By Yali N’Diaye

WASHINGTON (MNI) – U.S. governors Monday urged Congress in a letter
to give them more flexibility in managing state budgets.

“States should be given increased flexibility to create
efficiencies and achieve results” to make up for diminishing funding,
the National Governors Association said.

For example, states must be allowed to consolidate funds from
similar programs, the NGA argued, adding that “Federal mandates, even
those that are paid for, fail to encourage state innovation or cost
savings that can benefit both states and the federal government.”

This is one of four principles that federal budget reduction should
be based on, governors said at a time they are preparing their budget
proposals for the coming year.

Such requests come amid a debate on changes that could be made in
the law to facilitate state budget management, with the ability to
declare bankruptcy being an alternative some are advocating.

Such a possibility, however, is strongly opposed by California
State Treasurer Bill Lockyer, who will participate in a conference call
later Monday sponsored by the Economic Policy Institute, in an attempt
to convince ‘Why Letting States Declare Bankruptcy Harms Far More Than
It Helps.’

Bankruptcy is not the route that governors are advocating in the
letter to Congress.

Instead, the NGA only called for more cooperation from the Federal
government amid difficult budget times, encouraging the federal
government to “follow the lead of states and make the tough decisions to
ensure the long-term strength of states and the country.”

Another way to increase states budget management flexibility is by
eliminating requirements imposed by “maintenance of effort (MOE)
provisions.”

Such provisions imposed as a condition for funding, the NGA
aregued, “curtail state authority to control their own budgets and
fiscal systems and over time discourage investment in state-federal
programs.”

Governors also argue for a shared responsibility in terms of
savings when reforms are made at the federal level.

And when the federal government is working in reducing deficits, it
should not be by transferring the costs to the states.

“The structural deficit facing federal lawmakers cannot be solved
by the states,” the association said. “Good fiscal policy must take into
account the effects of federal action on state government to avoid
actions that harm the ability of governors to manage state budgets.”

State and local budget woes have been making headlines, making it a
mainstream issue, which in turn has translated into increased volatility
in the muni bond market.

Fears of default have increased, especially following predictions
from banking expert Meredith Whitney of numerous bankruptcies that would
cost hundreds of billion dollars.

The three major credit rating agencies, however, do not expect such
a dire outcome.

Earlier Monday, Standard & Poor’s said it did not expect
“noticeable” defaults among muni issuers.

States collectively face budget deficits of $175 billion through
2013, according to the Center on Budget and Policy Priorities.

** Market News International Washington Bureau: 202-371-2121 **

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