Posted by: Deborah D | January 16, 2011

Congress can help states manage crises.

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Congress can help states manage crises.

Matthew Continetti of the Weekly Standard says that Congress can help the states manage their fiscal crises by easing the restrictions the federal government puts on the states. He highlights the unfunded mandates the federal government imposes on the states via federal regulations and the strings attached to federal monies transferred to the states, which many times make the states spend more money.

No one wants his state to end up like Illinois, which massively increased personal and business taxes last week to cover a fiscal gap the size of the Olduvai Gorge. But the governors won’t easily avoid that fate on their own. State budgets are so dependent on federal dollars that Congress has a role to play as well. What the governors need are federal policies that allow the states maximum discretion to economize and innovate. It’s lucky for everyone involved that the governors’ interests dovetail with those of the House Republicans.

One of the biggest drivers of state deficits, for example, is Medicaid, the health insurance program for the poor. Medicaid is funded through a combination of state and federal dollars; the poorer your state, the larger the federal subsidy. But those subsidies come with strings attached. The federal government, in the form of “maintenance of effort” requirements, dictates where and how the states must spend Medicaid funds.

Such requirements tie governors’ hands when it comes to writing budgets. They also force governors into uncomfortable situations, since the offer of federal money is often predicated on additional spending by the state. As a group of 33 governors put it in a January 7 letter to the president and Congress, “Efforts by the United States Department of Health and Human Services (HHS) to regulate state operations impose greater uncertainty on our budgets for oncoming years and create a perfect storm when coupled with the current state of the economy.”

Congress could also turn Medicaid into a block-grant program along the lines of welfare. That way each state would know in advance how much money it would receive in a given year. A block grant would force state governments to spend the money more responsibly. Feckless legislators and governors would no longer be able to drink from an endless spigot of money originating in Washington.

…Putting fewer conditions on the money the federal government sends to the states would not only help the governors. It would also advance House Republicans’ deregulatory agenda. Anything that allows the states to experiment and compete is worth trying. The Davis-Bacon Act, for example, requires states to pay the “prevailing wage” in contracting. In the real world, this forces the states to contract with unions at the taxpayers’ expense. Repealing Davis-Bacon would enable the states to save money—or build more highway projects at the same price. It’s a good deal either way.

Continetti also says that Congress should pass Congressman Devin Nunes’ (R-CA) Public Employee Pension Transparency Act, which will shine the light on the true cost of state and local pension plans. Right now that sort of financial data is extremely difficult to find. He correlates state pension accounting practices to Enron’s.

Republicans in Congress might also want to revisit the way the federal government subsidizes state borrowing through the tax deduction for municipal bond interest. And Congress could take up the state bankruptcy law proposed by University of Pennsylvania law professor David Skeel in these pages last year…

We highlighted David Skeel’s state bankruptcy law proposal here on our website:

This blog has posted many good ideas for reducing the federal bureaucracy and reducing spending at the federal level. Now, with the changing of the guard at many state governorships, coupled with the constant bombardment in the news about the states and their growing Greece-like status, it’s time to focus efforts on stopping the next big idea from Washington (bailing out the states) and replacing it with valid, common sense solutions. Read all of Continetti here:


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