State and local finances are in distress. State revenues are 12 percent below what they were in 2008. Several states face big structural deficits and many localities aren’t far behind.
Somehow, there is the illusion that at the national level we are helpless to do much about this. One modern-day myth is that the federal government has no interest in the plight of states and major cities. But a look at the past suggests that clearly hasn’t been the case.
During the Great Depression, the federal Reconstruction Finance Corporation (RFC) provided extensive credit assistance to states and localities. Between 1932 and 1937, it financed $3 billion in relief payments. The loans, which weren’t repaid, were canceled in 1938. Similarly, the RFC made loans to several major cities to help them ride out the bank-failure crises when the cities and their taxpayers both had money tied up in failed banks.
The RFC also was active in the bond markets, bidding directly on state and local bonds or co-financing them with banks. For example, in 1941 it bought the $136 million refinancing bond issue of Arkansas (the one state that had defaulted during the Depression), giving the state breathing room to pay off its debt, which it did in full. In addition, the RFC made loans on state and local self-liquidation projects, such as bridges, aqueducts and toll roads. The Pennsylvania Turnpike was built with a $35 million RFC loan, as were the San Francisco-Oakland Bay Bridge ($70 million) and the Huey P. Long Bridge over the Mississippi at New Orleans ($17 million). In today’s dollars, the $10 billion in RFC loans to state and local governments would equal $160 billion.
More recently, the U.S. Treasury loaned $2.3 billion to New York City during its 1975 financial crisis. Over the life of the loan, the city cut its expenditures by $1 billion, as it froze salaries, reduced benefits and got rid of its city-financed college system. Those who saw the city then will remember its profound deterioration during the late 1970s and into the 1980s. But by 1984, New York City had returned to fiscal health and repaid all its loans. The Treasury ended up with a profit on the bailout.
The New York City rescue, however, pales in comparison to the many bailouts that were granted to the private sector in the same time period. A series of federal rescues of private-sector institutions (Penn Central Railroad, Chrysler, Lockheed, the Continental Illinois bank) amounted to $36 billion in today’s dollars. Bailout, of course, doesn’t mean loss. Overall, the federal government came out whole and often with some profits.
In 1989, the U.S. undertook the first great bailout of fiscal institutions with the Financial Institutions Reform, Recovery and Enforcement Act, which in present day terms amounted to about $300 billion. Of that amount, $190 billion ended up as taxpayer loss. Subsequently, there has been $1.5 trillion in bailouts, most stemming from the financial crisis that led up to the Great Recession. Most of it went to bailing out what we choose to call “Wall Street” and the privatized, mortgage-guarantee institutions of Fannie Mae and Freddie Mac.
Amid the anti-government mantra of the day, we’ve forgotten past lessons. The federal government once stepped in to help individual state and local governments get on their feet. But that’s history. Since then, federal assistance in restructuring debt and restoring liquidity has only been provided to the private sector. Politics aside, we choose to have selective memory about these things.
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