Bailout, bankruptcy not popular words at hearing on state debt

In total, states are facing about $125 billion in combined budget deficits this year. But, if Wednesday’s hearing is any indication, states and localities should not expect much help from the federal government. State and local governments had received infusions of cash from the stimulus package passed early in President Obama’s term. 

“The era of the bailout is over,” declared Rep. Patrick McHenry (R-N.C.), the chairman of the oversight subcommittee on TARP and financial services, also said the federal government must learn from previous bailout experiences.

“We must understand the magnitude of this problem to avoid the reactionary ad hoc decision making that fueled the federal action of the 2008 financial crisis,” he said.  

For his part, Rep. Mike Quigley (D-Ill.), the subcommittee’s ranking member, said he did not think either bailouts or bankruptcies “can work or is optimal.”

The hearing also came on the same day that Rep. Devin Nunes (R-Calif.) and other lawmakers announced they were introducing a measure that looks to bring more transparency to state and local governments’ pension funds and would expressly forbid the federal government from bailing out any state or local government that could not pay out pensions. McHenry mentioned that measure on Wednesday and cast much of the blame for states’ problems on what he termed “unfunded pension liabilities.”

At the hearing, three out of the four witnesses said states did not need bankruptcy capabilities, and Rep. Elijah Cummings (D-Md.), the full oversight panel’s ranking member, noted that the National Government Association has declared that states do not need that ability. A spokesman for McHenry said he was leaning toward that position as well, though he was keeping his options open. 

Iris Lav of the liberal Center on Budget and Policy Priorities told the panel that states already had all the tools they needed to manage their finances. But David Skeel, a law professor at the University of Pennsylvania, said in his prepared testimony that while most states will find ways to get their fiscal houses in order, allowing those governments to declare bankruptcy would enable them to more easily restructure obligations and ensure sacrifices are fairly distributed, should that step be necessary.

In general, the witnesses also agreed they did not expect any state or major locality to default this year. But there was some disagreement about whether the stimulus package had helped state budgets. In her prepared testimony, Lav asserted that stimulus funds had helped states avoid sharp budget cuts. But some Republican lawmakers and panelists said the aid allowed states to stave off needed changes to their spending habits. 

While the notion of bailouts or bankruptcy clearly are meeting resistance, the White House appears to be looking for other ways to help out cash-strapped states. In his budget set to be released next week, President Obama is expected to propose ways to help states that have been forced to borrow to pay unemployment benefits.

At the end of Wednesday’s hearing, McHenry said he hoped to next meet on the issue of state debt next month. He also said the committee would issue a report on the issue at some time down the line, but did not specify when that might be.