WASHINGTON -- Following the midterm elections, attention understandably focused on those parts of the South and Midwest where the Obama coalition collapsed. But a second wave of trouble is coming for the president and his party, precisely in those states where the first wave barely reached. Having experienced the revolt of red America, Democrats must now deal with the fiscal crisis of blue America.
While massive state budget shortfalls are not limited to predominantly Democratic states, they are concentrated in them. "In California and New York," says John Hood of the John Locke Foundation, "the fiscal crisis flirts with bankruptcy." Explanations include rising Medicaid costs, increased spending on higher education, and the long-term challenge of funding public pensions. At the same time, says Hood, "All the major sources of revenue have cratered." The states doing worst are the ones, such as California and New York, that had irresponsible budgets going into the recession. States that were fiscally responsible during good economic times, such as Indiana, have had a softer landing.
The political crisis in many states has been delayed by President Obama's 2009 stimulus package, which temporarily plugged gaps in state budgets, and by a variety of budget gimmicks. Illinois, for example, has simply delayed payouts to doctors providing Medicaid, leaving about $6 billion in unpaid bills that will be eventually covered by the issuing of debt.
But now comes the reckoning. Stimulus support of state budgets is running out. Gimmicks generally work only once. And much of the country has turned hard against tax increases that might help close the gaps. Following the economic panic of 2008, a number of states hiked taxes as an emergency measure. But with Republicans recently electing their highest total number of state legislators since 1928, even Democratic governors will think twice about proposing tax increases.
Governors are seeing their options dramatically narrowed, leading them toward severe spending reductions -- cuts in popular programs and in aid to local governments. We are likely to see more municipal defaults, with state governments unwilling or unable to bail out failing cities. While it remains unlikely that states themselves will default on their debt, several governors have attempted to claw back past benefit promises to public employees -- which Josh Barro of the Manhattan Institute calls "an implicit default."
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