House Budget Chief Ryan Says Republicans Won't Bail Out States in Default

Congressman Paul Ryan, the Budget Committee chairman in the U.S. House of Representatives, said Republicans don’t intend to save states from debt defaults.

“We are not interested in a bailout,” the Republican from Wisconsin said yesterday in Washington. Ryan said some states are “already telling us” that, when asked how he would respond if he was told one was in danger of defaulting.

U.S. states face a combined $140 billion in deficits in the next fiscal year, the Washington-based Center on Budget and Policy Priorities said Dec. 16. State tax collections remain below pre-recession levels, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. No state has defaulted on its debt since Arkansas did in 1933.

“Should taxpayers in frugal states be bailing out taxpayers in profligate states?” Ryan asked during a forum near the Capitol. “Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t? No, that’s a moral hazard we are not interested in creating.”

While negative budget news likely will mount as most states near the July 1 start of a new fiscal year, Wells Fargo & Co. said yesterday that “the potential for credit default is low overall and varies widely.”

Go It Alone

“We expect state and local governments to wrestle with their fiscal problems on their own without help from the federal government,” said Natalie Cohen, a New York-based senior analyst for the bank, in a report. She said 35 states haven’t reported midyear deficits, while Illinois’s $13 billion gap is 47 percent of its budget. In California, she said, the current- year imbalance amounts to 6.6 percent of the spending plan.

Moody’s Investors Service said yesterday in a report that this year won’t bring any defaults on state debt it rated. There were no defaults last year involving state and local securities it rated, the New York-based company said.

The U.S. government will face pressure before October to help states that have taken on too much debt, Meredith Whitney, the banking analyst who correctly forecast a Citigroup Inc. dividend cut in 2008, said in September. Last month, speaking on the CBS show “60 Minutes,” she predicted defaults of more than $100 billion in local debt and said municipal finances posed “the largest threat to the U.S. economy” next to housing.

Wien’s Surprise

A major state won’t pay interest on a bond this year, “causing havoc” in the $2.86 trillion municipal-securities market, Blackstone Group LP’s Byron Wien said Jan. 3, without naming the state. The default will occur “because of a lack of funds,” the chairman of the company’s advisory services unit said in a statement.

Republicans in the House aim to cut $60 billion in U.S. government spending, Ryan said yesterday at the forum sponsored by the Manhattan Institute for Policy Research in New York and Economic Policies for the 21st Century in Washington. Both are nonprofit groups engaged in public-policy research.

“If we bailed out one state, then all of the debt of all of the states is not just implied, it’s almost explicitly put on the books of the federal government,” Ryan said. He said he would call hearings to examine states’ fiscal situations and the “proper federal response” in the event of a default.

Kevin Seifert, a spokesman, declined to elaborate on Ryan’s comments about states that may be in danger of defaulting.

States can’t declare bankruptcy and need bond-market access to fund infrastructure, so the possibility they would renege on “full and timely” debt service is “remote,” BlackRock Inc. analysts said in a Dec. 7 report. The New York-based company is the world’s largest money manager with $3.45 trillion of assets.

To contact the reporters on this story: James Rowley in Washington at jarowley@bloomberg.net; Simone Baribeau in Miami at sbaribeau@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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