The stage is set for the next congressional food fight — a battle over a phase-four stimulus package aimed at relieving state and local governments.
Truly they have both suffered from sharply declining revenues as business life closed down and patients piled up at their hospitals. Nobody should begrudge them the funds to make them whole.
But in most liberal states (e.g. Connecticut, Illinois, Michigan and New York) the coronavirus deficit comes on top of the regular state budget shortfall that surfaces each year.
For years, particularly after the open-handed Obama administration left office, these states have papered over their deficits by borrowing and other fiscal gimmicks.
Rolling them over from year to year, the snowball has gotten quite large as it has rolled down the Capitol Hills of the northeastern states — so large that now the states’ hungry eyes focus on Washington, hoping to slip in a subsidy of their routine annual deficits into a coronavirus relief bill.
Now, House Democrats are leading the chorus for aid to deserving states.
New York Gov. Andrew Cuomo even asked that we change the moniker of such aid from “subsidy to state and local governments” to “money for police, nurses, firefighters and the like.”
Senate Republicans clearly need to approve some aid to these states.
But it should only fund relief from deficits due to the virus, not from the routine budget deficits. All grants under the phase-four relief should require that each state seeking special aid submit to an audit by the Treasury Department to determine how much of the amount it needs is for coronavirus-specific shortfalls and how much is its regular, annual budget deficit.
The coronavirus-specific aid should be given immediately with no strings. We must sympathize with states like Connecticut, New Jersey and New York for having taken the brunt of the hit from this virus.
But if the states want Congress to go further and fund their regular deficits, the legislation should require the appointment of a fiscal control board, perhaps appointed by the chairman of the Federal Reserve System, to review their annual budgets and certify that they are in balance and not just trying to disguise deficits with gimmicks.
After all, every state requires a balanced budget each year — unlike the federal government — and these profligate states have pretended to balance their books by one-shot revenues, borrowing and capital debt being used for operating costs. If federal funds are to be used, we need to be sure that states are not just disguising their deficits, but genuinely balancing their budgets.
When New York City went bankrupt in the ’70s, state aid was conditioned on just such a financial review board (Municipal Assistance Corporation, dubbed Big MAC). It only relinquished its control over city finances in the 1980s. More recently, Detroit has labored under just such constraints.
The key culprit is, of course, the costs of pensions. When he was mayor of New York City, Rudy Giuliani said “I have to pay for three police forces: the current one, the last one and the one before that.”
To avoid giving demanding public employee unions unaffordable wage increases, states and cities bought off labor at each year’s collective bargaining table with pension benefits.
When interest rates fluctuated in the six-nine percent range, the revenues were enough to pay for this largesse without unduly burdening state coffers. But with rates as low as they are now, investment income from pension funds makes barely a dent in the annual cost of pension outlays.
The only solution to the pension crunch is state bankruptcy, as proposed by Senate Majority Leader Mitch McConnell. His idea was greeted with howls of criticism from Democrats, but bankruptcy, under which union contracts can be renegotiated, might be the only solution.
Eventually, pensions should be allocated based on available funds, not on a rigid guarantee of a fixed income to the pensioners regardless of fiscal reality.
But it will be a cold day in hell before the municipal unions agree to this reform. Now, when they earnestly seek Washington’s aid, might be the time to force the issue.
Democrats will cry that we are using the virus to force bankruptcy. But if virus-related aid is separated out and given without restrictions, they won’t have a case.
Of course, some states may decide that fiscal honesty and integrity is too high a price to pay for assistance. In which case they are on their own until they come back for more aid next year.
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