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Henes: It is Time for States to Regain Fiscal Health & We Need True Leadership

States are not too big to fail.

In many ways, they have already failed.

Clearly, a state cannot fail in the traditional sense such as when a company shuts down its business; however, through decades of fiscal mismanagement, states have failed their citizens by creating structural deficits, shutting down critical services, making promises that they cannot keep and leaving current state and local governments with a legacy liability problem.

While states are not too big to fail, they are too big to save - at least if the federal government is asked to do the saving. The federal government has its own problems as it runs an eye-popping budget deficit, spends 70% of its budget on entitlements, prints money and continues to borrow (with 70% of treasuries being bought by the Fed). If the federal government were to add the states’ obligations to its balance sheet, the United States may topple over.

While states can fail and while states are too big for the federal government to save, it is time for states to do things the old-fashioned way and save themselves. To do this, the states’ leaders need to show political courage and fiscal discipline, determine what they want their states to look like over the long-term, develop a long term fiscally responsible and achievable governance plan and implement the plan through negotiations and compromise with the states’ stakeholders.

Andrew Cuomo (D)
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Andrew Cuomo (D)

This is not easy to do, but certain leaders stand out as role models.

For instance, in New York, Governor Andrew Cuomo, in connection with his proposed budget, called for a “redesigning” of government. His words are important. He recognized that New York faces “enormous fiscal challenges” and funding decisions will not be based on “past practices.” Instead, “Governor Cuomo is guided by three principles:” (1) recalibrating “New York’s spending and programs to match State resources, and to stop the current unsustainable trajectory,” (2) “supporting programs that best demonstrate value to taxpayers” and (3) putting an end to “New York’s dysfunctional government” by “inviting New Yorkers from the public and private sections to work in partnership with their government to address the [State’s] challenges.”

The challenge is getting actions to match the words. But creating the framework for change is a key part of the battle. It is critical that states take bold and aggressive actions to fix their problems for the long-term. Kicking the can down the road is no longer an option for states as the road is closed. If states continue to mask the problems through short term fiscal legerdemain, states and the states’ leaders will have failed, thereby negatively impacting families and our nation. To paraphrase President Andrew Shepard in the movie The American President, for too long our leaders were so busy keeping their jobs, they forgot to do their jobs. Our newly elected state leaders have the great opportunity to look at the legacy liabilities they inherited, set a plan for their states over the long term and lead their states back to good fiscal health.

Jon Henes is a partner in the Restructuring Group of the law firm of Kirkland & Ellis. Jon's practice involves representing debtors (including portfolio, privately-held and public companies), creditors' committees and distressed investors (including hedge funds, private equity funds and companies) in acquisitions, restructurings and bankruptcy cases.