States facing fiscal meltdown 

As if Congress did not have enough to worry about, the states are on the verge of a fiscal meltdown.

From Albany to Springfield to Sacramento, the bill for decades of profligacy has suddenly come due. A gimpy economy brings in lower revenue for state comptrollers. The bond vigilantes have caught the scent of states’ massive unfunded liabilities. The federal stimulus money that some states used to cover expenses is about to run out.

The good news is that, thanks to recent elections, a slew of pro-business budget hawks now occupy governors’ mansions across the country. Furthermore, even some liberals recognize the magnitude of the crisis.

There must be something in the water of the Hudson River because New York Democratic Gov. Andrew Cuomo recently delivered a State of the State address that ought to be required reading in every capital. He railed against an out-of-control government, dismissed any tax hike and extolled the virtues of the private sector.

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 governors will not 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.

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. And they force governors into uncomfortable situations, since the offer of federal money is often predicated on additional spending by the state.
Even absent a crisis in the states, the GOP House would be wise to re-examine Medicaid. So why not begin by suspending or eliminating the maintenance-of-effort requirements? This would allow the governors greater latitude in shaping their budgets.

Also, Congress could 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, D.C.

The federal government does not restrict its meddling to health care. There are all sorts of mandates with education and transportation spending as well. Putting fewer conditions on the money the federal government sends to states would not only help the governors, it would advance House Republicans’ deregulation 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 states to contract with unions at the taxpayers’ expense. Repealing Davis-Bacon would enable states to save money — or build more highway projects at the same price. It is a good deal either way.

This article appeared in The Weekly Standard.

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