Local and state governments shouldn’t be bailed out

Ray Hartwell Contributor
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Our founders — being federalists, after all — believed in the rights of states and localities to make their own decisions. Today, it seems most Americans trust folks at the local level to know, much better than our federal overlords, what works for their communities. This makes common sense. And without question, it’s what our founders contemplated when they conceived and drafted the Constitution.

Of course, the founders no doubt assumed that state and local governments would be required to pay their obligations, and to take responsibility for their decisions. Today, however, this simple and sensible proposition is under continuing assault.

You may have read about the six San Francisco firemen who crew the city’s fire-fighting tugboats. These city employees maintain and operate two boats, which spray water into the air for the entertainment of tourists a couple of times each week. Each crewman is paid $172,250 per year, and their benefits include free health care. After 20 years on the job, they can retire at an annual pension of 90% of the average of their highest two years’ salary, with annual cost-of-living increases and continued free health care.

In California, pay and benefits for public employees account for some 80 percent of government spending. San Francisco alone now spends $400 million annually on public employee pensions, a figure that has more than doubled in the past several years. Yet, in November, San Francisco voters rejected “Proposition B,” which would have required city employees to make reasonable contributions to their pension plans and pay half the health care premiums of their dependents.

These are not isolated examples. According to a Northwestern University study, state and local governments combined have unfunded pension liabilities approaching $4 trillion. The American Recovery and Reinvestment Act — the “stimulus bill” — provided about $150 billion to state and local governments in 2009, making it easier for them to kick this rather large can down the road. The same law also enabled states to borrow another $200 billion through the Build America Bonds program, which provided for federal underwriting of 35 percent of the states’ interest expense.

To make matters worse, state budgetary problems have been dramatically exacerbated by a plethora of federal mandates. The “Mandate Monitor,” published by the National Conference of State Legislatures, catalogs mandates identified by the Congressional Budget Office as well as other laws that “create cost shifts to states.” The list identifies almost 300 such federal laws! And if you can say “Obamacare” and “Medicaid,” you know the trend is not in the right direction.

California, New York, Illinois, New Jersey. These and other states, and many cities and towns, face serious economic challenges as the result of irresponsible decisions made over the past decade or more. There is a powerful combination of politicians and bureaucrats, at all levels, whose self-interest is served by keeping the unsustainable spending ball rolling down the road. Doing this plainly benefits these politicians and their government employee and dependency constituents.

No doubt some states and localities will be looking to Washington to bail them out. After all, they’ll say, everyone else has been bailed out or subsidized, from big banks that ravaged the finance sector to unions that ravaged auto manufacturers.

On the other hand, it bears noting that some states and localities have behaved responsibly. Some are pushing back hard on federal mandates, and starting to deal with public employee compensation and pension issues. They deserve support. And those less responsible deserve firm encouragement to deal with their problems themselves — with their own money.

There are encouraging developments. New Jersey Governor Chris Christie has been bold in attacking excessive spending, and his actions have the support of taxpayers. Likewise, Governor-elect Rick Scott in Florida has pledged an array of actions aimed at reducing the state’s $3.5 billion deficit, including a requirement that state employees contribute more to pension funds, a freeze on new regulations, and broad and aggressive budget cuts. In tandem, he has proposed eliminating the state’s corporate income tax, reducing property taxes, and expanding the use of vouchers.

At the federal level, the Build American Bonds Program, which encouraged states to incur excessive debt, has been eliminated. Moreover, California Republican Devin Nunes and others have proposed the Public Employee Pension Transparency Act. This law would require states to make accurate disclosures about their pension liabilities as a condition of eligibility to issue bonds exempt from federal taxation. The law will also make clear that state and local governments must meet their pension obligations and cannot look to the federal government for bailouts.

These developments are promising because it’s imperative that indebted states and localities, and their lenders, not be immune from the difficulties of dealing with the problems they have created for themselves. If San Franciscans want lavish pay and benefits for their firemen, it’s their call — so long as it’s their money.

For the newly elected Congress, this is an issue that needs to be at the very top of the “pay attention and don’t screw this up” list.

(An earlier version of this article appeared in The Washington Times on January 17, 2011.)

Ray Hartwell is a Navy veteran and a Washington lawyer. He can be reached at rayhartwell@rocketmail.com.