Socializing State Budget Shortfalls Through Federal Bailouts Won’t Help: Here’s What Will

COMMENTARY Budget and Spending

Socializing State Budget Shortfalls Through Federal Bailouts Won’t Help: Here’s What Will

Jun 19th, 2020 2 min read
COMMENTARY BY
Rachel Greszler

Research Fellow in Economics, Budget and Entitlements

Rachel researches and analyzes taxes, Social Security, disability insurance, and pensions to promote economic growth.
Fortunately, states can address COVID-19 budget shortfalls, boost the economic recovery, and set the stage for long-term prosperity without bailouts. Pineapple Studio/Getty Images

Key Takeaways

The problem with federal bailouts isn’t just that they force taxpayers in responsible states to pick up the tab for irresponsible ones.

They also incentivize bad behavior by enabling financially imprudent state and local lawmakers to escape the consequences of their fiscal mismanagement.

Increasing the size, scope, and debt of the federal government cannot erase the widespread economic hardships caused by COVID-19.

Citing COVID-19-related budget shortfalls, many state and local officials are calling for a nearly $1 trillion federal bailout. That works out to about $7,800 per household in new federal spending.

It’s also more than twice the projected COVID-related state and local revenue losses for 2020 and 2021 combined.

To go along with this would throw fiscal restraint to the wind. Luckily there are better options for states, ones that wouldn’t require higher taxes and would leave their treasuries, economies, and residents better off in the long-run.

The problem with federal bailouts isn’t just that they force taxpayers in responsible states to pick up the tab for irresponsible ones. They also incentivize bad behavior by enabling financially imprudent state and local lawmakers to escape the consequences of their fiscal mismanagement.

Consider that Wyoming, Alaska, North Dakota and New Mexico had saved more than 25% of their annual revenues in rainy day funds. Why should their citizens bail out Illinois, Kansas, Pennsylvania and New Jersey, which had put aside 1% or less?

>>> State Bailouts

While many states responded to COVID-19 shortfalls with belt-tightening measures such as pay freezes and hiring limits, others eschewed even the slightest restraint, counting instead on a federal bailout. Illinois, for example, adopted a 2021 budget that includes record-high spending, a $6 billion deficit, no reductions in personnel costs, large pay raises for unionized state workers and lawmakers, and excessive retiree costs that consume almost one-third of the state’s own revenues.

And while it may seem that big-spending states would benefit from federal largesse, history suggests that bailouts only drive up state spending and forestall necessary reforms.

Fortunately, states can address COVID-19 budget shortfalls, boost the economic recovery, and set the stage for long-term prosperity without bailouts.

For starters, they can safely reopen parts of society. Saving lives and livelihoods go hand in hand. Data-driven, localized reopening decisions that reflect the importance of child care availability and in-person school options can help reverse some of the damage caused by COVID-19 shutdowns.

Next, just as families and businesses are revising their budgets, state and local lawmakers can focus on paring back recent spending increases.

Florida sets a great example. It has reduced per-capita and inflation-adjusted spending by 16% over the last two decades. During that same period, New York and California hiked their spending by 49% and 52%, respectively.

A key difference: Florida spends $9,075 per student on education while New York spends $23,091. Yet Florida has experienced greater achievement gains, especially among minorities.

Another area of excessive spending is Medicaid. New York’s spending there has increased 20% per recipient over just three years—a difference of $20 billion in 2019.

States can also realize enormous long-term savings by bringing public employee compensation in line with the private sector. Even short-term changes, like skipping an annual 2% cost-of-living adjustment for 2021 could save states a collective $26 billion. A one-year pay freeze could save up to twice as much.

Suspending public employee pension contributions and accruals for one year—something some private-sector companies have done to avoid layoffs—could save states up to $234 billion, enough to cover a 13% decline in state and local revenues for 2020.

Can the federal government help? Of course. But instead of providing bailouts, it would do better to help states to cope with revenue losses by relieving them of the burden of unfunded federal mandates such as the Davis-Bacon Act (which inflates construction costs), the new paid family and sick leave mandate, and education mandates.

Increasing the size, scope, and debt of the federal government cannot erase the widespread economic hardships caused by COVID-19. But state and local officials can respond sensibly, through short-term adjustments and responsible budgeting, to boost recovery and set the stage for a stronger future.

This piece originally appeared in The Washington Times