What Will Tomorrow Bring: Federalizing Federalism

Huge shout out to Eileen Norcross and Frederic Sautet. Their article "Who's Next in Line for a Bailout?" sidesteps the auto industry side-show to draw focus to the true next chapter of our little financial challenge: Local Governments.

41 states face budget shortfalls ... But the governments in the worst shape didn't get here overnight. New York, California and New Jersey--who are all petitioning the Treasury for relief--are dealing with the fallout from bad budgeting.

The main cost drivers, such as pensions and school aid, are often budgetary third rails, wrapped up in court orders and government mandates and guarded by unions. That is what makes the plea for federal assistance so appealing--it's a politically cheap way to avoid the hardest reforms.

Clearly, data mining gurus, they found stats and figures which stand alone to tell a story which could hardly be crisper. To writ:

• $900 million in local law enforcement grants in the new Reid/Pelosi stimulus plan
• Between 1997 and 2007, total state and local spending grew by more than 81% in real terms, while GDP increased by 32%.
• In 2001, the California legislature reduced the retirement age and increased benefits for public employees, producing a $26 billion unfunded liability
• The City of Vallejo let unions fatten their contracts on cascading revenues until 80% of the city's budget was dedicated to police and fire benefits
• Gov. Jon Corzine of New Jersey found $600 million in cuts this June, only to borrow $3.9 billion for school construction projects
• Gov. Arnold Schwarzenegger made $5 billion in cuts to fill in the state's $15.2 billion gap but wants to make up the rest by levying a sales-tax hike.
• Years of intergovernmental aid have created budgetary paralysis and policy dependency, calcifying spending patterns while limiting experimentation in the delivery of services
• [NJ's] school aid formula imposed on the legislature in the 1990s ... has redistributed half of income tax collections to 31 of the state's 585 school districts

Viewed from this perspective, it's clear why states are where they are ... and what they need to fix. Right on, guys!