States Seeking Bailout Bucks Should Disclose as Much as Big Three

New Jersey Gov. Jon S. Corzine listens to a question during a bill signing ceremony in Trenton, N.J.

Even before President Bush announced that billions of dollars in aid from the Treasury Department's Troubled Asset Recovery Program will soon flow to America's automobile manufacturers, a third wave of relief-seekers was already washing up on the shores of the Potomac.

New Jersey Gov. Jon Corzine, speaking recently on behalf of the National Governors Association, outlined a nearly $300 billion request from the states, including $100 billion to cover day-to-day operating costs and billions more for infrastructure improvements. California Gov. Arnold Schwarzenegger has identified $28 billion in "ready to go" projects in his state alone and is seeking billions more to supplement the state's "Medi-Cal" Medicaid program. Behind the governors stand advocates for all manner of businesses and causes, ready to explain how their imminent collapse would be the final straw for the American economy.

The logical question, then, is what the government should expect in the way of disclosures, assurances, and conditions as it becomes the quasi-official lender of last resort. And how can the taxpayer be assured that the trillions of dollars to be spent on relief will be cost-effective, at least in terms of their long-term impact on the country and its citizens?

These questions were at the root of the scolding letter that Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi sent the automakers after their first appearance on Capitol Hill. In it, Reid and Pelosi demanded a full accounting of the cash and credit positions of the companies and their plans to improve these positions. The congressional leaders also set rigorous terms for reporting and repayment by the firms and requirements that they make clear how they will deal with issues such as the crippling cost of healthcare and pensions and the production of vehicles that meet the recently increased fuel-efficiency standards. Finally, they warned against "excessive executive compensation, including bonuses and golden parachutes."

With this move, Congress clearly intended to announce that its "blank check" window--first opened when Henry Paulson submitted a three-page request for $700 billion--is now closed. A good start, for sure. But getting tough on the automakers was the political equivalent of investing in treasury bonds--virtually risk free. The real test starts now, as governors, social service advocates, and industries without the baggage of the Big Three descend on Washington and ask for the "no strings" treatment.

For the sake of restoring confidence in both the government and the economy, President-elect Obama and congressional leaders should declare that any entity seeking relief from the federal government, starting with the states, must provide at least as much in the way of documentation and planning as the auto companies were forced to do. Specifically, they should be required to answer the following questions in detail and with supporting documentation:

(1) How will this spending expedite an overall economic recovery?

(2) How do the activities you will undertake with this money contribute to the goals of modernizing the American economy, increasing productivity, and creating solid, sustainable middle-class jobs?

(3) How will you phase out and/or supplant this federal assistance once your initial goals have been met?

This might seem an obvious first step before cutting billions of dollars in checks for fiscal relief. But the fact is that past state bailout requests have been proffered with minimal data from the states and even less rigorous reporting requirements on how the money was spent.

As part of an overall $20 billion package for the states in 2003, for example, governors were granted $10 billion in flexible relief that could be used for providing "essential services" that had been included in their current operating budgets. In exchange, the Treasury Department required each state to check two boxes on a one-page form self-certifying that they had met these less than onerous requirements.

There is thus no record of how or if these funds improved the long-term fiscal stability of the states--although the fact that they are back five years later asking for an exponentially larger aid package would seem to answer the latter portion of that question. Nor do we have any data that would identify what has worked, and not worked, in the way of emergency federal assistance.