The Future of State Politics: How Can We Get to a Good State?

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John Bingham Event in Ohio

Gerard N. Magliocca

On Friday, I will be in Cadiz for the official renaming of the town Post Office for John Bingham. This is the first national honor for Bingham. I will speak at the ceremony along with Representative Bill Johnson (R-OH) and Richard Aynes, the former Dean of the University of Akron Law School. I hope to share some pictures from the event next week.

Pension Underfunding is Just a Form of Debt

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For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

Amy Monahan

State and local finance has an enormous impact on the lives of nearly all Americans, yet is too often ignored in favor of splashier or more digestible areas of public life. I was therefore delighted to see David Schleicher’s new book, In a Bad State: Responding to State and Local Budget Crises, take a sustained look at both the complex world of state and local finance, and how federal actors might think through whether and how to respond to state and local fiscal crises.

I will begin with a few disclaimers. First, there were so many interesting issues raised by this book that I had a difficult time limiting myself to a length appropriate for this online symposium. I have therefore chosen to highlight just one of many potential discussion points, which I hope will be of broad interest to readers. Second (and maybe in contradiction to my first disclaimer regarding broad interest), I am going to focus my comments on In a Bad State’s treatment of distressed state and local employee pension plans (referred to as “public pensions” for the sake of simplicity).

Budget Deal as Rorschach Test

David Super

     A month or so ago, I expressed skepticism that Speaker McCarthy had the authority to reach a budget deal that could get the Democratic votes necessary to pass.  Obviously, I was wrong.  Accordingly, I am doing what any serious academic does when events prove them wrong:  I am writing a long-form scholarly article explaining why I was actually correct after all.  (I say that only half-kidding.) 

     In the meantime, however, it seems useful to consider what factors allowed the deal to surmount the obstacles that polarization posed.  This analysis draws little from the “inside accounts” in the popular media that are almost entirely spin:  almost no disinterested parties are present in these discussions so what they tell the media is instructive only as to what they want the public to think about their side’s role in the process.  So, for example, Republican accounts emphasize White House staff’s role to further their narrative about President Biden’s incompetence; Democratic stories try to make this process sound as different as possible from the negotiation in 2011 – when Speaker John Boehner bullied and manipulated President Obama and his vice president – to fend off criticism that they learned little and repeated unpleasant history.

     The biggest surprise to me was Speaker McCarthy’s willingness to make himself dependent on Democratic votes – and most House Republicans’ willingness to allow that.  The rule that House Freedom Caucus negotiated in exchange for allowing Rep. McCarthy to become speaker allow a single Member to move to declare the speaker’s chair vacant.  If Democrats were to follow ordinary practice and vote against the Speaker, the Freedom Caucus’s votes would be more than enough to carry the motion to victory even if the vast majority of House Republicans stayed loyal.  One might expect Democrats would be pleased to vacate the speaker’s chair:  with no obvious replacement, House Republicans could become locked in another divisive and embarrassing public fight, supporting Democrats’ narrative that House Republicans are beholden to extremists. 

     The reason no Freedom Caucus Member has filed such a motion is clearly that they understand that Democrats have Speaker McCarthy’s back.  If forty or so Democrats abstain, the same Republican Members that backed him throughout the votes in January would be enough to preserve his gavel.  A Republican official depending on Democratic votes would ordinarily be disqualifying, but apparently the majority of their Members have wearied of the Freedom Caucus enough to accept it.  Rep. Thomas Massie, a right-wing Member added to the House Rules Committee at the Freedom Caucus’s insistence, recognized how embarrassing this situation is for the Speaker and voted to bring the deal to the floor so that the Speaker would not need Democratic votes in Committee.  But everyone knew Democrats would help if needed. 

     This does not mean that Speaker McCarthy is now a coalition speaker or that he will not zealously advocate for many extreme Freedom Caucus positions.  But it does mean that on issues where many of his Members agree with Democrats, such as aid to Ukraine, he has some latitude to bypass the Freedom Caucus.  Even without the Freedom Caucus, however, several election cycles of primaries and forced retirements have yielded a quite extreme set of House Republicans so little true moderation is likely. 

     Also surprising about the final budget deal was how effectively leaders on both sides managed to induce and manipulate wishful thinking by their Members.  On issue after issue, each leader managed to find just the right kind of complexity or ambiguity to allow Members to see what they wanted to see.

     For example, the deal has six years of spending caps that will force huge real cuts in what the federal                        government is able to do domestically.  Two of those caps are backed with the threat of sequestration; the other four are not.  Speaker McCarthy accordingly claimed that he had won six years of caps and calculated huge savings numbers.  Because his Members were seeking big numbers and had not bothered to identify particular policies to achieve those numbers, this went over well.  President Biden, on the other hand, played to the legalism of many Democrats by claiming that the final four years’ caps were “non-binding”, suggesting that he had outmaneuvered the Speaker. 

     In practice, because appropriations levels always require bipartisan agreement no matter who controls Congress or the White House, Republicans can, and presumably will, insist that Democrats agreed to these out-year caps and reject any appropriations bills that exceed them.  But Democrats like to think of Republicans as stupid so the outmaneuvering narrative stuck.

     Similarly, Speaker McCarthy won imposition of a three-month time limit on food assistance to unemployed and underemployed 50- to 54-year-old childless adults – what Republicans call “work requirements” even though they offer no chance to work for assistance.  The White House, again playing on Democrats’ conceit that they are more sophisticated than Republicans, included three exemptions that it claimed would actually increase the number of people eligible for food assistance.  This claim is incorrect for several reasons, most obviously that states are terrible at recognizing and applying those exemptions.  The largest group the White House claimed to have protected was the homeless, yet USDA issued guidance several years ago advising states that homeless people already were generally exempt.  States face audit penalties for providing food assistance to people who should be disqualified, they face no sanctions for denying food to people who should be exempt. 

     Finally, I was surprised at the willingness of Members of both parties to trust their leaders on the contents of side agreements not included in the legislation on which they were voting.  The explicit cut to IRS funding appears fairly moderate, but Speaker McCarthy claimed to have a side agreement for much deeper cuts that would hobble the agency’s ability to audit affluent tax cheats.  This question could potentially have a huge impact on the deficit as well as on the morale – and propensity to pay – of non-affluent taxpayers.  Similarly, the two sides appear to be contradicting one another on how much the appropriations caps in the first two years will be softened by side deals on “adjustments”.  On these issues and others, the vast majority of Members of both parties were content to tout their leader’s story despite clear evidence that the other side believed something very different.  For all both sides’ mutual distrust and demands for transparency, opacity won the day. 

     A side note is that nobody should put any real weight on how either representatives or senators voted.  Speaker McCarthy promised 150 Republican votes.  He missed that level slightly, but even if he had missed by a great deal the Democrats would have supplied whatever was needed (including some who took advantage of the solid majority for passage to vote “no”).  In the Senate, the Democrats’ majority made them responsible for corralling most of the needed votes.  Minority Leader McConnell was responsible for supplying only enough Republican votes to invoke cloture, plus a few more to cover for dissents from a few Democrats (who likely would have voted “yes” if Senator McConnell had stumbled). 

     Perhaps most interesting was the failure of Sens. Mike Lee or Rand Paul to filibuster:  Leaders Schumer and McConnell had the votes to end debate, but doing so would have taken several days, possibly preventing final passage before the June 5 deadline Secretary Yellen had announced.  They likely concluded that no viable vehicle existed for locking in additional concessions from Democrats so they would reap little reward from keeping their colleagues in Washington through the weekend.

     Finally, after months of complaining that the debt limit’s validity under the Fourteenth Amendment should be tested in court before he asserted it – not a terribly realistic expectation – President Biden threw away a perfect opportunity to obtain that ruling.  He had more than enough time for Treasury to auction off a token amount of bonds in excess of the debt limit, enabling a legal challenge, and then to sign the legislation and hold a regular Treasury auction to meet the government’s on-going expenses.  On each individual occasion, it may seem more beneficial to pay protection money than to rid oneself of extortionists, but the cumulative long-term effects are devastating. 

     @DavidASuper1

Planning for Fiscal Resiliency in a Fragmented World

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Response to In a Bad State

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Can Courts Resolve the Trilemma?

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For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

Clayton P. Gillette

            David Schleicher’s terrific new book, In a Bad State, offers a novel and cohesive account of the various objectives (bailout, austerity, measured default) that the federal government might pursue in the face of state and local fiscal crisis, and compellingly analyzes the impossibility of simultaneously achieving all of those goals.  By providing a roadmap to the manner in which academics and policy makers must think about actual and potential distress, David’s insight, which amounts to an Arrow’s Theorem for fiscal crisis, stands as a major contribution to the literature. 

            I want to focus on the role of courts in addressing or resolving David’s trilemma.  David treats the courts, especially the Supreme Court, as an equal partner in structuring a federal response.  I am less confident that courts play the role that David attributes to them, in part because of the limited function of courts and in part because of their relationship with the executive and legislative branches.  In short, I want to suggest that while David is certainly correct in focusing on courts as major players in confronting the trilemma, they are structurally and functionally different from the other relevant actors.  And those differences bring into question whether courts can play a coherent, intentional role in resolving the trilemma, or whether their contributions only fortuitously coincide with one or more of the objectives of other federal branches.

State Constitutions as Fiscal Fulcrum

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For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

Daniel B. Rodriguez

David Schleicher’s outstanding new book is an instant classic, in its breadth and erudition on the highly complex topics of fiscal policymaking in times of crisis and also in its handiness as a one-stop-shopping for students and scholars who hanker for a comprehensive resource in understanding these issues from both positive and normative perspectives.  As he concedes at the end of the book, one’s ultimate views on the sense of one or another scheme of addressing crises will turn on one’s fundamental principles of the role of government.  How to resolve the tradeoffs Schleicher describes requires judgments that are “deeply ideological.” [121]  Still and all, the book makes and explains the essential point – that We the People cannot have our cake and eat it too.  There is an unavoidable trilemma.  Feds want to avoid the harms that come with spending cuts and tax increases, to avoid moral hazards, and ensure that states and cities can continue their access to capital markets so as to invest in infrastructure projects.  That they cannot implement all of these goals simultaneously is a hard constraint on policy choice; and so the federal government needs to navigate this trilemma by conspicuous awareness of and accounting for this trilemma.

The principal focus, and hence the audience, for this book is the federal government.  There is plenty to manage with respect to these complex issues just at the federal level.  And yet what I am dying for is really a sequel, one that fills out the analysis that Schleicher gestures toward at the very end of the book, in a section entitled “Why States are often Bad?”  Herein lies a profound statement of his:  “[T]e primary responsibility for addressing state and local fiscal problems lies with state and local governments.” [167].  This point is not developed in this book, for Schleicher’s focus is here on the feds.  There are many things to say about state and local governments in this space, as the robust body of scholarship by political scientists, economists, and legal scholars, indicates.  Moreover, this vein of research is likely to expand as on steroids, given the greater interest among public law scholars in matters state and local (we might see Dobbs and the post-2020 election cases as major engines of this renewed interest, but that’s a story for another time).  Just to surface a small sampling of the questions that the trilemma raises for scrutiny of state and local decisionmaking, consider:

David Schleicher’s Trilemma Trilemma

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Historical Empiricism and the Schleicher Trilemma

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For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

Vince Buccola

The principal object of David Schleicher’s slim, new book, In a Bad State, is to set out a conceptual schema for mapping policy options with respect to state and local financial distress. The Schleicher Trilemma states that no policy response can simultaneously vindicate each of three commonsense values that (national) political actors are apt to hold, and the book is devoted to elaborating this core insight. There is much more to the work, of course. As anyone who knows Schleicher even a bit will expect, the book’s 171 pages (sans notes) brim with fascinating data and anecdotes. (Schleicher aficionados will, however, be disappointed not to find an index entry for “Stillman, Whit.”) By word count, much of the book (pp. 33–117) is historical. Schleicher offers a fresh account of each major wave of state and local financial distress in the United States, from the aftermath of the Revolutionary War through Covid-19. The historical vignettes alone more than justify the cover price. In the context of the book’s analytical purpose, though, they serve didactic and argumentative functions, on one hand to illustrate the Trilemma through real-world application and on the other to verify the causal relationships it posits.

The Schleicher Trilemma turns on a mismatch between policy levers and policy goals. In Schleicher’s typology, there are three generic strategies national policy can pursue in relation to local (in which category I’ll include state) government financial distress. The national government can (1) bail out the local government and its creditors; (2) encourage the local government to default on its creditors; or (3) force the local government to pursue an austerity path—raising taxes, cutting spending—to pay its creditors. And there are three generic political values at stake. National policy makers will want to (A) reduce moral hazard (for future leaders of, and lenders to, local governments); (B) encourage future lending to local governments (to further infrastructure investment); and (C) avoid social fallout from local collapse of services or tax hikes. The rub is that each policy attitude sacrifices one of the values. The choices are A(2,3), B(1,3), or C(1,2).

It is a tremendous heuristic. Like all great heuristics, it manages simultaneously to encompass the wide universe of relevant possibility and to be, for lack of a better word, true. One doesn’t need to indulge game-theoretic axioms or harbor an unrealistic notion of rational expectations to see that the trade-offs Schleicher posits are inevitable. Grasping them is fundamental for those interested in the connection between national policy and state and local investment, and I therefore predict that In a Bad State will long prove a starting point in policy analysis of local financial distress in the same way that Modigliani-Miller is still the beginning of interesting questions in corporate finance.

Balkinization Symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises

JB

This week at Balkinization we are hosting a symposium on David Schleicher's new book, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

We have assembled a terrific group of commentators, including Vincent Buccola (Penn-Wharton), Sheila Foster (Georgetown), Clay Gillette (NYU), Rick Hills (NYU), Noah Kazis (Michigan), Amy Monahan (Minnesota), Daniel Rodriguez (Northwestern), Miriam Seifter (Wisconsin), and Christopher Tyson (National Community Stabilization Trust).

At the conclusion, David will respond to the commentators.

Losing Big

David Super

     President Biden got owned.  Nominally, he got owned by Speaker Kevin McCarthy.  In reality, he got owned by Rep. Matt Gaetz.  Rep. Gaetz had a clear, well-developed long-term strategy that he followed with great discipline.  The Administration had only a set of half-formed, often contradictory, impulses that it followed haphazardly, rarely thinking even one move ahead.  It likely thinks it won several news cycles and is hard at work trying to win another.  Rep. Gaetz set out to win on substance, and the wailing and moaning we are now hearing from the Freedom Caucus is precisely what they ought to do to lock in their huge substantive victories and set the stage for more.  Surely the Members that are paying attention know that they won.  But by withholding their votes, they can force even more Democrats to vote for this deal.

     The details have yet to emerge, but from media accounts it appears the President agreed to a substantial nominal-dollar cut in non-defense discretionary spending for next fiscal year.  When roughly five percent inflation is considered, this will be a deep reduction in the capacity of the federal government to perform its basic functions.  For the following year, nominal non-defense discretionary spending would rise one percent, which after the effects of inflation will mean several additional percentage points of real cuts in its ability to do its job. 

     But it gets worse:  a lot worse.  Media accounts say that veterans’ health care, one of the larger accounts within that category, will be protected.  That means that everything else will have to absorb proportionately deeper cuts to make up for those not going to veterans’ health care.  Numerous other government functions (e.g., Border Patrol, protective details for high officials, utilities for federal buildings) will not be cut, forcing still-bigger cuts in what remains. 

     In addition, if Congress and the President do not agree upon all twelve annual appropriations bills by January 1, the agreement apparently would impose a year-long continuing resolution (CR) with a one-percent across-the-board nominal cut.  This will give Republicans – who can effortlessly hold back one or more bills – enormous leverage in negotiating the content of those appropriations bills.  So not only will the levels be far below those needed to maintain government functions, but the money that is spent will almost certainly be badly misallocated.  It remains to be seen how these pieces fit together, but even the best-case scenario is pretty grim. 

     This result has enormous long-term significance.  First, and most obviously, each year’s appropriations discussions start with the prior year’s spending level.  Merely restoring a program to its now-current level of effectiveness will require the President and Congress to go far above that baseline and invite the label “big spenders.”  Many programs still have not recovered from the “sequestration” cuts President Obama agreed to over a decade ago. 

     More insidiously, underfunding government programs will cause them to function less well.  National parks will close off areas for lack of resources for operations and maintenance.  People will miss flights as TSA lines lengthen, or those flights will get cancelled when air traffic control is overstretched.  People will get sick when contaminated meat gets past USDA inspectors even more overwhelmed than they are today.  The FDA will hold up approvals of anticipated drugs for lack of examiners to review applications.  All this will support the Republican narrative that government is incompetent and “deserves” more funding cuts. 

     Beyond that, the Biden Administration passively accepted – at times even reinforced – Republicans’ profoundly tendentious framings of the issues.  Rather than working to gain public acceptance of the legal theories that could end debt limit hostage-taking once and for all, the Administration planted stories about how it was having trouble taking seriously “out there” theories and the President himself pledged not to use them (and thus obliterating his negotiating leverage). 

     People who would never be foolish enough to say that de-indexing the Internal Revenue Code was not a tax increase are nonetheless accepting the inflation-denialist demand to discuss spending programs only in nominal dollar terms. 

     The Administration ceded without serious contest the mantle of “fiscal conservatives” to Members of Congress proposing huge unfunded business tax cuts that would swamp the effects of these spending cuts.  The approach of Presidents Ronald Reagan and George W. Bush was to ram through large unfunded tax cuts and then later “discover” a “fiscal emergency” that “required shared sacrifice” to address.  Today’s Republicans believe they can get away with pursuing these contradictory agendas simultaneously.  And the Biden Administration is telling them they are right.

     Perhaps most insidiously, the Administration continually accepted Republicans’ characterization of eligibility purges from basic assistance programs as “work requirements.”  None of the Republicans’ main proposals for the Temporary Assistance for Needy Families (TANF) block grant had anything to do with putting anyone to work:  they simply sought to increase the quotas for families that states must purge from their already-shrunken assistance programs in order to avoid creating the work programs states almost unanimously are unwilling to operate. 

     And the so-called SNAP “work requirement” would cut off food assistance after just three months to low-income people between ages 50 and 55 who cannot prove that they are working at least half-time every month.  Minimally skilled people in this age range, which the Social Security Administration describes as “closely approaching advanced age,” commonly see their employment prospects dwindle as they are unable to compete with younger people at hard physical labor.  They may make ends meet with several jobs, often with volatile hours.  If they cannot collect adequate verification of all those hours each month, or if their total hours ever dip below half-time, they are cut off.  Nothing in current law or the Republicans’ proposal requires states to give individuals in need the opportunity to work for continued benefits.  And despite generous financial incentives to offer work slots, only a handful of states even purport to do so.  Yet when most reporters hear about “work requirements,” they assume that only the willfully idle are affected.  And the Biden Administration has made little effort to educate them otherwise – making its capitulation all but inevitable.

     President Biden had a front-row seat for the Obama Administration’s short-sighted, strategically clueless approach to Republican debt-limit extortion.  Apparently he learned very little from it.  He had plenty of time to raise the debt limit on a budget reconciliation bill after the election, needing no Republican votes.  All candidates for Chair of the House Budget Committee last fall were publicly promising debt limit extortion to radically transform the federal government. 

     Failing to raise the debt limit in December might have made sense as part of a plan to invoke the 14^th Amendment or to employ one of the several available technical means of avoiding it.  Unfortunately, the Administration had no plan.  This is the result.  The President should tip his hat to Matt Gaetz.

     @DavidASuper1