Federal aid for genuine disasters should remain narrow, temporary, and tied to the event that caused the damage.
Federal aid for genuine disasters should remain narrow, temporary, and tied to the event that caused the damage.
A long series of poor fiscal choices by officials across the country means that a major state or municipal budget crisis may be only a few years away. Eventually, a state or big city will have a financial crack-up that cannot be papered over with short-term fixes. When that happens, a governor or mayor will hold a press conference calling for a federal bailout. Congress should start rehearsing its answer now: “Absolutely not.”
Resolve in advance is vital. By the time a bailout is requested, officials will have already test-marketed an array of plausible-sounding justifications, and “We just spent too much money” will not be one of them. They will say their motives were politically sympathetic, and therefore they should not be punished for “doing the right thing.”
Congress and the White House should establish policy now, before the pressure campaign begins: No federal bailout for state and local governments that mismanage taxpayer dollars.
Optimists should not be complacent. National growth, inflation, and unemployment numbers may look decent, but many cities and states are reporting budget stress. Those averages can disguise deteriorating local balance sheets. Paying firefighter salaries and teacher pensions doesn’t derive from average national economic indicators. Fulfilling those obligations depends on state and local fiscal choices, and many of those recent choices have not been good.
California shows how temporary windfalls become permanent commitments. Sacramento presents higher spending as proof of enlightened government, regardless of whether programs work. Covid-era surpluses became recurring budget problems as spending commitments outran durable revenues despite Governor Newsom’s claim that the deficit has been eliminated. That is how one-time revenues become recurring obligations.
Illinois offers another version. For years, Springfield defended high spending and generous public sector promises as obligations to disadvantaged communities. Those promises went underfunded. Illinois’s pension burden, among the nation’s worst, crowds out current services and forces taxpayers to fund promises made by earlier politicians. State law also requires public investment managers to integrate sustainability factors into investing decisions, inviting political pressure into funds already strained by years of underfunding.
Large cities have the same problem. In New York City, Mayor Zohran Mamdani claims to have created a “balanced budget” by deferring payments to city employees’ pension funds, whose members helped elect him. That one-time deferral is expected to cost $5 billion. Former Comptroller Brad Lander and current Comptroller Mark Levine have also pushed for net-zero climate goals for New York City’s nearly $300 billion pension system. Even when such goals are framed as fiduciary, they turn pension management into another arena for politics.
Chicago illustrates the pattern in another form. In January, the Windy City split its advance supplemental payment into two installments, paying part immediately and hoping to pay the rest “later in the year.”
In both New York and Chicago, officials pointed to cash-flow problems, but the underlying issue is familiar: Leaders promised more than budgets could bear and then searched for accounting tricks to make the numbers work.
The greater danger is moral hazard — and American history supplies a useful warning. In the 1830s, states borrowed heavily to build canals, railroads, and other infrastructure projects. Their leaders claimed they were investing in growth and that many projects would pay for themselves. When recession hit, many states defaulted.
States then came to Congress asking for a bailout. Congress rightly rejected those requests and established an important principle: States should not expect D.C. to insure against their mistakes.
The aftermath was constructive. Many states rewrote their constitutions to require annual balanced budgets. Fiscal crisis produced institutional reform because Congress refused to socialize state losses. That lesson should be remembered before the next request arrives with sympathetic stories and urgent deadlines.
This is the model Washington needs now. Federal aid for genuine disasters should remain narrow, temporary, and tied to the event that caused the damage. Operating deficits, pension shortfalls, and routine program expansions are not disasters. A family in Indiana or Tennessee should not be conscripted to underwrite politicized investing gimmicks or spending experiments dreamed up in New York, Chicago, or Sacramento.
Some coming budget crises will be presented as beyond the control of mayors, legislatures, and governors and framed as the unavoidable cost of compassion.
But even if that were true — and investigations of fraud in state benefits programs suggest it is not — it is the duty of the ostensibly generous to budget their own generosity. A donor who maxed out his credit cards on good causes must pay the bill. Compassion does not repeal arithmetic, nor does it justify sending the invoice to strangers. State politicians who regularly overspend on favored constituencies are not candidates for debt forgiveness. Congress should say so before the first bailout demand arrives.
Thomas Savidge is a research fellow at the American Institute for Economic Research. Richard Morrison is the host of the Free the Economy podcast and a senior fellow at the Competitive Enterprise Institute.