November will decide the fate of economic bailouts in blue states
The coronavirus has exposed the debilitating and growing disease in the management within many capitals. Blue states, run with years of reckless spending and unbalanced taxation, have to now swallow the bitter pill of three options. They can slash spending, declare bankruptcy, or even beg for trillions of dollars in federal bailouts. As the economic damage of the pandemic becomes more apparent, a defining political debate next year will be how Congress and the White House will react to this issue.
At the start of 2020, some blue states were in fiscal trouble after decades of drawing up pension liabilities and bloated payrolls. Despite a $6 billion budget deficit in New York, some 300,000 public employees and retirees earned six figures. Illinois had a $1 billion budget deficit, today more than four times that, while a family of four owed $76,000 in pension liabilities and 100,000 public employees and retirees earned six figures. California had a $54 billion budget deficit as well as $1 trillion in unfunded pension liabilities but still paid over 340,000 public employees six figures.
Such trends were accelerating before the pandemic hit. A recent analysis done by Pew Charitable Trusts of deficits versus surpluses between 2004 and 2018 shows nine states averaged deficits. All nine states either had a Democratic governor or were dominated by the party during that period. There was also data over how long states could run on their reserves. The median was short of 28 days last year. Some have more formidable funds. Alaska was at 171 days, North Dakota at 109 days, and Texas at 70 days. Of the states dominated by Democrats, the numbers tended to be more dire. Rhode Island clocks in at 19 days, New York at 10 days, and Illinois at less than one single day with the money under its proverbial mattress.
Things have only gone further downhill since the shutdowns. The states projecting the worst losses in 2020 and 2021, except Wyoming, are blue states already in hock. California estimates losses up to 21 percent, New Mexico predicts up to 30 percent, New Jersey predicts 18 percent, New York predicts 13 percent, and Illinois and Hawaii each predict 12 percent. These calamitous numbers, paired with incredible pressure to increase spending on both health care costs and an economic stimulus with the coronavirus, have created ticking time bombs around the nation.
This is a growing issue due to the revenue losses under middle class and upper class families abandoning several high tax states. New York has an exodus that makes the surge after 9/11 seem picayune. United Van Lines reports a 95 percent rise in demand for moving vehicles from Manhattan. Governor Andrew Cuomo is literally begging wealthy New York residents chased off by the coronavirus, high costs of living, and taxation to return. Mayor Bill de Blasio claims his plan to increase revenue is to further raise taxes on high earners who remain in his city. The Big Apple is not the one urban area losing residents. Around the country, people are ditching city living for the suburban and rural areas often located in red states.
If history is any guide, blue states will not change spending habits in the face of fiscal disaster. Rather than cut spending, Democratic governors kowtow to public sector unions looking to spend more, even in times of crisis. Governor Jay Pritzker is asking voters to approve a $3 billion “fair tax” amendment to the Illinois constitution. But even that will not solve the fiscal problems. The pension costs are sucking up the oxygen. With pension costs in Illinois spiking 500 percent over the last two decades, funding for education and police have been reduced by the state.
Bankruptcy is an unpopular option for which governors of states on the rocks do not want to take political responsibility. The electoral cost with bankruptcy, particularly for states under control of one party, would be disastrous. Declaring bankruptcy could also raise severe backlash from judges legislating from the bench. When Chicago sought to restructure pension liabilities to reduce benefits, the state Supreme Court called it unconstitutional. The same kind of move happened in New Jersey.
The only remaining solution is federal bailouts. If Democrats control both the White House and Congress next year, they may likely pass bailouts for blue states. This would force taxpayers to subsidize decades of spending with the guise of coronavirus relief. The Heroes Act provides the taste of what Congress could jam into its hastily passed “emergency” legislation. There simply appears to be no appetite to cut back on spending.
The 2020 election offers a slate of candidates to answer questions about hundreds of issues. One critical question we have to ask before handing lawmakers, governors, and the next president power to pass bailouts for failing states is whether or not they learned from their own errors in the past. If not, their mistakes soon will be the responsibility of us all.
Kristin Tate is a libertarian author and an analyst for Young Americans for Liberty. She is a Robert Novak journalism fellow at the Fund for American Studies. Her newest book is “The Liberal Invasion of Red State America.”