It's an intriguing idea, and certainly spurs debate. Obviously, there are huge differences in circumstances between the private and public sectors. State and local government officials haven't overtly made the same kind of bone-headed decisions that the financial and auto execs made that necessitated bailouts in private industry. When economies go into recessions, the revenues of states and local governments shrink automatically, and that's not the fault of the public officials. So why blame them for factors beyond their control?
If Uncle Sam needs to hand money over to state and local governments to stimulate the economy and to offset their revenue losses, that doesn't feel quite like the same problem as a misguided insurance behemoth taking immense risks in the derivatives market or the big banks that bought billions of subprime mortgage paper. Moreover, most public administrators are agents in the process, not principals. Nobody would suggest that a CEO or CFO of a construction company receiving stimulus money should take a pay cut, right?
But, that's not a complete answer. The inevitability of business and economic cycles and recessions is a fact of life that every public official and executive is well aware of. Yet few governments across the country have established formal "rainy day funds" to tide them over with financial reserves,* which is one of the main reasons that federal intergovernmental assistance became necessary. Most states and many local politicians spent every dollar of available tax revenue when times were good, making little if any provision for the next down cycle. Like the grasshopper in Aesop's fable, they saved nothing for the next winter. That kind of thoughtless public policy is every bit as bad for federal taxpayers as the corporate blunders.
Why weren't there reserves? In retrospect, state and local governments receiving stimulus money should have at least established a rainy day fund with financial reserves sufficient to tide them through a "normal" business cycle recession of 12 months duration. In California, for example, the first $20 billion of its deficit is purely the result of lousy financial management by the governor and legislators. That said, the current neo-depression is far deeper and longer than that, and I can't fault any state or local government for having run through its reserves by now. Nobody saw this 100-year financial storm coming. From that, let's learn a lesson.
Here's where some "strings" would make sense. I've suggested before that federal countercyclical stimulus assistance to state and local governments should be accompanied with a requirement to establish a rainy-day fund as soon as the economy begins to recover and expand. Otherwise, the recipients should be required to return the aid to the federal government as a loan and not a grant. The grants should be seed capital to ensure we don't get into a pickle like this every time the economy enters a cyclical recession, which occurs regularly in a capitalist economy. If Congress wants to impose a pay cut on top officials if they again come begging for money, I wouldn't object despite my Jeffersonian federalist bone structure.
Unfortunately, the horse is out of the barn with the recent stimulus package, and there is clearly no sentiment in Congress to retroactively impose pay caps on public officials or to impose rainy day clauses for the stimulus aid already approved. But it wouldn't hurt for this Congress and this President to attach a rider on the next round of fiscal assistance to states and municipalities to give them fair warning that next time they must establish a rainy day fund -- or suffer the consequences of payroll micromanagement and clawbacks just like the private sector.
Maybe the Connolly bill? One possible vehicle for this approach is Congressman Gerald Connolly's proposed bill that would provide federal guarantees of municipal bonds. As explained in my companion column describing that bill, his proposal provides a natural forum for this idea to be introduced. Any municipality that wants its bonds to be guaranteed by Uncle Sam should first agree to set up a budget stabilization reserve as well as a debt reserve, to protect the interests of both local and federal taxpayers.
Leadership is needed. President Obama wants to set a sustainable long-term course for the nation's finances, and I applaud that instinct. To achieve that goal, he will need to teach all Americans a first principle: Recessions are to state and local governments what snowstorms are to Washington D.C. They come regularly, and if you haven't planned ahead for them, don't expect federal taxpayers to bail you out every time it "snows." Or expect to be paid well for behaving that way.
For the governors, mayors and county executives, the lesson here is that you must exercise leadership - and think like Aesop's ant. When the economy begins to get back on its feet, insist on establishing prudent rainy day funds. By putting money away in reserves during the good years, rather than spending it just because it's available, you will also help to moderate the business cycle and reduce the boom-bust swings in the nation's economy -- and the "ratchet effect" of endlessly increasing state and municipal taxes on a population that has reached its limits.
* The Government Finance Officers Association has recommended for many years that state and local governments maintain formal fund balance policies, and my Elected Officials Guide to Government Finance has recommended this practice for 20 years. The new Governmental Accounting Standards Board Statement 54 provides clear and helpful financial reporting guidance for fund balances and rainy day funds.
