Tag Archives: state governments

The States and Too Big to Fail

Bloomberg reports:

U.S. House members are returning to Washington from summer recess to act on a $26 billion plan to aid cash-strapped state governments.

The U.S. government has a long history (see pp. 57-60) of refusing to bailout profligate state governments. It dates all the way back to the 1840s when eight state governments (and one territory) came to Congress with hats in hand: Arkansas, Illinois, Indiana, Louisiana, Maryland, Michigan, Mississippi, Pennsylvania, and the territory of Florida all wanted a federal bailout of their debts. Representatives from fiscally responsible states would have none of it and an important precedent was established. There have been no state defaults since.

Today’s action is not a full state bailout (as far as I know, none of the states are threatening bankruptcy just yet), but the federal assertion that the states are too big to fail does mean that they will face a significantly softer budget constraint tomorrow than they did yesterday. That is: the states have a weaker incentive to be fiscally responsible.

How might we expect the states to behave in this post-bailout world? 

In recent research, Alexander Fink and Thomas Stratmann of George Mason University shed some light on the question. It would be nice to just compare the performance of states that receive federal aid with that of states that do not. But the states that receive federal aid are not random. In all likelihood, they are probably mismanaged to begin with (or perhaps poorer to begin with). In any case, a simple analysis of those that receive aid may not tell us much about the bailout effect itself.

Fink and Stratmann untangle this causal relationship, however, with a clever technique. They look at the German upper chamber, where different states enjoy different levels of political influence. Because political influence makes a state more likely to receive a bailout and because it is unrelated to the states’ underlying fiscal management, this allows Fink and Stratmann to test for the impact of the bailout without accidentally picking up other influences. What do they find?

States with a softer budget constraint [i.e., greater expectation that the German national government will bail them out], have higher deficits and debts and receive more bailout funds.


The larger the expectation of a bailout, the higher the amount spent in a number of spending categories, and special interests are most likely to benefit from this additional spending. We also find that bailout expectations lead to less efficient state government service provision. 

One wonders if Congress is doing the states any favors.

What Do State Bailouts Really Mean?

John Hood writing at National Review suggests in addition to encouraging state profligacy, federal bailouts of state governments are an “act of contempt for constitutional government.” Congress is getting ready to extend the stimulus by $26 billion. Thirty states presented balanced budgets on the expectation that Congress would extent the Medicaid FMAP provision. It’s like balancing your checkbook on the theory that your rich uncle will come through with another windfall. That analogy of course breaks down. The federal government is no ‘rich uncle’. It is sinking under $13 trillion in debt that is to be paid by taxpayers. Publicly-held debt will represent 100 percent of GDP in 2015 – in part, the courtesy of bailout fever.

A Greek Tragedy in U.S. Municipal Debt

In recent days, as the debt crisis in Greece and throughout the Euro zone has been splashed across world headlines, smoldering problems in public finance are coming to the fore of public attention.  In Europe and the United States, federal, city, and state governments have habitually bowed to the requests of their employees and public labor unions, offering salaries and benefit packages that they lack the tax dollars to support.

In the public sector environment of generous pay and benefits, some New York state policymakers are pursuing the difficult option of freezing state and local employees’ pay at current levels.

The Buffalo News reports:

In emergency legislation to keep the government running without a 2010 final budget in place, Paterson has not paid the 4 percent raises for state workers in the executive branch that were to have kicked in April 1. The extra pay is being delayed.

The governor also is threatening to start a once-a-week furlough program next week for about 100,000 state workers. The furlough plan would be put, under Paterson’s current thinking, in next week’s “extender” legislation to provide emergency funding for things like state worker paychecks, some road construction and unemployment and Medicaid payments. The bill requires a straight up-or-down vote — meaning if the Legislature rejected the bill because of the furlough, the government would run out of money and have to shut down.

The Empire Center, a conservative New York think tank, determined that canceling state workers’ raises for this year, as well as limiting municipal worker raises, would be legal if the state Legislature declares a fiscal emergency.

This dramatic action would help New York close its budget gap for the year, but larger municipal finance challenges, such as unfunded pension obligations, will continue to plague workers until state policymakers are willing to stand up to union demands that states cannot afford to meet.

Property Rights and Blight

Proceedings for state takeover of Brooklyn properties continue with developer Bruce Ratner closing on the future sight of the Nets new stadium .  George Will explains in his column:

The Atlantic Yards site, where 10 subway lines and one railway line converge, is the center of the bustling Prospect Heights neighborhood of mostly small businesses and middle-class residences. Its energy and gentrification are reasons why 22 acres of this area — the World Trade Center site is only 16 acres — are coveted by Bruce Ratner, a politically connected developer collaborating with the avaricious city and state governments.

To seize the acres for Ratner’s use, government must claim that the area — which is desirable because it is vibrant — is “blighted.” The cognitive dissonance would embarrass Ratner and his collaborating politicians, had their cupidity not extinguished their sense of the absurd.

The properties in question are half-million dollar Brooklyn condos. Rather than paying the necessary price to buy each property, Ratner has turned to the political process to carry out his business. Despite a few remaining residents who are attempting to keep their homes, it appears that Ratner, aided by the state, are gaining the necessary court approval to seize the properties.  The New York Observer reports:

The state has officially filed in court to acquire the property in the footprint of the Atlantic Yards mega-development in Brooklyn, home-to-be of the Nets. The acquisitions are for much of the 22-acre site, as the state’s development agency, the Empire State Development Corporation, is seeking to take title to the private property in the footprint and the city streets that currently run through it.

At present, the situation is grim for Prospect Heights homeowners, but simultaneously higher courts have an opportunity to uphold Fifth Amendment rights with this case.

Public Transit 2010: Higher Fares and Less Service

The Wall Street Journal reports higher fares and less frequent service will hit public transit systems nationwide this year. About $8.4 billion of the $787 billion stimulus  meant to boost state and local budgets and prevent transit cuts has only pushed forward tough decisions by 11 months. Chicago will furlough some transit workers. San Francisco is raising fares to close a $129 million budget gap. And New York is cutting service. Transit riders may well be frustrated in 2010, but ultimately that’s because riders aren’t customers, they are beneficiaries of a subsidized service. As Sam Staley writes at Planetizen, only one-third of transit’s revenues come from fares, the bulk comes from tax revenues and federal grants. Urban transit systems have evolved as a product of political lobbying not in response to rider needs.

The crisis in budgets has a silver lining. More cities and states may be forced to pursue fundamental reform. Leonard Gilroy writes in the Reason Foundation’s  23rd Annual Privatization Report, Chicago leased its parking meters and Dunwoody, Georgia is contracting out non-safety-related services. Given the revenue outlook for local and state governments 2010 may be the year that cities finally try and fix what ails public transit.

Is the USACE Ruling a Pyrrhic Victory?

Yesterday’s court ruling that the US Army Corps of Engineers is at least partially to blame for the flooding in St. Bernard Parish and New Orleans’ Lower Ninth Ward after Hurricane Katrina is being hailed as a landmark ruling. The judge in the case wrote in his decision:

The Corps’ lassitude and failure to fulfill its duties resulted in a catastrophic loss of human life and property in unprecedented proportions. The Corps’ negligence resulted in the wasting of millions of dollars in flood protection measures and billions of dollars in Congressional outlays to help this region recover from such a catastrophe. Certainly, Congress would never have meant to protect this kind of nonfeasance on the part of the very agency that is tasked with the protection of life and property.

Residents of the affected areas are hailing this as a landmark decision. But their victory may be Pyrrhic and may have the perverse impact of slowing down post-Katrina recovery. Continue reading

Assorted Links

Evidence from Germany: When the federal government bails out state governments, unsound fiscal policies emerge.

Tax Less but Spend More in Millburn, N.J. “Taxes have grown with people’s expectations of what local government should provide.” (The average homeowner pays $18,195 in property taxes.)

“No revenues left to share.” Rhode Island likely to cut funds to local governments again.

Against the tide: Atlantic City to expand outlet mall, “The Walk” with a $9 million loan from the Casino Reinvestment Development Authority.

Tax District forming  in NOVA to extend DC Metro to Dulles Airport; Fairfax, VA will pitch in $90 million.

“Resetting” State Governments

How will state governments recover from the catastrophic collapse in revenues? According to Indiana Governor Mitch Daniels, that all depends on whether states want to face up to the caus — the happy (and now unsupportable) spending binge of the 1990s, when states increased spending an average of 6% a year.

Writing in today’s Wall Street Journal, Governor Daniels estimates it will take GDP growth twice the historical average of 3.49% to return state tax revenues to their previous long-run trend line by 2012.

And even then, revenue recovery may not happen. Consumer spending is down. Americans may have moved into a renewed era of saving. That means less sales tax revenues for states.

The choice before states: more taxes, or less spending, and permanently smaller government.

State governments will continue to face hard choices: slash services, union benefits, or privatize what the state cannot support.

The Journal also reports on what one-day employee furloughs look like in the states: A 3 hour wait for drivers license renewals in California, no birth certificates available in Wisconsin, the shutdown of shooting ranges and visitor centers in Michigan, no food stamp applications filed in Maine, and fewer traffic patrols on Maryland highways.

There is a bright spot in this exercise: furloughs force efficiencies. When California began DMV furloughs in January, 473,000 people chose to renew online, an increase of 32%.

The Tax Contract

When citizens pay taxes to their municipal, state, or federal government, they generally view the payment as upholding their end of a contract with their government. In return, they expect a certain level of services such as infrastructure, public safety, and education.

This model of taxation requires transparency in public spending and taxation, a transparency that can be obscured by fiscal gimmickry that is prevalent at all levels of government. One way that policy makers obfuscate the level of taxation is by creating complicated tax structures that levy high rates on certain goods, such as excise taxes. Constituents may not realize the full burden of these taxes until they reach high enough levels, as may be occurring in Chicago. A recent Chicago Tribune article explains:

Mayor Richard Daley’s budget includes dozens of new or higher taxes and fees to raise an extra $53 million.

[ . . . ]

The taxes and fees were part of what Ald. Robert Fioretti (2nd) calls a “nickel-and-dime” approach to balancing the city budget. Like nearly all his colleagues, Fioretti voted for them in late November, but this week he questioned whether city and county taxes and fees had reached a tipping point.

My constituents are saying they will have to move out of the city, and I’m hearing it also from suburbanites who say they can no longer afford to come into the city,” he said. “I’m concerned. I’m more than concerned at this point.”

When local tax rates reach a level that citizens feel far exceeds the level of services they receive in return, cities and states risk population loss or the type of citizen protest seen in Toms River, New Jersey. In theory, competition between localities should ensure that city and state governments do not allow their tax burdens to get out of line with the public services that they offer. However, if tax policy is difficult to decipher, residents may have a hard time keeping track of what they’re paying for.

This may lead to the conflicting opinions on Toronto’s tax levels.  As reported in the Toronto Sun:

Toronto residents may pay the lowest property taxes in the GTA, but the city’s true property tax rates are being masked by growing user fees, resident groups and council critics told the Sunday Sun.

At 0.85%, Toronto’s combined rate for city and education taxes is the lowest in the GTA. But when you combine other fees, such as garbage, a personal vehicle tax and the land transfer tax, homeowners are also feeling the pressure of being “taxed to death.”

However, a Toronto Star editorial argues that unlike in Chicago, Toronto residents do receive a level of public services that correlates to their tax burden:

You get what you pay for, of course, and despite what the right-wingers would have us believe, Torontonians have it relatively easy when it comes to municipal taxes.

As for the media, their response is as dumb as it is predictable. Mere mention of higher taxes sends the scribblers into paroxysms of outrage.

Get over it.

The Star’s flippant attitude toward the level of municipal taxes may be because the people of Toronto do, in fact, get what they pay for. Or it may perhaps be that the author, the Star‘s Christopher Hume, is a victim of fiscal illusion, unaware of the full amount he pays in taxes and fees.

Regardless, these two conflicting and subjective opinions draw attention to the important concept: all levels of government must honor the contract that they enter into with their citizens when they levy taxes. If this contract is breached, cities and states risk losing population to places that offer a higher value of services for taxes.

Homeland Security and Federalism

Matt A. Mayer is this week’s guest on Inside State and Local Policy, where he discusses his new book, Homeland Security and Federalism: Protecting America from Outside the Beltway. The podcast runs just over 15 minutes. Here’s a description:

Local governments have historically played a key role in homeland security that most of us living in the early 21st century wouldn’t recognize.  In this episode we discuss where and how we draw the line between homeland security functions and which are the responsibility of the federal governments and and the responsibility of state governments.

Joining us to discuss these issues  is Matt Mayer, CEO of Provisum Strategies and Adjunct Professor at The Ohio State University.  Matt served as the head of the Office of State and Local Government Coordination and Preparedness within the US Department of Homeland Security, and now works to help policy makers better understand how federalism is a key component of an effective homeland security strategy.  In this episode, Mayer discusses his new book, Homeland Security and Federalism: Protecting America from Outside the Beltway, which was released earlier this month and is available at Amazon.com and other book retailers.

Matt’s bio is here. His book is an excellent analysis of how and why state and local governments can and should take leadership on many aspects of homeland security and disaster preparedness.

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