A top House Republican said Monday that the federal government will not bail out fiscally ailing states and said he opposes a proposal that Congress allow states to declare bankruptcy as a way of handling their growing piles of debt.
Though there has been little discussion of Washington bailing out states, some congressional Republicans and conservative groups are suggesting that states be allowed to seek protection in federal bankruptcy court, which they are currently barred from doing. Public employee unions, liberal groups and some lawmakers of both parties oppose the bankruptcy idea.
House Majority Leader Eric Cantor, R-Va., told reporters Monday that he believes states already have the tools they need to ease crushing budget deficits since they can cut spending, raise taxes and pressure public employee unions to renegotiate their contracts and pension benefits. As a result, he said, he opposes letting states declare bankruptcy because he said they don't need that power.
While some conservatives say that allowing states to declare bankruptcy would prevent a federal bailout of states, Cantor said he disagreed.
"We don't need that to stave off a federal bailout. There will be no bailout of states," he said. "The states can deal with this and have been able to do so on their own."
Supporters of allowing states to declare bankruptcy say it is the best way for states to dig themselves out of debt. Opponents say the idea will drive up borrowing rates for states on the already shaky municipal bond market and make it easier for states to cut government workers' benefits and pensions, even though those benefits are just a minor cause of states' budget problems.
Thirty-five states and Puerto Rico expect to run up budget gaps during the fiscal year ending Sept. 30, according to a December report from the National Conference of State Legislatures. Twenty-one expect spending to outpace tax collections and other revenue by more than 10 percent, the report said.
For their upcoming fiscal year, the 50 states face combined projected deficits of about $125 billion, according to Iris Lav, a senior adviser with the liberal Center on Budget and Policy Priorities. About one-fifth of President Barack Obama's $814 billion economic stimulus law has gone to help states reduce their budget deficits and help pay for costs like education and Medicaid since 2009, but that aid is winding down.
The idea of letting states declare bankruptcy — such a move could let states restructure their debts — has been suggested by conservatives such as Newt Gingrich, the former GOP House speaker who is a possible 2012 presidential contender. Former Minnesota Gov. Tim Pawlenty, another potential presidential candidate, told a group of New Hampshire Republicans on Monday that the idea is worth considering as a way to avoid costly pension liabilities.
Cities and counties are already permitted to declare bankruptcy.
"It currently looks to be one of the best options to prevent a federal bailout of the most fiscally reckless states," said Patrick Gleason, director of state affairs for the conservative Americans for Tax Reform, which also champions the idea.
Government labor unions see the idea as one that is aimed directly at them because it would give states more leverage in trimming workers' benefits and pensions, and because the proposal makes it appear that state workers are a major cause of states' budget problems. Even if the proposal fails to become law — a strong scenario given Democrats' control of the Senate and White House — it could still hurt unions, they say.
"I think the goal is to create an issue-frame in states in severe fiscal straights in which public employee unions are mainly responsible for this. We strongly disagree with that notion," said Charles Loveless, director of legislation for the American Federation of State, County and Municipal Employees.
With many investors already fleeing the municipal bond market, even discussion of letting states declare bankruptcy further weakens municipal bonds because it "injects more buzz, or more of what's referred to as headline risk," said Paul S. Maco, an attorney and former top Securities and Exchange Commission official under President Bill Clinton.
Sen. John Cornyn, R-Texas, asked Federal Reserve Chairman Ben Bernanke about the state bankruptcy idea at a Senate hearing earlier this month. Bernanke was noncommittal.
"Bailing out a state is not an option," Cornyn spokesman Kevin McLaughlin said of the senator's concerns. "But we need to explore what, if anything, should be done."
Kate Dickens, spokesman for Sen. Mark Kirk, R-Ill., said Kirk believes Congress should give states the power to declare bankruptcy and avoid default and is talking to other lawmakers about potential legislation. Illinois lawmakers recently voted for a 66 percent hike in personal income tax, from 3 percent to 5 percent, to address a $15 billion deficit that amounts to more than half of the state's general fund. The tax increase will be coupled with strict 2 percent limits on spending growth.
"Governors should have the option of reorganizing to operate under lower costs. This allows essential functions to continue, no federal bailout and the state preserves its credit," Dickens said.
House Judiciary Committee Chairman Lamar Smith, R-Texas, said his panel will hold a hearing on the issue in two weeks and expressed misgivings about the idea. In a written statement, he cited constitutional and policy concerns, "including whether state bankruptcy will actually encourage more irresponsible spending by states."
Mike Schrimpf, spokesman for the Republican Governors Association, said GOP governors oppose state bankruptcies and a federal bailout of states because states should be forced to live within their means.
Ray Scheppach, executive director of the bipartisan National Governors Association, said he is aware of no states or governors interested in the idea of being allowed to declare bankruptcy.
"Who would turn over a state's whole fiscal situation to a judge?" said Scheppach.
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