The future for local governments across the state is not looking good. Julie Havlak at Carolina Journal reports that before the Coronavirus shut down more than 150 local governments were on a watch list for risk of insolvency. Auditor Beth Wood said it’s going to be a domino effect,
“It’s a domino effect. We’re going to see more and more local governments get into financial stability issues. … Less revenues at the state and county level can only trickle down to everything they fund.”Beth Wood, Carolina Journal
With the state facing a 4 billion dollar shortfall, there is no doubt something needs to be done. States and local governments, alone, can only either cut spending or raise taxes. Both options will inevitably stifle their ability to recover from this crisis. This is where Option C comes in. The chatter in and around Washington has focused on a possible bailout for the states.
Greg Ip at The Wall Street Journal wrote a few weeks ago about why the states deserved a bailout,
Most states, across the political spectrum, spent the 10 years between the last recession and this one repairing their finances. Total state and local debt fell steadily from 21% of U.S. gross domestic product in mid-2009 to just 14%, or about $3 trillion, at the end of 2019, according to Federal Reserve data.Greg Ip, WSJ
Ip goes on to argue that despite these savings we are dealing with measures nobody could have planned for,
Michael Zezas, municipal strategist at Morgan Stanley, estimates states will lose $180 billion and local governments $90 billion in revenue through mid-2021 because of the pandemic and recession.
Ramesh Ponnuru at National Review points out that the argument for a state bailout is a strong one,
The case for federal help is strong. For one thing, the expectation of federal aid in a public-health emergency can encourage state governments to take action that has benefits for other states. We would not want a state to skimp on safety measures because of the expense and cause infections to spike in its neighbors. For another, state lockdown policies generally followed the guidelines of the federal government.Ramesh Ponnuru, NR
However, Ponnuru does point out it gets complicated when it comes to pension plan shortfalls especially for northern states,
A federal bailout would encourage further future irresponsibility on the part of states. It would also be unfair. Teachers in Wisconsin, where pensions have been managed relatively well, should not have to pay higher taxes because politicians in Illinois made unrealistic promises.
Ponnuru goes on to explain that strategic bankruptcies could be used to help states, not end their pensions, but make them more manageable. We will recover from this current downturn, but the cracks in our longterm financial obligations have been exposed. Normally politicians don’t act until the very last moment. I’m hoping this time i will be different. Let’s all hope this horrific downturn has opened their eyes to the coming problems. The sooner they act, the less damaging the solution will be. I’ll keep my fingers crossed, but I definitely won’t hold my breathe.