Policy Documents

Texas Threatens Lawsuit Over $26 Billion State Bailout Law

Steve Stanek –
August 12, 2010

At least one state could be readying a federal lawsuit against a $26 billion federal bailout of state governments and local school districts President Obama signed into law this week.

Texas Lt. Governor David Dewhurst (R) said on Wednesday the state “absolutely” will sue over being forced to commit to future education spending levels required by the law.

The $26 billion package steers money to states to spend mainly on public education and Medicaid. Ten billion dollars is supposed to go to public education, meaning primarily to teachers and school administrators. The remainder goes to Medicaid, enabling states to redirect money to save the jobs of police and other government workers who had been threatened with layoffs.

The White House estimates 300,000 teachers, police, and other state and local government workers’ jobs will be saved.

Punitive Provision for Texas
The bill stipulates each state must use its portion of the education funds to supplement,  not replace, state spending on education. Also, each state’s education spending as a percentage of total spending next year must match or exceed the current percentage of state spending.

The bill singles out Texas for special—some say punitive—treatment. The education spending requirement in the law stays in place until 2013 for Texas and no other state.

Lawsuit Likely
On Fox Business News on Wednesday, Texas Lt. Governor David Dewhurst (R) said the state “absolutely” will sue over being forced to commit to future education spending levels to qualify for the money. He said he has already told the state attorney general he “would be delighted to be the plaintiff.”

Twenty-two members of the Texas Congressional delegation have also sent a letter to House Speaker Nancy Pelosi (D-Calif.) pointing out lawmakers cannot bind the spending of future legislatures.

“Requiring the State to assure that a future Texas Legislature would commit to spend funds in accordance with these provisions would violate the Texas Constitution,” they wrote.

State Budgets ‘Hijacked’
The law’s provisions will force many states to rewrite their budgets to receive the education funds.

Mississippi Gov. Haley Barbour (R) said in a statement his state might have to transfer up to $100 million to education, "funds that must be taken away from public safety, human services, mental health, and other state priorities and given to education," to meet the bill’s provisions.

"There is no justification for the federal government hijacking state budgets, but that is exactly what Congress has done," Barbour said.

$11 Billion Tax Hike
The law also raises $11 billion in taxes on some U.S. multinational firms and cuts food stamp spending, though many people doubt the food stamp cuts will happen.

“This is a lose-lose for taxpayers,” said Ryan Ellis, director of tax policy at Americans for Tax Reform, because the federal government is spending more money it does not have and raising taxes on multinational firms in ways that “may result in jobs and even whole companies shipped overseas” to avoid the higher taxes.

Praise from Teachers
Teachers and other government workers praised the bailout.

The President signed the bill on August 10 and stood with teachers union representatives in the White House Rose Garden and said, “We can’t stand by and do nothing while pink slips are given to the men and women who educate our children or keep our communities safe.”

National Education Association President Dennis Van Roekel said in a statement lawmakers and the president “reaffirmed that the road to economic security and prosperity runs directly through our nation’s schools. As a result of this vote, we expect to see less crowded classrooms, reinstated bus routes, and restored education programs and services.”

Surge in Education Employment
Opponents point out that, unlike private-sector workers whose taxes fund government, public-sector workers have been largely shielded from layoffs, pay cuts, and reductions in pensions, health insurance, and other benefits. This is especially true in education, said Mattie Carrao, government affairs manager at Americans for Tax Reform, who opposed the bailout bill.

“We have seen spending for education explode over the past few years, with no improvement in student performance,” Carrao said.

Research by Eric Hanushek of Stanford University backs her up. Hanushek reports the number of public school teachers grew 41 percent from 1990 to 2007 while student enrollment grew barely half as much: 22 percent. Between 2000 and 2007, enrollment grew 5 percent and teacher employment grew 10 percent.

 ‘Legacy of Debts and Deficits’
“When we have the federal government subsidizing what is properly state or local government activities, as they’re doing with this bailout, this is a further disincentive to pay attention to how the schools and other governments are operating, because people aren’t feeling the complete pain of paying for those services,” said budget analyst Tad DeHaven of the Cato Institute in Washington, DC.

“This isn’t a vote for the children,” DeHaven added. “If anything, children in this country should be petrified at what these government folks are doing, because the children are going to get stuck with the tab for this spending. Children are being left a legacy of debts and deficits and the possibility of a lower standard of living.”

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.