Congress and Obama Enticing States Further into Bankruptcy

I missed this in the original discussion of the stimulus.  I was one of the first to point out that most of the stimulus was earmarked for maintenance of state government budgets rather than the infrastructure projects people thought they were getting  (here and here).  But I missed this part of the law, which basically made acceptance of these funds a suicide pact for many states:

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.

A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs.

These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona's revenues are expected to be lower this year than they were in 2004. Some states don't expect to regain their 2007 revenue peak until 2012.

So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.

Apparently a couple of states (no surprise, Texas is among them) were smart enough to turn down some of the money.


  1. Michael:

    I must admit I have a morbid curiosity to watch as the first state goes bankrupt. It probably is going to happen on Obama’s watch and as we saw with GM and Chrysler, it’s anything goes in bankruptcy court.

    I’d bet he goes for the ports and state’s land in exchange for a bailout.

  2. Greg:

    I'm crossing my fingers that we see a lot of Pols lose their jobs this year, and many more in 2012. It would be lovely to see the Republicans find some common ground with the Tea Party crowd and field some candidates who have some real respect for the constitution of this country.

    I'm also hoping that the 10th Amendment Center gets some traction.

  3. Brad K.:

    Igor Panarin, the ex-KGB analyst, predict about June, 2010, that California and New York will refuse to send in collected Federal tax revenue - kicking off a rebellion/fragmentation of the US.

    Of course, Obama is supposed to be building for a credible claim to impose martial law - extending his term of office until he damn well gets tired of it. This might be another brick in the wall.

  4. Jody:

    California and New York will refuse to send in collected Federal tax revenue


    Which taxes would that be?

  5. Craig:

    Obama will bail out California. Without such a move, unions and legislators there would be forced to change their destructive ways, and the Democratic party will do what's necessary to prevent such a reckoning.

  6. JimK:

    Nearly a year ago Sarah Palin warned about exactly this situation. See her Note:

  7. stan:

    Imagine the political ads that could be made to skewer Democrats this fall. There are so many examples of devastating points that can be made that the hard part should be trying to narrow them down to the best three or four to focus on. The GOP, of course, will completely screw it up.

  8. ElamBend:

    When the Arizona Governor said he couldn't cut 2/3rds of his budget due to state and federal restrictions, I had wondered what he meant by federal restrictions. Now I know.

  9. NormD:

    What kind of law can the Federal government use to bind the States???

    Most Federal coercion is of the form, if you do not pass seatbelt laws then we will not send you highway money. I always thought this more political theater rather than a real threat, sorta like "oh we cannot possibly cut that program, there's a law that says we can't - wink-wink" Does anyone really believe that the House would pass a bill that defunds a large state???

    Now if there really is some law so that the FBI would arrest the government of CA if they cut highway maintenance, I would love to see its basis in the Constitution. Hell, Californians could pass a proposition cutting highway maintenance and the FBI could arrest the whole state!

    I can imagine a law that would require the state to repay all funds if they violate the law, but this would seem equally toothless in reality.

  10. Link:

    As part of its budget cuts, California was going to cut the pay of state-funded home health care workers. When Arnold went to Obama and Nancy for his bailout, reversing these cuts was a condition. If memory serves, there was an SEIU connection.

    Even the worst state budgets deficits are small in the scheme of the federal government -- but the federal governmnet has the dollar printing press.

  11. Mark:

    I suspect if California goes bankrupt it will end up being 79% owned by the feds, with the other 21% given to the Unions, due to Obamas intervention.

  12. Scott:

    The Feds are pitting states against each other with bailouts and sweetheart deals in the healthscare bill...Who in the hell wants their taxes collected in a fiscally responsible state to bail-out the irresponsible? Yes, I know it happens in many forms all the time...However, as the vultures get down to picking bones on the carcass the squabbling will begin in earnest. Most marriages fail due to money disagreements. The marriage of these states will be tested as never before with the dysfunctional leadership in Washington.

  13. epobirs:

    There is no provision for states to declare bankruptcy. If there were, CA would long since have been through the process. Our deficit is greater than the entire budget of several small states combined. For the federal authorities to step in would be exploring terra incognita. A completely new and unknown, worse, unknowable, territory.

  14. OBloodyhell:

    > What kind of law can the Federal government use to bind the States???

    I suspect this will be used in states where the libtards maintain power to continue it, by rejecting even the local voter mandates to cut or reduce taxes and expenditures -- e.g., Cali, NYC, Michigan, Wisconsin... No one will challenge it in a state where there would be a real chance of rejecting the federal power to do so.

    Q: Anyone got a decent list of the states affected by this crock of excrement? And in what areas?

    > A completely new and unknown, worse, unknowable, territory.

    I don't see why. One would assume the same sort of thing that happened when NYC went insolvent, with the fed taking the place of the state, and the state taking the place of the city. While there would be some differences, the models ought to scale for the most part.

  15. Link:

    In legal theory, states are sovereigns. Municipalities are more akin to corporations and have their own Chapter 9 in the federal bankruptcy code.

    A state bankruptcy would really test legal theory, expecially now that states are dependent on federal funding with strings attached.

    The economic answer is to cut state retiree benefits -- as the reitirees are akin to an unsecured creditor, but there's a lot of politics between here and there.

    It's setting up a political war between those who get government checks and those who pay for them.

  16. Another guy named Dan:

    I expect the crisis will come when a state(I'd bet on CA or MI) finds itself without the cash to meet payroll and pensions and it's lines of credit exhausted, then tries to force a federally chartered or regulated bank to accept its IOUs as deposits. Snce the Congressional leadership is heavily from these states, I can see them trying to authorize it, giving a de facto federal guarantee to state debts, even though this is tantamount to allowing the states to issue currency wth the full faith and credit of the US government.

  17. Ken:

    It will continue until defiance is bid to the crown and made to stick.

  18. Link:

    We may have a several years' long experiment in redefining "what is money."

    I'm not a fan of gold, but could be very wrong. I'd buy bricks of cocaine, were it legal.

  19. markm:

    epobirs: With or without a legally-defined bankruptcy process, states can still become unable to meet their obligations. Michigan was bankrupt 50 years ago. I don't know the details of how that worked out, since I was six years old at the time, but it's the reason the new state constitution adopted in the early 1960's rigidly requires a balanced budget.

    This time? I'd suggest taking the federal money, spending it, then slashing everything we're not supposed to slash until the state's accounts are zeroed instead of negative. What are the feds going to do, put a lien on a zeroed-out bank account? Auction off the governor's mansion? (Whole neighborhoods have been abandoned a few miles away, so they won't raise much.)

  20. tehag:

    Why should these decrees, ukases, contracts between the states and the fed have any more authority than an athletic contract or marriage contract. The state should ignore the fed's conditions, then have a state judge declare the state isn't bound by the contract, which violates federalism.