Vitter wants to slam door on state, local bailouts

Sen. David Vitter (R-La.) wants to prevent both the federal government and Federal Reserve from bailing out struggling state and local governments with a bill he introduced Tuesday.

With the State Bailout Prevention Act, Vitter is looking to make legally binding an earlier commitment from Fed Chairman Ben Bernanke that the central bank would not make loans to states and municipalities struggling with budget gaps and large debt burdens.

Testifying before the Senate Budget Committee on Jan. 7, Bernanke said states "should not expect loans from the Fed."

“It’s encouraging that the chairman believes that the Fed shouldn’t get involved in bailing out states, but my legislation solidifies that into law,” Vitter said Tuesday. “The Federal Reserve has already put taxpayers at serious risk in recent years by unilaterally propping up failing banks and other financial entities, and by no means should the federal government be in the business of bailing out state and local governments that are in the red."

Under the measure, which has been co-sponsored by Sens. Jim DeMint (R-S.C.) and Mike Crapo (R-Idaho), would prevent the Fed from providing assistance or creating facilities to help any state or local government. It also would block Congress and the Treasury Department from doing their own bailouts of states through the legislative process.

While Congressional Republicans have previously backed bills or made statements opposing federal bailouts of state governments, Vitter's legislation is the first to try to exert similar restraint at the Fed.

Several state and local governments are struggling to make ends meet, driven in many cases by substantial public pension obligations. The National Council on State Legislatures estimates that states are facing a total budget gap of $110 billion for fiscal 2010.

While no states have come forward seeking a federal bailout yet, Congressional leaders have already shut the door to potential bailouts. House Majority Leader Eric Cantor (R-Va.) said state and local governments already have all the tools they need to shore up their budgets. House minority whip Steny Hoyer (D-Md.) has agreed that the federal government will not step in to rescue state budgets.