EDITORIAL: Rein in state spending

Forty-two states are facing a combined $140 billion in shortfalls in this and future budget years and that was after trimming $53 billion. They have asked Congress and President-elect Barack Obama for an economic-stimulus package that includes increasing federal reimbursements for Medicaid by $40 billion and an indeterminate amount of federal money to fund $136 billion in infrastructure projects. The idea is that government-sponsored construction will generate jobs and increase tax revenue - and they do. But just as the Big Three automakers are being asked to offer their respective reorganization plans, so, too, should the states. Governors and state legislatures should not get a free ride. They should be required to put forth their plans to cut spending and trim their bureaucracies. And even then, there should be no guarantees.

States that were booming in the early 2000s to mid-2006 lived high on the hog of high taxes and corporate tax receipts. Now, they are struggling alongside the slumping economy as consumers cling to every dollar of their paychecks, and corporations, unable to borrow capital from banks to expand, are contracting. Two and three years ago, some states were smart and put their surpluses into rainy-day funds, which meant their money was earning money. Many states had surpluses large enough until they could forgo borrowing for capital projects.

Few states followed the examples of Mississippi and Tennessee, which actually appropriated money to rainy-day funds. Tennessee Gov. Phil Bredesen, a Democrat, also cut hundreds of state jobs last year (buying out employees while covering their health care for two years) and asked state agencies to cut spending by 3 percent. His state is still looking at a minimum $300 million gap in this fiscal year, but thanks to smart saving, Tennessee has $1.2 billion in reserves to draw from to cover shortfalls in 2009 and 2010. Mississippi Gov. Haley Barbour, a Republican, has asked for 22 percent cuts in spending of his agencies and said he may cut another 4 percent. His rainy-day fund of $365 million, which only stood at $19 million in 2005, is more than ample to cover his state’s $24 million gap this year - and the next two fiscal years as long as the reins are tightened on spending.

Some governors who met last week with Mr. Obama, like South Carolina Gov. Mark Sanford, a Republican, opposed asking for a federal handout. Instead, he urged his fellow executives to start thinking about their spending and bloated bureaucracies. A stimulus package that includes infrastructure projects for schools and roads may help the states in the outyears. But there is a recession.

The wake-up call for governors is that it is in their states’ best interest in the short- and long-term to make the tough calls. Adding taxpayers onto the government dole instead of the tax rolls isn’t smart public policy. Cutting taxes so taxpayers and businesses can spend more is good policy. After all, unchecked spending on Wall Street and Main Street is what led us into a recession.