November will decide the fate of economic bailouts in blue states

The coronavirus exposed a debilitating and growing disease inherent in the management of many state capitals. Blue states, run with years of reckless spending and unbalanced taxation, now must swallow the bitter pill of three options: Slash spending, declare bankruptcy, or beg for trillions in federal bailouts. As the economic damage of the virus becomes more apparent, a defining political debate of 2021 will be how Congress and the White House will react.

By the beginning of 2020, several left-leaning states were already in severe fiscal trouble after years of racking up unfunded pension liabilities and bloated public payrolls. Despite New York’s $6 billion budget deficit, nearly 300,000 public employees and retirees earned six figures. Illinois was facing a $1.3 billion budget deficit (now over quadruple that), while a family of four owed $76,000 in pension liabilities and more than 100,000 public employees and retirees in the state earned six figures. In California, a $54 billion budget deficit and $1 trillion unfunded pension liability didn’t stop Sacramento from paying more than 340,000 government employees six-figure salaries.

These trends were accelerating before the pandemic hit. An analysis of overall deficits vs. surpluses between Fiscal Years 2004-2018 shows nine states averaged a deficit during those years. All nine either had a current Democratic governor or were dominated by the Democratic Party during that period (and No. 10 was California, which just barely met its needs). In 2019, Pew collected data on how long states could run just on their reserves. That year, the median between the 50 states was just shy of 28 days. Some have more formidable rainy-day funds: Alaska could run for 171 days; North Dakota, 109 days; Texas, 70 days. Among states dominated by Democrats, the figures tend to be far more dire. Rhode Island clocks in at 19 days, New York at 10.3 days, and Illinois could not run its state for even a tenth of one day with the money under its proverbial mattress.

Things have only gone downhill since COVID-19 shutdowns in March. Every state projecting the worst losses in FY 2020 and 2021, aside from Wyoming, are Democratic states that were already in hock. California estimates a loss of between 16 to 21 percent of its revenue in fiscal 2021. New Mexico predicts a 22 percent to 30 percent loss, New Jersey predicts 18 percent, New York predicts 13 percent, and Illinois and Hawaii predict 12 percent each. These catastrophic figures, paired with incredible pressure to increase spending both on health care costs and economic stimulus, have created ticking time bombs around the nation.

This is a compounding issue due to the loss of tax revenue from middle- and upper-class families abandoning many high-tax states. New York is seeing an exodus that makes the post-9/11 surge seem picayune. United Van Lines reports a 95 percent increase in demands for moving vehicles leaving Manhattan. Gov. Andrew Cuomo is now begging — literally — for rich New Yorkers chased off by the virus, costs of living, and taxation to return. New York City Mayor Bill de Blasio says his plan to increase revenue is to further raise taxes on high earners who remain in his city. The Big Apple is not the only Democrat-run urban area bleeding residents. Around the nation, people are ditching big-city living for suburban and rural areas—often situated in low-tax red states.

If history is any indication, Democrat-run states won’t change their spending habits in the face of looming fiscal disaster. Rather than cut spending, Democratic governors kowtow to public sector unions looking to spend more, even in times of crisis. Illinois Gov. J.B. Pritzker is asking voters to approve a $3.4 trillion “Fair Tax” amendment to the state constitution. At least it’s going to plug the state’s problems? Far from it. The pressure of pension costs is sucking up the oxygen. With Illinois pension costs spiking 500 percent in the last two decades, the state has been forced to cut funding for higher education, the state police and childhood vaccinations.

Bankruptcy is an unpopular option for which the governors of financially-struggling states don’t want to take political responsibility. The electoral cost of bankruptcy, especially for states under current one-party control, would be disastrous. Declaring bankruptcy could also face severe backlash from judges legislating from the bench. When Chicago attempted to restructure its pension liabilities to reduce benefits, the state Supreme Court deemed it unconstitutional. The same happened in New Jersey.

The only remaining solution is federal bailouts. If Democrats control the White House and both chambers of Congress next year, they likely will pass huge blue-state bailouts. This would effectively force taxpayers to subsidize decades of irresponsible state-level spending under the guise of pandemic relief. The Heroes Act provides just a taste of the largesse Congress could jam into a hastily-passed “emergency” bill. As such, there is no appetite to stop the runaway train, especially seeing that Senator Kamala Harris’ own California would be most rewarded for their fecklessness.

The 2020 election offers a slate of state and federal candidates answering questions on hundreds of issues. One consequential question we should ask ourselves before giving new legislators, governors and the next president the power to bail out failing state budgets is whether or not they learned from their own errors. If not, their mistakes soon will be the responsibility of us all.

Kristin Tate is a libertarian author and an analyst for Young Americans for Liberty. She is a Robert Novak journalism fellow at the Fund for American Studies. Her newest book is “The Liberal Invasion of Red State America.”

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