U.S. Governors Say Federal Shutdown, Budget Cuts May Weigh Down States

Photographer: Matthew Staver/Bloomberg

Washington Governor Christine Gregoire. Close

Washington Governor Christine Gregoire.

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Photographer: Matthew Staver/Bloomberg

Washington Governor Christine Gregoire.

A Congressional budget fight that shuts the federal government and slashes spending would hobble states struggling to recover from recession, U.S. governors said yesterday.

States don’t expect Congress to provide additional aid to close budget shortfalls, as it has during the past two years, said Washington Governor Christine Gregoire, the Democrat who heads the National Governors Association. Lawmakers should avoid worsening strains from deficits that during the next two years may total $175 billion, she said.

“We know there’s no money coming to the states,” she told reporters in Washington, D.C., where the National Governors Association began a three-day meeting. “Anything that Congress does that can undermine our recovery would be quite troublesome to us.”

The budget cuts pushed through by states have been a drag on the economy as governors make up for revenue lost during the past two years. State and local government spending dropped at an annual rate of 2.4 percent during the last three months of 2010, the Commerce Department reported yesterday, marking the sixth quarterly drop since the last three months of 2008.

The governors said the clash between Democrats and Republicans in Congress over how to pare the record U.S. budget deficit might aggravate their problems. The federal government could be shut down next week should an agreement not be reached. Democratic Arkansas Governor Mike Beebe said a shutdown would choke off money for health care, education and workforce development programs.

“It will definitely impact every state,” Beebe said.

Move to Compromise

The U.S. deficit will widen this year to $1.6 trillion, Democratic President Barack Obama said in his fiscal 2012 sent to Congress on Feb. 14, partly because of the $858 billion tax cut approved in December.

Democrats have balked at the $61 billion in spending cuts sought by the Republican-controlled House. Republicans agreed yesterday to temporarily drop some demands for reductions in federal spending, proposing instead to keep most agencies at current budget levels through March 18. Democrats, who dominate the Senate, said the Republicans’ action was a step toward forging a compromise to keep the government open until a final budget is passed.

Since 2009, the federal government has cushioned the recession’s blow to states by providing aid to help close budget shortfalls and cover the increased cost of Medicaid, the health- care program for the poor whose rolls have swelled as residents are thrown out of work. Some $151 billion of such help will have been provided by the end of June, when the assistance is to run out, according to the National Governors Association.

No Hiccups

While tax collections have improved with the economy, they have yet to return to pre-financial crisis levels or rebound enough to make up for the lost federal help. Obama hasn’t proposed new aid and House Republicans have said they wouldn’t support it.

States can’t afford more pressure from Washington, Gregoire said.

“We don’t need any hiccups right now in our recovery,” she said.

The governors also asked Congress not to advance legislation that would let states file for bankruptcy to escape from their debts, as cities and counties can. The suggestion, endorsed by potential 2012 Republican presidential candidate Newt Gingrich, has drawn fire from lawmakers in both parties. No governors have seconded Gingrich; no lawmaker has said such a bill has been filed.

Gregoire urged Congressional leaders to say that any such plans are dead, saying the mere discussion elevated borrowing costs in the $2.9 trillion municipal bond market.

‘Height of Insanity’

Yield on 20-year general obligation bonds rose as high as 5.41 percent by Jan. 20 from 3.82 percent in mid-October, according to the Bond Buyer 20 Index, as investors fled the market amid speculation that defaults could mount.

A bankruptcy proposal would “destroy the municipal bond market” by rattling investors, Connecticut Governor Dan Malloy said.

“You’re talking about a drying up of capital for every single public works project,” Malloy said. “It just would be the height of insanity.”

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Mark Niquette in Washington at mniquette@bloomberg.net

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

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