Don’t Bail Out Feckless States Without Strings Attached

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On July 1, Illinois state workers got an automatic pay raise. In all, those raises will cost taxpayers $261 million. Meanwhile, nearly 1.4 million Illinoisans have filed for unemployment since COVID-19 shuttered much of the economy in March. 

Other state governments have operated on the principle of shared sacrifice, recognizing the need to pare back demands on taxpayers amid major revenue shortfalls. 

Blue state governors in Washington, Pennsylvania, New York and Virginia have cut costs through measures including canceled pay raises, furloughs and 15% agency spending cuts for fiscal year 2021. In Illinois, Gov. J.B. Pritzker just signed a budget that increases spending by $2.4 billion over last year and relies on $5 billion from a nonexistent federal bailout to partially close a $6 billion deficit.   

Ironically, this continued disregard for basic fiscal responsibility shows why Illinois stands as the best single argument against state bailouts. 

Congress is still considering how to handle more aid to state and local governments, and another coronavirus relief package is expected to move this month. True to the times, many partisans sit on extreme ends of the issue: Many on the right are philosophically opposed to offering any aid to struggling states, while the left wants to pump in as much as $1 trillion more without regard to the amount of money actually needed or how those funds are safeguarded. 

The recession and pandemic have created legitimate challenges for government finances. Thankfully, there’s a compromise solution that would avoid rewarding irresponsible behavior in troubled states. Congress can offer more aid, but if — and only if — it’s conditioned on sound financial management to protect taxpayers from tax increases or service failures. 

Attaching “strings” to financial rescues is already the norm across the world – just look at the relief packages that followed the 2010 Greek debt crisis, the 2007-2009 U.S. bank bailouts and, most recently, the corporate financial assistance under the recently passed CARES Act. Without conditions, there’s no way to ensure good money isn’t thrown after bad to be squandered by those with a history of misusing funds. 

The federal government should follow this best practice as it debates further support for states such as Illinois, New Jersey and Connecticut that have built up crushing debt burdens through decades of bad decisions having nothing to do with COVID-19. Funding should be conditioned on three hallmarks of healthy state finances: sound pensions, truly balanced budgets and sufficient rainy-day savings. 

First, states must be on a path to fully eliminating unfunded pension liabilities over no more than 25 years, in line with generally accepted actuarial principles. If a state can’t achieve this, pension liabilities should be reduced to the level the state can afford without increasing employer contributions, i.e., taxpayer costs. States where legacy systems are unsound should be required to close those systems to new employees in exchange for more sustainable models such as a defined contribution plan or Wisconsin-style risk sharing system. 

Next, any state receiving funds should be asked to maintain a truly balanced budget, meaning the fiscal year ends in the black and no deficits are carried over. Illinois is one of just 11 states that doesn’t require end-of-year balance by state law or constitution. The requirement calls for the planned budget to be balanced on paper, but what actually happens is irrelevant. Balance should also mean only money actually coming in gets counted as revenue, rather than allowing for Illinois-style gimmicks such as sweeping money from other state funds or relying on short-term borrowing to paper over deficits. 

Lastly, states should have restrictions on rainy-day fund withdrawals to ensure they’re only used in an emergency and have rules for automatic deposits when the economy returns to growth. The federal government should not be expected to bail out states in every future recession, and that means states must have sufficient emergency savings of their own.  

Without these reforms and proof of effort by state governments, fiscally irresponsible states would use aid money in an inefficient and ineffective manner – just as they’ve done with their own mismanaged funds for decades. 

Federal lawmakers have a tremendous opportunity in front of them: They can provide aid to ensure the people have access to essential government services while encouraging mismanaged states to fix their tumbledown fiscal houses.

Adam Schuster is director of budget and tax research at the Illinois Policy Institute, a nonpartisan research organization that promotes responsible government and free market principles.





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