04 December 2008

Obama, U.S. Governors Seek Cooperation on Troubled Economy

With balanced budgets constitutionally mandated, states face tough choices

The president-elect says he understands the difficult choices states face as they address funding shortfalls.

By Stephen Kaufman
Staff Writer

Washington — American taxpayers might look to the federal government for solutions to U.S. economic upheavals, but most programs and services on which they rely are funded and delivered by states. The nation’s governors met with President-elect Barack Obama and Vice President-elect Joe Biden in Philadelphia about how best to cooperate during difficult economic times.

Speaking to the December 2 meeting, Obama said, “It is in state and local governments that the most meaningful changes take place and some of the most difficult decisions have to be made,” as state officials work to reconcile the mandate of having a balanced budget while providing services and encouraging economic growth within their boundaries.

All U.S. states except Vermont are prohibited by their constitutions from having a budget deficit. This means state governments have far less flexibility than the federal government to fund programs that could boost their economies in the long term by running a debt in the short term.

“Forty-one of the states that are represented here are likely to face budget shortfalls this year or next, forcing you to choose between reining in spending and raising taxes,” Obama told the governors.

With the requirement to have a balanced budget, “you're placed in an extraordinarily painful choice of violating your constitutional responsibilities or upholding those responsibilities at the expense of helping families,” he said.

On economic issues, there are divisions of labor between the federal and state governments as well as areas in which responsibilities overlap. States cannot enact laws that are in conflict with the U.S. Constitution and cannot engage in activities that are exclusively federal, such as negotiating treaties, but states have broad jurisdiction in most other areas of governance.

DIVISION OF FINANCIAL RESPONSIBILITIES

State governors offer the incoming administration a list of projects they hope will boost their economies.

Although federal agencies such as the Federal Reserve System guide overall national monetary policy and set basic interest rates that affect everyone, relatively few federal programs directly serve individual citizens. State and local governments operate schools, maintain roads and enforce the law.

Through taxes and economic incentives, individual states can encourage businesses to invest in their communities and create jobs. They establish license fees, determine how state revenues are spent, regulate businesses and administer the health and safety services that affect the daily lives of their citizens. (See “U.S. Governors Head American ‘Laboratories of Democracy’.”)

The federal government and the states do share financial costs for programs such as the Medicaid health care program for the poor, and federal tax incentives and subsidies apply throughout the United States. For example, Pennsylvania Governor Ed Rendell told President-elect Obama that U.S. governors are “very excited” that Obama’s economic recovery plan is encouraging the development of renewable energy as a means of creating new jobs.

Obama also cited the late Supreme Court Justice Louis Brandeis, who said in 1932 that under the federal system “a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” The president-elect said he hopes the states will indeed be testing new ideas, and that the federal government would be investing in what works.

NEXT STEPS

Speaking after the conference in Philadelphia, Obama’s chief of staff, Rahm Emanuel, told reporters December 2 that the governors presented Obama and Biden with a list of pre-approved projects that could be funded jointly by the federal government and the states.

Those projects include “the physical infrastructure of schools, roads, bridges, water systems,” as well as other 21st century infrastructure projects such as information technology to facilitate medical programs, mass transit, and universal broadband Internet access. “All of them had kind of a green technology, green infrastructure direction,” Emanuel said, adding “all these investments are state and federal partnerships.”

The future White House chief of staff said there is a general consensus between the incoming administration and the governors on the need to move quickly and that the proposed projects would result in a more productive economy.

“There’s a general sense if you put a lot of reforms in, you can move resources that are critical in a fast way if you cut through the normal periods of times and studies, etc.”