The Coming State Budget Crunch

With the House focused on repealing health reform, another problem is going unnoticed: the large number of states having trouble paying their bills.

The House of Representatives under its new leadership is going to charge into 2011 looking to undo much of the Obama administration’s legislative successes during the past two years. This is what the voters expect and what the new members of Congress believe is their charge. These are not the only issues that need to be instantly addressed though and there are other issues other that may be more pressing to the nation.

While there are a number of elephants in the room, one that should rise to instant rock star status at the beginning of the 2011 Congress is the financial condition of several major states. Without severe action by these individual states with respect to their budgets, there will be several states without sufficient funds to operate, an inability to print money and an inability to declare bankruptcy. The impacts of states not paying their bills is unprecedented and unknown. And surely, the impacts will not be confined to the individual states themselves.

Specifically, California is not going to solve its problems by taxing the wealthy as the wealthy already pay most of the income taxes collected. California is only going to solve its problems by making structural changes to spending and revenues. Given the requirement for Californians to vote to approve any tax increases, expiring temporary tax increases and existing voter-passed constraints tying the allocation of state revenues to specific spending initiatives, the California legislature is short on options.  The California legislature, even if it for once acted responsibly, will find its ability to solve this crisis limited. And given the make-up of the legislature and the legal constraints to action, there may actually be no solutions to the financial crisis in California. We may just watch the state fall off the cliff into… well, no one quite knows what.

The question for Congress to determine is what, if any, help the federal government is willing to provide to the states in reaction to this coming crisis. Rather than wait until a specific state is insolvent and witnessing that state begging the federal government for help, the House of Representatives should hold hearings as soon as possible to discuss what reaction it would have to this likely event.

Those hearings should start with an understanding of the facts and result in the states knowing if it is the intention of the federal government to help (or not help). The federal government is already committed to helping: for example, states receive annual payments to help with unemployment insurance, etc. The hearings must make it clear whether the federal government intends to continue this help and if Congress is willing (or not willing) to provide further assistance to the states.

If the states know what Congress is willing to do (or not do), hopefully, they will act appropriately and quickly to resolve their budget .