More About Iris J. Lav

Iris J. Lav

Iris J. Lav, after many years serving as deputy director of the Center, is now working as senior adviser. Lav maintains her special focus on the Center’s state-level work, including fiscal and health policy, and is also involved with the Center’s international work.

Full bio and recent public appearances | Research archive at

Cantor and Bernanke Got It Right: State Bankruptcy Law Is a Bad Idea

January 25, 2011 at 4:22 pm

Two prominent voices – a House Republican Congressional leader and the chair of the Federal Reserve – said recently that enacting a federal law to let states declare bankruptcy doesn’t make sense:

  • Yesterday, House Majority Leader Eric Cantor said he didn’t support allowing states to address their debts by seeking bankruptcy protection: “The states can deal with this and have been able to do so on their own.”
  • On January 7, Federal Reserve Chairman Ben Bernanke said that “we ought to focus on states meeting their obligations which they do have the tools to do.”

In a recent blog post and report, I explained why a state bankruptcy law isn’t needed and would do more harm than good.  States debt is not particularly high by historical standards, and there’s no evidence that states won’t be able to service that debt and meet other long-term budget challenges, just as they have successfully closed large, recession-induced budget gaps over the past several years to keep their annual operating budgets in balance.

State Bankruptcy the Wrong Response to an Exaggerated Problem

January 21, 2011 at 2:52 pm

Today’s New York Times report that Congress may consider allowing states to declare bankruptcy provides yet another example of the widespread misunderstanding of state budget problems.

The Times described state debt as “crushing,” but it really isn’t.  As the report we issued yesterday documented (and as the graph shows):

In the second quarter of calendar year 2010, state and local government outstanding debt stood at 16.7 percent of GDP, up from a recent (and relatively brief) low of 12 percent in 2000 but similar to the average levels from the mid-1980s to the mid-1990s.  The vast majority of this debt is long-term, fixed rate debt used to finance infrastructure projects.

States are incredibly faithful in repaying their debt, and have been since the late 1800s.  Over the last century, only one state has defaulted on its general obligation debt:  Arkansas in 1934, during the depths of the Great Depression.  In most states, bonds have the first call on revenues; the state makes required debt service payments before funding any public services.

States do indeed face long-term budget challenges, including revenue systems that need modernization and pension funds that are somewhat underfunded.
But there is no evidence that they won’t be able to address these challenges — just as they’ve successfully closed large, recession-induced budget gaps over the past three years in order to balance their annual operating budgets.

So a state bankruptcy law isn’t needed.  Moreover, it would do real harm.  As our report said:

It would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute.  States have adequate tools and means to meet their obligations.  The potential for bankruptcy would just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions.  In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in infrastructure.

Despite the talk, no lawmaker has yet filed a bill in Congress to allow state bankruptcy.  Let’s hope it stays that way.

False Alarms on State and Local Bankruptcy

January 20, 2011 at 11:41 am

We released a major report (and press release) today to correct the misconceptions behind recent media reports that states and localities are facing an imminent fiscal meltdown.

A number of articles have lumped together the current fiscal problems of state and local governments, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that states and localities must take drastic and immediate measures to avoid an imminent meltdown.

Most states project large gaps between revenues and spending for fiscal year 2012, which begins July 1 in most states.  States have faced large projected shortfalls in each of the past three years — mostly due to an unprecedented drop in revenues during the recession — and have closed them through a combination of reserve funds, federal stimulus funds, budget cuts, and tax increases.  They’re required to close budget gaps before the fiscal year starts, and they will do so again as they enact budgets for the upcoming fiscal year.

In contrast, states and localities have several decades to address issues related to bond indebtedness, pension obligations, and retiree health insurance. Unfortunately, numerous articles have greatly exaggerated the size of these long-term costs and have added them to states’ projected operating deficits for 2012 as if they are an immediate problem.  All of that has produced a severely distorted picture of the state and local budget situation.

In a series of posts over the next several days, I’ll examine those three major long-term issues and explain why the kinds of measures that some have suggested, such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds, wouldn’t be appropriate.  I’ll also highlight some reforms that states and localities should adopt to strengthen their budgets over the long term.

House Republican Budget Plan Would Hit States — and Economy — Hard

November 11, 2010 at 4:03 pm

A recent budget proposal from House Republican leaders could lead to a $32 billion reduction in fiscal year 2011 funding for programs operated by state and local governments — a step that would be harmful at any time but would be extremely ill-advised at this time, with states facing unprecedented budget shortfalls and the expiration of fiscal relief from last year’s Recovery Act.

GOP leaders featured the proposal in their “Pledge to America” campaign document and have since said they plan to pursue it.  The plan would cut overall spending for discretionary (non-entitlement) programs other than those related to defense or homeland security by $105 billion (21.7 percent) below President Obama’s proposed level and by $101 billion (21.1 percent) below last year’s level, adjusted for inflation.

Lawmakers would be hard-pressed to implement this proposal without cutting deeply into grants in aid for state and local governments.  Those grants, which help support a wide range of public services — education, environmental protection, job training programs, public health services, child care assistance, law enforcement programs, and others — represent roughly a third of all non-security funding.  If lawmakers applied the 21.7 percent cut across the board to non-security discretionary programs, state and local grants would be cut by $32 billion; the table below lists the dollar cost to each state if each state’s grants were cut by the same percentage.  (See here for our new report on this issue.)

Such cuts would make an already bad state and local budget situation worse, and would further slow an already tepid economic recovery.

Despite the budget cuts states have implemented over the last two years, the continuing dramatic reduction in revenues from the economic downturn will require them to take additional steps to balance budgets this year and next even without the cuts in grants threatened by the GOP leaders’ plan.  States will close about $100 billion in shortfalls by the time the current fiscal year ends (next June 30 in most states), and shortfalls for next year will likely reach $134 billion — higher than in 2010 or 2011 because federal fiscal relief will largely end after this year.

To balance their budgets, states have cut funds for education, health programs, and services for vulnerable populations.  They also have shrunk their payrolls by more than 400,000 jobs since mid-2008.  These layoffs raise unemployment and slow the economy as laid-off workers cut back on their purchases.  Similarly, when states cancel contracts and cancel or delay payments to private companies and nonprofits that provide services, that slows the economy by reducing overall demand.

Economists estimate that state and local budget-balancing actions are already reducing economic growth.  The GOP leaders’ plan would further impede it.

Cuts in Funding for State and Local Programs Under the House GOP Leaders’ Proposal in Federal Fiscal Year 2011, If These Cuts are Proportional to Those Required of Non-Security Programs Overall
(in millions of dollars)
State Cut in Discretionary Funding State Cut in Discretionary Funding
Alabama $581 Montana $141
Alaska $151 Nebraska $179
Arizona $913 Nevada $178
Arkansas $329 New Hampshire $115
California $3,610 New Jersey $788
Colorado $427 New Mexico $270
Connecticut $314 New York $2,574
Delaware $92 North Carolina $853
District of Columbia $152 North Dakota $103
Florida $1,652 Ohio $1,213
Georgia $992 Oklahoma $382
Hawaii $130 Oregon $355
Idaho $162 Pennsylvania $1,299
Illinois $1,379 Rhode Island $145
Indiana $600 South Carolina $453
Iowa $355 South Dakota $121
Kansas $269 Tennessee $628
Kentucky $507 Texas $2,377
Louisiana $581 Utah $249
Maine $151 Vermont $86
Maryland $481 Virginia $633
Massachusetts $645 Washington $548
Michigan $1,106 West Virginia $254
Minnesota $483 Wisconsin $487
Mississippi $432 Wyoming $115
Missouri $592 U.S. Total $31,630

Federal Loans a Poor Alternative to State Fiscal Assistance

July 9, 2010 at 1:47 pm

In a New York Times op-ed, Chris Edley rightly warns that state budget cuts and tax increases are undermining federal efforts to boost the economy; that’s why we’ve recommended (most recently here) that Congress extend the state fiscal assistance in last year’s Recovery Act.

In contrast, Edley’s proposed solution — to allow states to borrow from the federal Treasury and repay it through cuts in future federal payments for programs like Medicaid — isn’t workable.  Some states might not be able to borrow these funds, and many of those that could borrow them wouldn’t want to because it would worsen the already difficult fiscal situation they’ll face after the recession.

The constitutions of five states prohibit debt altogether, according to the National Conference of State Legislatures, which could make it impossible for them to accept the loans.  At least 16 other states require voter approval of debt backed by general tax revenue; while it’s unclear whether borrowing from the Treasury for operating expenses would fall into this category, the matter could be tied up in debate or litigation for a substantial period of time, and it would take further time until such measures could be placed on state ballots and voted on in states found to require such approval.

To keep deeper state budget cuts from slowing economic growth, however, and to protect critical state services from severe cuts, the fiscal relief is needed now, not at some potentially distant future point.

Even states that didn’t face these barriers would want to think twice about accepting the proposed loans, which would add to the very large budgetary obligations they’ll already face when economic conditions improve:

  • In response to the sharp increase in unemployment, states are now compelled to borrow heavily from the federal unemployment insurance trust fund to finance the basic 26 weeks of unemployment benefits for which they are responsible.  By 2013, some 40 states will have borrowed $90 billion.  States already will be required to pay this $90 billion back.  (Since this is borrowing for a state trust fund rather than for state general fund expenses, the legal limitations noted above do not apply.)
  • States’ “rainy day” budget reserves have helped them cope with the historic drop in revenues in this recession, but those reserves are now largely depleted.  If states do not rebuild them when the economy recovers, they’ll be much less prepared for the next recession — and more likely to need substantial federal help when it hits.  The need to replace the cut in future federal support for vital programs would compete with, and in many cases render impossible, the rebuilding of rainy day funds.
  • States also will have to repay the money they’ve borrowed from themselves (e.g., from state pension funds and future revenue streams) to help balance their budgets as the economy recovers.
  • And states will need additional revenues to restore an appropriate level of public services in the aftermath of the deep cuts they’re now making in education and other critical areas.

Facing all of these pressures, states will be very hard pressed to do what Edley’s proposal would  require — raise billions of dollars more in taxes or make billions of dollars more in budget cuts to compensate for future reductions in federal support.

Fortunately, we don’t need to adopt an untried, unworkable loan mechanism to provide temporary aid to states to help them weather the worst economic downturn since the Depression.  The fiscal assistance in last year’s Recovery Act, by closing part of states’ budget shortfalls, has preserved hundreds of thousands of jobs and kept state budget problems from acting as an even bigger drag on the economy.  With the economy very weak, unemployment very high, and state revenues deeply depressed, Congress should extend this assistance for a modest additional period, as legislation pending in Congress would do.