Governors plead for cooperation in addressing state, federal deficits

In a letter to Congress yesterday, the National Governors Association (NGA) requested that federal officials follow a handful of broad “principles” in reducing the state-federal deficit. The letter comes amid rising concerns from some Congressional leaders that states are in danger of needing bailouts or initiating bankruptcy procedures.

According to the NGA, twenty-nine new governors are facing $175 billion in budget gaps through 2013. This number is in addition to the $230 billion gaps already filled between fiscal years 2009 and 2011. Revenue declines appear to be slowing, with some states recently reporting revenue increases for the first time since 2008. However, revenues derived from sales taxes, income taxes, property taxes and corporate taxes are still well below their pre-recession levels.

“Over the last two years, states have made significant changes cutting spending by more that 10.7 percent – $75 billion – tapping rainy day funds, shrinking the size of government and streamlining state services,” NGA Chair and Washington Governor Chris Gregoire, said in a statement. “Unfortunately, more difficult decisions will have to be made over the next few years.”

The letter was careful, though, to underscore that governors were not asking for more federal money to help them stave off cuts to basic state services. “Despite states’ difficult fiscal situation,” the letter stated, “governors are not calling for new one-time help from the federal treasury.”

Still, some leaders on Capital Hill are anxious that states will eventually come asking for money or seeking ways to declare bankruptcy.

Yesterday, House Majority Leader Eric Cantor of Virginia told the Associated Press, “There will be no bailout of states.” The issue of state bankruptcy and bailouts has gained renewed interest with a recent New York Times story examining the seriousness of many states’ fiscal situation. But federal concerns about state bailouts has periodically surfaced over the last several months.

Last May, when Congress was considering financial overhaul legislation, state and city governments dodged a bullet when the Senate voted down a measure by New Hampshire Senator Judd Gregg 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.

In an effort to reframe the fiscal situation facing many states, the NGA asked that federal officials heed four principles that should ease state-federal tensions over money. According to the letter, the four principles include:

  • Federal reforms should be designed to produce savings for both the federal government and states;
  • Deficit reduction should not be accomplished by merely shifting costs to states or imposing unfunded mandates. Federal fiscal policy must take into account the effects of federal action on state government;
  • States should be given increased flexibility to create efficiencies and achieve results – such as increased block grants and more flexibility to consolidate funds from similar programs; and
  • Congress should not impose maintenance of effort (MOE) provisions on states as a condition of funding.

“The recession forced many states to take difficult short-term actions to balance budgets and to find innovative ways to make government a more efficient and productive instrument that can do more with less,” the letter concludes.

“The federal government must now do the same.”