ON-Lion Letter
Alarming as recent developments have been in state budgets, John Hood writes in the Winter 2011 National Affairs, "the states' fiscal calamity is not simply a function of the recession.  Their shaky financial foundations were in fact set long ago -- through unsustainable obligations like retirement benefits for public employees, excessive borrowing, and deferred maintenance of public buildings and infrastructure.  The result has been a long-building budget imbalance now estimated in the trillions of dollars.

"The nightmare that governors and state legislators are living through will therefore not end when the effects of the recession do," continues Hood, president of the John Locke Foundation in Raleigh, N.C., in "The States in Crisis."

"If these states fail to find their way out of their current predicament, their only option may be to beg for federal bailouts," he goes on.  "And the states would not be the only losers if this comes to pass.  If the federal government were to refuse a bailout request, it would risk a disastrous crisis in the bond markets -- as investors who had always assumed state debt to be safe (in part because they assumed it would have federal backing in a crisis) would suddenly rethink all their state-bond investments.

"On the other hand, if the federal government were to grant a bailout to any one state, the other 49 would certainly expect assistance as well.  This would put our federalist system to an unprecedented test.  It would also require an enormous amount of money from federal coffers that are themselves perilously hollow.

"It is in everyone's interest, at all levels of government, to avoid such a collapse."

The Lynde and Harry Bradley Foundation in Milwaukee substantially supports National Affairs.
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