In an attempt to quiet the debate over whether or not the Federal government will step in and bail out the states, last week Federal Reserve Chairman Ben Bernanke told the Senate Budget Committee the Fed would not engineer a bailout.
"We have no expectation or intention to get involved in state and local finance," Bernanke said according to a Wall Street Journal report.
While we may all hope that is true, past governmental actions lend credence to the idea that the United States government will take any action necessary to prevent insolvency at the state, and perhaps even at the local, levels.
While it may not be reasonable to expect Washington to bail out states when the Federal government is in such dire financial straights itself, many state leaders probably hope it will happen.
As Federal stimulus funds begin to dry up, states will be forced to take further measures to shore up their budgets.
Currently, 46 states are facing serious budget issues. Though many of these have cut spending, increased taxes and increased fees, more budget shortfalls are forecast for 2012 and beyond.
The total budget gaps faced by the states in 2011 equaled $130 billion. In 2012, shortfalls are expected to grow to $140 billion.
So where are states to turn? Hit a recession weary state populace with more tax increases, service cuts and layoffs or hide the pain in a $14 trillion national deficit?
No matter how irresponsible any one state may have been in terms of spending, it seems unlikely the United States government will allow any state government to collapse. The economic fortunes of each state are too closely intertwined with the economic health of the nation to stand idly by while states begin to fall in a domino effect.
Given the government’s past actions in bailing out banks, car companies and mortgage giants Fannie Mae and Freddie Mac, a bailout of the states not only seems possible, but entirely plausible.
Our United States government refused to allow AIG and Bear Stearns to bankrupt because they were “too big to fail.” It seems likely that Washington would consider California or Illinois too big to fail as well.
Even talk of legislation to allow states to file bankruptcy seems somewhat ludicrous at this point. If you personally file bankruptcy, your credit rating takes a huge hit and your costs of borrowing skyrocket even though your debts may be liquidated. As attractive as an orderly debt restructuring may seem, it ignores the economic reality in which governments must be able to borrow money at a reasonable rate in order to fund operations and make up shortfalls.
It also ignores the reality that to restructure much of the debt – namely pension debt and healthcare costs – would be to renege on the promises made to state employees. Even if you argue the state was wrong to promise such benefits, that is not the fault of the public sector employee who rely on those benefits.
Assuming the states cannot renegotiate or default on their pension and healthcare obligations, they are left to cut all other fat out of the budget.
The states and the people they govern must make difficult decisions regarding not only what programs each state should continue to fund, but, more fundamentally, what the role of government should actually be to avoid such dire economic situations in the future.
Kristi Reed 2011. All Rights Reserved.
