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Investor's Business Daily


Better Stimulus For States: Cash For Cuts

July 12, 2010

By Nicole Gelinas

From Illinois to California, states started their fiscal years this month mired in deficits and facing a Congress that has refused more emergency cash. Conservatives, worried about a Greek-style meltdown, want spending cuts. Liberals, worried about adding hundreds of thousands of people to unemployment rolls, want more stimulus. A solution exists. Call it “cash for cuts.”

Washington should present the following deal: States can legally commit now to specific proposals to save money in the years to come. In return, the feds, with the help of financial markets and private industry, will allow them to put some of that savings to work now.

Lawmakers should model this “cash for cuts” stimulus on one element of last year’s $787 billion bill: President Obama’s $4 billion “race to the top” for education, which required state governments to think differently if they wanted the extra cash.

The goal now is to apply the think-differently principle to state budgets as a whole. The problem with most of last year’s $229 billion in stimulus aid to the states is that it allowed them to maintain an unsustainable decades-old imbalance for an extra year: ever-rising labor costs, at the expense of infrastructure investment.

Federal lawmakers should stimulate states, cities, and towns to correct this imbalance. Congress should offer a carrot: $200 billion now — for more than $200 billion in public — sector savings and investment later.

To get the cash, state and local governments would address the first half of the imbalance: out-of-control public labor costs. They could commit to wage freezes and asking public workers to pay more for health care, where savings will compound.

More important, states can revamp public-worker benefits for the newly hired. Public employers should close the generous pension plans that allow workers to retire in their 40s and 50s with a guaranteed lifetime income. New public-safety and physical-labor workers should work longer before retiring, and new civilian workers should contribute to private-sector-style 401(k) plans.

These changes would require governors and legislators to change laws and negotiate with unions. But asking for such things doesn’t infringe on state sovereignty. If states balk, they can leave the money for their neighbors — a choice that the “race to the top” education program last year offered, too.

For participating states: Each state could bring a contractual savings commitment to the feds. The feds would use the new stimulus cash pot to reward each state for its committed savings — with a bigger percentage going to states that demonstrate that they’ll save more relative to how much they spend.

To correct the second half of the imbalance, states would face restrictions on the funding. They could use only 20% for immediate deficits — a little less than the $50 billion that President Obama requested.

States would have to put the remaining 80% toward starting infrastructure investments over five years.

Washington should make sure that states stretch this infrastructure money far. The direct federal grants would be the seed funding for projects. With the new federal money there to absorb any delays or cost overruns, state and local governments could borrow more from financial markets.

To help with borrowing, Congress should extend tax-subsidized “Build America” bonds, another part of the stimulus — but only to states that commit to save two more dollars in the future for every dollar that they borrow now.

Call them Structured State Savings and Investment Bonds, with future savings to be outlined in the bond documents and monitored by underwriters, perhaps underwriters who have specialized to lending to distressed entities in the past.

To stretch the money even further, Congress and the president should abandon requirements for union labor or other special interests — and require states to do the same. States could invite private-sector companies to compete with public employees and the usual contractors on infrastructure work.

To take an example of how “cash for cuts” could pay off: New York must spend perhaps $10 billion to rebuild the deteriorating Tappan Zee Bridge, which connects upstate to the city. Albany could find the equivalent amount in savings over the next three decades — the life of the financing — by downscaling future public-sector benefits. California could follow the same approach for a rail link between San Francisco and Los Angeles if it wishes.

Washington, along with bond underwriters, would have to score states’ savings commitments — and have “clawbacks” for states that renege. The feds and investors would also score projects for value, so that borrowed money will fund projects that reduce maintenance costs as well as support new jobs and tax revenues.

To liberals worried about public-sector cutbacks: The day is coming when the private sector, struggling with ever more burdensome state and local taxes and hobbled by bad infrastructure, won’t be able to pay for public-sector benefits, anyway.

And to conservatives worried about the federal deficit: If states go on as they have, the feds will end up paying in the coming decades. Municipal pension and debt defaults will mean more bailouts and more strain on social services.

Act now, and we’ll be doing just what jittery global bond markets want to see: taking steps to avoid a looming catastrophe, by cutting future spending and creating an infrastructure foundation for private-sector growth.

Original Source:



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