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Writer's pictureTom Cochran

A New Tough-Love Debt Approach to State/Local Fiscal Aid




Back in the beginning of April, as I saw what damage to state and local tax and fee revenue would be done as every jurisdiction implemented federal guidance to "flatten the curve," the Institute published my draft concept paper outlining how the Federal Reserve could step in with a PPP-like forgivable loan program to get money out swiftly into a sector that in past recoveries had been a drag on the pace of recession recovery. While the Fed did set up and is operating it's $500Billion Municipal Liquidity Facility providing loans without forgivability, there has been very little use of the MLF for a number of reasons. Governors, County Executives and Mayors know that nothing helps states and localities like grant money and the Fed views forgivability as being tantamount to grant-making, forcing that monetary policy institution across a Rubicon into Fiscal Policy. And Congress began playing a robust fiscal stimulus role, including large amount of Covid expense-related aid to states and localities with the CARES Act, so a debt approach to state and local assistance appeared to be unnecessary..



But Congress has now taken its foot off the fiscal stimulus gas peddle and state local fiscal assistance measure covering revenue shortfall such as components of the HEROES act and the SMART Act have not moved a visible inch toward passage. So some legislators think it may be time to consider a forgivable debt approach again.


Yesterday, Illinois Representative Darin LaHood (R CD-18) introduced a bill titled the "Taxpayer Protection Act of 2020" to provide for a total of $186 billion in potentially forgivable loans from the US Treasury to states, tribes and local governments to help cover tax and fee revenue shortfalls caused by the pandemic. If you don't want to wade through the bill's language, here's a good two-pager summarizing its provisions in actual plain English. Debt forgivability would be contingent on a number of public finance "tough love" conditions, including that governments governmental units would have to achieve:


* Sound pensions systems: Recipient states and large localities (over 250,000 population) would have to have a contribution schedule in place allowing for 100% funding of projected pension liabilities over no more than 25 years, using generally accepted actuarial principles as defined by the Secretary of Treasury. The kicker: a recipient which does not have sound pension funds at the time of application must reduce liabilities to the amount that can be fully funded, without any increase in employer (i.e. taxpayer) costs.


* "Truly" balanced budgets: Recipient states would have to have a constitutional or statutory requirement for end of year balance and may not carry a deficit from year to year. The kicker the this provision: the Revenue for the purposes of this requirement is limited to actual monies coming in, and could not include borrowing proceeds or transfers from other government accounts.


* "Sufficient" rainy-day funds: States must have a target to maintain between 5-10% of annual revenues in a reserve fund when the economy is not in a recession and make automatic annual deposits to achieve this level of funding. States must have protections preventing the use of emergency savings for non-emergency purposes, such as a supermajority requirement to withdraw from rainy-day funds or another at least as effective limitation.


While many will see the legislation just as a demonization and punishment of public employee pension funds and their beneficiaries, might not its introduction somehow lead to serious federal-state-local consideration of how the pension - and in some cases the public employee retiree health program - underfunding mess facing not only Rep. LaHood's home state of Illinois but many other states and localities across the nation's industrial heartland and beyond can be honestly addressed in the mid- to long-term future.


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