on his Web page, New Jersey’s Gov. Chris Christie lists “Getting Control of the Budget” among his top priorities. He says the Garden State needs to prioritize its funding commitments, establish and empower “fiscal watchdogs,” and implement simple, responsible budget practices.


Every state running huge budget deficits should follow Christie’s advice This means hard discussions with taxpayers, program beneficiaries, business leaders, public employee unions and other creditors about what programs, services and obligations are appropriate and affordable, and which need to be dramatically reduced or eliminated.


Christie is a Republican, but this is not a partisan issue. California’s Democratic Gov. Jerry Brown, in his recent “State of the State Address,” called fixing the state budget and getting spending in line with revenue “Job Number 1.” Connecticut Gov. Dan Malloy, another Democrat, said much the same. “We must establish our means and live within them,” he told Nutmeg State residents.


The solution to state fiscal problems does not reside in Washington. States have the capacity to right what’s wrong in their budgets. What they need is the political will to do so.


Citizens, public employee unions and the business and investor communities all have contributed to the states’ financial woes by placing huge demands on the resources of state and local governments. All should share in the pain of fixing the problem.


Lynndee Kemmet is a visiting research fellow at the American Institute for Economic Research and author of “Follow the Money: A Citizens Guide to Local Government.” Readers may write her at AIER, 250 Division St., Great Barrington, Mass. 01230; website: www.aier.org.

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