Tim Johnson

After the dust settled on the American Recovery and Reinvestment Act, ARRA, 21 percent of the
$787 billion was allocated directly to the state and local governments to backfill for the loss of tax
receipts due to the downturn in the economy. So far the bailout has been for banks caught up in
the mortgage collapse and auto manufacturers also impacted by the collapse.

But now, local and state government officials are looking at the stimulus package as their way out
of taking huge budget cuts. Many policy makers, government analysts and economists have said
that's exactly what the stimulus package should do. They say forcing governments to close schools,
cut services and lay off thousands of workers will only deepen the recession. But there is an emerging
opinion that  argues  that state and local governments have been irresponsible by increasing spending
and that federal taxpayers should not have to pick up the tab.

"To demand that residents from other states bail out California is really unfair," Brian Riedl of the
Heritage Foundation. 

Unfortunately, California makes a good target because it’s the nation's largest state and with the eighth
largest economy in the world by itself, yet it is confronted by having to fulfill unfunded federal mandates
while trying to cut back to balance its budget.

Felix Rohatyn, the chairman of New York's Municipal Assistance Corp. from 1975 to 1993, said at the
recent Reuters Infrastructure Summit that policymakers should look to something similar to the
Reconstruction Finance Corp. created in 1932 as a model to aid cities and states as they confront their
biggest deficits in decades.

Today, scores of cities and states are running billions of dollars of deficits. Some have suspended
non-critical services by furloughing workers to save money.  California has both laid off and raised taxes,
to compensate for the revenues lost -unpopular steps in a recession. Unlike the U.S. government, which
can print money to close deficits, states and cities are required to balance their budgets and cannot print
their own money.

Rohatyn said hard-pressed state and local governments should be temporarily allowed to run deficits
instead of curtailing vital services. If these governments cannot solve their deficits by themselves, then
a national agency could step in, he said.

Solution, start with the elimination of all unfunded mandates for the next two years. That will go a long
way to reducing costs.  Then apply an accrual form of accounting to state and local government.

What are your thoughts?