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April 01, 2011

Post Stimulus, States Are Where the Action Is

Unlike the Federal government, states can't print money. All states except Vermont are required by their constitutions to have balanced budgets (not counting pension obligations); and Vermont, justifiably proud of its triple A bond-rating, keeps its budget balanced as well (not counting pension obligations). So, when no more money is available, cuts have to be made. While Congress struggles over what are, so far, token cuts in spending, the headlines that matter are from states making deep cuts and facing up to structural problems such as the out-sized bargaining power of public sector unions, which face the people whose elections they help finance over the bargaining table. The action has moved back to where we can more directly affect it.

One way to look at the $800 billion dollar stimulus bill was as an attempt by Washington to keep states from cutting rapidly growing expenditures, particularly for education and Medicaid. Washington printed money on behalf of the states. In fact the bill contained specific provisions forbidding the states from making cuts in these and some other programs as a condition of getting the federal aid. There was even talk of bypassing governors who refused to promise not to make cuts and going directly to state legislators. This may have been the high water mark for federal control of what happens locally.

When I rejoined Vermont state government after a 27 year sojourn in the private sector, I was amazed to see that many state agencies are now run as much from Washington as from Montpelier. Power comes with funding. The feds offer matching funds to incent a state to adopt a program like Medicaid; the states don't want to lose the "free" federal funds; they sign up; and they're on the hook forever after. Much too often, when the governor or the legislature tried to change practices and policies, the answer was "the feds won't let us do that." (It wasn't always true.) Attempts to cut state budgets are met with the objection "then we won't get the federal funds. How can you be so stupid?" Some people in some agencies act as if they actually work for members of the congressional delegation, to whom they are beholden for the earmarks which fund their activities.

But earmarks have now been banned. And, more importantly, the stimulus money is gone and Republican control of the US House of Representatives assures that it won't be resumed any time soon. State revenues have recovered some with the economy but are not back at bubble levels. The recession increased the demand for state services. Knowing the Washington will not ride to the rescue again, states are forced to take back control over how programs are run, who is eligible for what, and even which programs to keep. Hard choices have to be made between the cost of benefits and the cost of delivering the benefits. BTW benefits on the chopping block are not just for the poor; there's plenty of "economic development" pork for business which is getting and should get a hard look as well.

Under Democratic Governor Cuomo, New York State is confronting its profligacy and even passed a budget on time for the first time in recent history. Remember, there is no federal budget for fiscal year 2011; Congress couldn't get this done.

In California very liberal San Francisco Public Defender Jeff Adachi is a leader in a movement to control the cost of public employee benefits. He is quoted in The Wall Street Journal as saying "I'm seen as a liberal progressive, a rage against the machine person. If you care about social programs or the network of support services, you have to understand that pensions and benefit costs are crowding out all these services."

Everyone knows something about what's going on in Wisconsin.

Ohio has just passed legislation doing away with automatic pay increases for public employees and limiting the bargaining activities of public employee unions.

Here in Vermont the legislature and governor are making hard choices on funding for programs; but are looking at some tax increases. Vermont is, unfortunately, apparently on its way to enacting its own version of single-payer health care – funding source tbd later. Certainly states can and will make mistakes; but the mistakes will be local, and one state can learn from another's experience.

IMHO the states will make much better decisions than the feds did because they can't print money so must make choices and because they are in a competition with each other, which prevents them from simply raising taxes to cover shortfalls. Moreover, state governments are closer to where the problems and opportunities are and much more accessible than Washington. Most state legislatures are part time which means that many of the members still have to earn a living outside government.

Going local doesn't stop at the state level. Cash-strapped states have slowed the flow of money to local school districts and towns, which also have lower revenues of their own than they used to and are seeing direct federal dollars die up. Municipalities and school districts are looking at ways to combine services or even whole districts – which should have been combined long ago but were propped up in their inefficiency through state and federal dollars.

This isn't an easy time. But with more decisions being made locally, there is even less excuse not to be involved in the decision-making process.

Related posts:

Confessions of a Stimulator

Increase in DC Housing Prices a Negative Indicator

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