"It's bad enough the Fed is papering over the national debt by buying treasuries. The last thing we need is for the central bank to step in and start bailing out states by buying municipal bonds or propping up the state pension systems."—ALG President Bill Wilson
December 7th, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today praised the discontinuance of a federally-subsidized bond program for states and local governments, which he said "has been used to bail out bankrupt states like New York and California."
According to Bloomberg News, the extension of the Build America Bonds program was omitted from a deal struck between the White House and congressional leaders on preventing imminent tax hikes on all Americans. The program is set to expire at year's end.
"The so-called 'Build America' bonds are really state bailout bonds, a federal subsidy of interest payments for state and local governments, should be discontinued, because they create a disincentive for troubled states to make the hard decisions to cut spending," Wilson said.
According to the Bloomberg report, under the program, "More than $173.6 billion of the taxable securities have been sold since April 2009, making it the fastest-growing segment of the $2.8 trillion municipal market, according to data compiled by Bloomberg. The U.S. pays 35 percent of the interest on the debt."
"These bonds are really a mechanism to nationalize the unsustainable spending of insolvent states and local governments, which are hampered with uncontrolled public pension and health care costs," Wilson said.
Wilson said blocking the continuance of the program was "a step in the right direction," but that "the danger now exists that some other entity, like the Federal Reserve, will intervene to bail out state pension funds and budgets." He urged members to cosponsor and approve HR 6484, a bill that would ban any federal agency, including the Federal Reserve, from bailing out state and local pension systems.
The bill was introduced by Representative Devin Nunes. In a recent letter to Nunes, Wilson wrote, "Your legislation's unequivocal declaration that the federal government won't bailout these state and local big spenders ends the state public employee pension bailout debate before it starts, and you are to be commended for this pro-active action."
The bill also would create a transparent database at the U.S. Treasury of state and local municipal pension systems so that the total unfunded liabilities would be known to taxpayers. In an exclusive interview with ALG, Nunes said that it was necessary for taxpayers "to find out what they owe to the people that work for them, the public employees."
Right now, state pensions could be facing a $1 trillion shortfall of unfunded liabilities, according to Pew Research. But some analysts, including Northwestern University Professor Joshua Rauh and Pacific Research Institute's Steven Greenhunt, foresee as much as a $3 trillion shortfall. Wilson said that without an explicit prohibition, "the Fed could arbitrarily act to prop up certain states, including their $3 trillion of unfunded pension obligations."
"It's time for states to stand on their own two feet. It's bad enough the Fed is papering over the national debt by buying treasuries. The last thing we need is for the central bank to step in and start bailing out states by buying municipal bonds or propping up the state pension systems. Congress needs to adopt Representative Nunes' bill to prevent that from happening," Wilson concluded.
Letter to Representative Devin Nunes, December 1st, 2010.
Video Interview with Representative Devin Nunes, December 2nd, 2010.