WASHINGTON (Reuters) - Governors of U.S. states see a new threat to their fragile budget and economic situations: the federal government.
On Saturday, governors from across the country warned that federal budget cuts and a government shutdown could hurt states’ slow economic recovery and said suggestions to allow states to declare bankruptcy damaged their ability to borrow.
“As Congress works to get its fiscal house in order, we call on them to cooperatively work with the states,” said Washington Governor Christine Gregoire at the National Governors Association winter meeting. “This means, for us, not creating proposals that allow states to declare bankruptcy.”
The recession caused deep collapses in states’ revenues. Because all states except Vermont must end their fiscal years with balanced budgets, they have cut spending, hiked taxes, borrowed and turned to the federal government for help.
The recession officially ended in 2009, but few states have recovered, and Gregoire, a Democrat who chairs the governors’ group, said states now face new budget gaps totaling $175 billion.
They will close those gaps with little federal aid, as help from the $821 billion economic stimulus plan comes to an end and President Barack Obama and Congress seek to cut domestic programs to shrink the deficit.
“We know there is no new money coming to the states. What we have asked them to do, however, is be mindful that cuts could serve to undermine our economic recovery,” Gregoire said.
Republicans in Congress are warning strapped states could soon seek a federal bailout and have floated the idea of allowing states to declare bankruptcy as an alternative. They have yet to introduce legislation, and academic and legal experts have told House of Representatives committees that bankruptcy would not solve states’ budget problems.
Connecticut’s Democratic Governor Dannel Malloy on Saturday called the idea “the height of insanity,” because it would damage investors’ faith in the $2.8 trillion municipal bond market and block states from borrowing.
Mississippi Governor Haley Barbour, who may seek the Republican 2012 presidential nomination, said the option “has to be looked at seriously” but could have unintended consequences.
“We don’t want the bondholders treated like the General Motors bondholders,” he said, referring to the automobile company that declared bankruptcy. “They got screwed.”
The impact of states’ budget woes are not confined to their borders. On Friday, the U.S. government said state and local government spending shrank 2.4 percent in the fourth quarter, and slowed the national economic growth.
A federal shutdown next month could add to the stress. If negotiations in Congress to fund the government through September 30 failed, the government will have to stop all but essential operations.
“It will definitely impact every state,” said Arkansas Governor Mike Beebe, a Democrat. Most states “don’t have that state general revenue to be able to offset the loss of any federal funds.”
A long shutdown would cause problems for programs funded by the federal government but run by states as well as for state employees with salaries partly paid for by federal funds. Laid-off contractors would likely pay less income and sales taxes, and transportation projects could be halted.
Additional reporting by Lucia Mutikani; Editing by Paul Simao