Sending More Money to States Could Make Their Budget Problems Worse

The National Governors Association recently asked Congress for a bailout
of $500
billion
in addition to the more than $200
billion
included in the Coronavirus Aid, Relief, and Economic Security (CARES)
Act.

The money sought by the governors would be “unrestricted,” meaning
its use need not be tied directly to COVID-19, the disease caused by the new
coronavirus.

Call it what you like–aid, cost-sharing, fiscal assistance, stabilization, bailout–but federal payments to backfill state budgets regularly accomplish just one thing: They create incentives for state governments to act recklessly in hopes or expectation of future bailouts.

The federal response to the COVID-19 pandemic already has been
extraordinary.

In less than a month, Congress passed three bills, increasing spending and decreasing revenues by well over $2.5 trillion. President Donald Trump declared a national emergency, making about $50 billion in federal financial assistance available for states, localities, and territories. And the Federal Reserve took significant new actions, including buying short-term municipal debt for the first time (a dangerous precedent).

Federal dollars primarily have been targeted at providing relief
in the current crisis through direct assistance to individuals and businesses struggling
from no fault of their own; Medicaid coverage for tests and vaccines; and more
than $200 billion in direct support for states and localities for unforeseen coronavirus
expenses.

But now, state and local governments want unfettered access to
$500 billion in federal funds. Instead of helping address the public health
crisis, this would encourage haphazard decisions by shielding state and local
governments from the fiscal consequences of their actions, leaving both state residents
and federal taxpayers worse off.

Federal bailouts of state budgets in the early 2000s, and again
following the great recession, provide clear examples.

In 2003, states got $20 billion in federal aid, but instead of this
infusion acting as a temporary buffer to get states back in the black, state
debts increased
by 20%
, total spending rose by 33%, and states shorted their pension contributions
over the following four to five years.

Again, much of the $300
billion
for state governments in the 2009 American Recovery and
Reinvestment Act was used to permanently expand government programs instead of
to bridge short-term gaps.

For example, that legislation provided about $50 billion to
stabilize education systems, but instead many
states used
the funds to add entirely new staff positions, including many
non-teaching ones.

The measure also included about $90 billion for Medicaid programs
that lasted through 2010. Yet, a majority of states built their 2011 budgets
around the
expectation
of continued higher federal Medicaid funding.

And crisis aid is rarely temporary. The federal share of state
budgets increased
23%
between 2000 and 2017.

The governors’ demand for an additional $500 billion of
unrestricted federal money would set a dangerous precedent for even larger
future bailouts, such as a $4
trillion
to $6
trillion
bailout of unfunded pension liabilities (more than two or three
years’ worth of federal income tax revenue).

Unlike past economic downturns, the current economic contraction
is purposeful and temporary, to address a global health pandemic.

Governors rightly have taken the lead on determining what shutdown and stay-at-home orders are best for their citizens, and they should be in charge of when to lift those restrictions.

But if states can tap federal revenues–really just a redistribution of costs from state taxpayers to federal taxpayers–their incentive will be to prolong COVID-19 restrictions unnecessarily and slow the economic recovery.

States and their governors have been central to the pandemic
response, and their decisions should be made without the creation of new
mandates or perverse incentives from Congress.

Instead of state and local bailouts, Congress should stay focused
on a timely, temporary, and targeted response to the public health crisis.

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