Bernanke balks at bailout for states

WASHINGTON Fri Jan 7, 2011 5:19pm EST

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WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Friday once again said he opposes providing financial aid to the many states still reeling from the economic recession.

Bernanke firmly said "No" after being pressed by Democratic Senators to consider a lifeline from the central bank for states where economic recovery remains elusive.

"They should not expect loans from the Fed," Bernanke said while testifying before the Senate Budget Committee. "It's going to be difficult, but on the other hand there is some improvement in the economy and tax revenues have actually picked up."

States are collectively forecasting a budget gap of at least $113 billion for the fiscal year that starts for most in July. Some states will soon have to turn to the federal government for help, West Virginia Senator Joe Manchin said.

"It's not if it's going to happen, it's when they're going to need our assistance and help," said Manchin, a former governor.

All states except Vermont must end their fiscal years with balanced budgets. Accomplishing that has become a growing challenge after years of cutting that has left few areas to provide new savings and as aid from the federal economic stimulus plan trickles off.

At the end of 2010, revenue gradually began rising and unemployment rates dropping in several states. But the improvements are not likely enough to undo a crisis caused by a collapse in revenue and high demand on social services.

Despite recent improvements "the pressures on state budgets and local municipal budgets are going to continue for a while and that is going to be a headwind for the overall economy as well as for individual states," Bernanke said.

From time to time, members of Congress have suggested the central bank assist states, especially at the end of 2008, when credit markets froze. Bernanke has demurred, and some states expressed concern that they will lose autonomy if the Federal Reserve becomes involved in their daily operations.

"I don't think the Federal Reserve has the authority. And I don't think it would be appropriate for us to do that," Bernanke said. "This is something that would take place over a period of time ... And there'd be plenty of time, I think, for Congress and for the state legislature to look at alternative solutions."

Senate Budget Committee Chairman Kent Conrad noted that Congress may not have the capacity to enact those solutions.

"I understand fully that's not in your domain," he told Bernanke. "And I can tell you I don't think Congress, the House or the Senate, are going to be very interested in bailouts to states."

Both Democrats and Republicans on the committee said there was little appetite for spending akin to the $814 billion stimulus plan, which included the largest transfer of federal funds to states in U.S. history.

Alabama Senator Jeff Sessions, a Republican, said "there's a moral erosion of significant nature" to bailing out states.

"I have to tell you, places like California have been living beyond their means for some time," he said. "I'm not inclined to ask my constituents to rescue someone who's been the problem."

Along with seeing signs of economic recovery, Bernanke also noted that municipal bond markets are functioning well, allowing states to borrow. That, he said, suggests "investors are still reasonably confident there won't be any defaults among major borrowers."

(Additional reporting by Glenn Somerville; Editing by Dan Grebler)

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