How States Solve Their Fiscal Crises
Though the Senate is moving to restore Medicaid funding to states and to hand them new money to keep teachers employed, Congress is granting far less than states initially requested — $10 billion in Medicaid funding, where states had hoped for $24 billion, for instance. Local budgets remain deep in the red, possibly necessitating as many as 500,000 layoffs, as well as serious service cuts.
But how else will states patch their budget gaps? In many cases, by taking on debt, CNN reports. All states save for Vermont are barred from running deficits, meaning they need to balance their checkbooks by using rainy-day funds, slashing costs or raising taxes each fiscal year. To make up budget gaps, several states have also taken on debt, mostly by selling bonds. All in all, states increased borrowing 10.3 percent over the last year
Experts in the article note that no state is “becoming the next Greece.” (Now is actually a good time for states to take on debt, because interest rates are so low.) But economists argue the situation is unsustainable, and states are simply saddling themselves with debt problems for years. Plus, on a national scale, such state deficits winnow down the impact of the federal stimulus: every dollar that state government cuts cancels out a dollar that the federal government spends.