WASHINGTON — The Senate Budget Committee is trying to come up with proposals to help states that come to Congress for help with serious financial troubles, its Chairman Kent Conrad, D-N.D., said Friday.
“We do have an effort underway,” he said during a hearing on the U.S. economy.
“We are talking about a significant problem here with some 35 states predicting [budget] gaps” for 2012, which starts July 1 for most states. “We need to be prepared with a plan in case we are approached from one or more states.”
“I think we may reasonably anticipate that we may have requests to us,” Conrad said, adding, “I don’t think the House or the Senate are going to be interested in bailouts to states.”
Committee member Sen. Joe Manchin 3d, D-W.Va., former chairman of the National Governors’ Association who said there may be as many as 20 or 30 states in serious financial trouble, agreed bailouts would not be appropriate, but said the committee should consider other measures.
It’s more of a “Can we help you help yourself,” Manchin said, adding that perhaps “there are some restrictions that [Congress] can ease up on” for states.
Conrad agreed that this might be possible.
Conrad said the National Conference of State Legislatures has warned states face a total of $97 billion of budget gaps for fiscal 2012.
The NGA released a fiscal survey last month warning that states face a total of $170 billion of budget caps during the next three years.
The remarks by Conrad and Manchin came after Sen. John Cornyn, R-Texas, pressed Federal Reserve Board Chairman Ben Bernanke on whether the Fed could help fiscally distressed states that could be in jeopardy of defaulting on their municipal debt.
“We have no expectation or intention to get involved in state and local debt,” Bernanke said. The Fed has no authority to buy state or local debt, he said.
The Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits the Fed from lending to an insolvent borrower and prohibits it from assisting an individual borrower unless is part of a bigger program, Bernanke said.
Cornyn asked Bernanke if Congress should write legislation permitting states to file for bankruptcy. “There’s been some suggestion...that Congress ought to look at procedures to allow that to happen,” Cornyn said.
Bernanke replied, “I think it would be useful to look at the situation broadly and identify what problems might be there.”
But Bernanke said it would extraordinary for a state to default on its debt and that this is something that has not happened for 160 years.
“While there’s not question there’s a lot of stress...the municipal market seems to be working,” he said.
“I expect we will be able to avoid defaults at that level,” Bernanke said, referring to the states. Debt is a top priority for states and comes in front of services in terms of what must be paid if revenues are limited, he said.
Cornyn asked him what the ramifications would be if a state defaulted.
“It’s difficult to know because it hasn’t happened in a long time,” Bernanke said. “Certainly it would create a lot of stress and volatility.”
