State, city governments dodge bullet on Senate plan to bar federal funding

Struggling city and state governments dodged a bullet Tuesday when Senate leaders rejected a measure that would have prohibited them from receiving federal funds to purchase or guarantee debt obligations. Critics worried the amendment would put at risk other forms of aid, including emergency disaster or needed social programs.

New Hampshire Senator Judd Gregg authored an amendment, to be added to the Senate’s financial overhaul measure that would have barred federal funding to state and city governments who have defaulted or are in danger of defaulting. The provision would also have prohibited the Federal Reserve from providing emergency funding to state and local governments, leading many to question the scope of Gregg’s amendment.

During Senate debate, Sen. Gregg insinuated that California’s $19.1 billion budget hole was more a product of self-inflicted injury, akin to the kind of trading Wall Street was performing with derivatives in the US housing market, than the economic recession. He said California’s budget gap underscored the need for his amendment.

“The people of California, because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their pension programs, their public pension programs which they can’t afford to pay,” Gregg said Tuesday. “And why did they run up those obligations? So the people running for office in California could get elected.”

“There’s no reason,” Gregg argued on the Senate floor “that our taxpayers should pay for inappropriate fiscal action by some other state or some other community.”

Although the amendment was lumped in with a handful of other changes, meant to curtail various instances of “bailouts,” critics of the Gregg amendment worried that its language was too broad and could tie Congress’ hands in vastly different situations, like natural disaster response.

“We read it much more expansively, affecting all federal aid that cities in economic distress could receive,” Lars Etzkorn, program manager for the National League of Cities said. In fact, Gregg’s amendment was quickly modified after being dropped in the “hopper” Monday night to specifically ensure that state and local governments could receive federal aid for relief efforts.

“To put at risk aid to struggling cities just doesn’t make sense,” Etzkorn said, “if what you’re trying to do is preserve necessary local government services and the jobs that go with them.”

Connecticut Senator Christopher Dodd also challenged Gregg’s assertions, saying the amendment could end up prohibiting the feds from sending money for social programs like unemployment insurance.

The amendment ultimately failed by three votes, 47 – 50.

“We are very pleased that reason prevailed and that the amendment did not reach sixty votes,” Mr. Etzkorn concluded.