Senate Nixes Aid Ban Plan

WASHINGTON — The Senate yesterday voted down an amendment to financial regulatory reform legislation that would have imposed a blanket prohibition on federal assistance to states and localities in financial trouble for reasons other than a natural ­disaster.

Proposed by Republican Sen. Judd Gregg of New Hampshire, the amendment only garnered 47 of the 60 votes it needed to pass. It was designed to insulate taxpayers from having to pay for potential bailouts to states like California that have been “profligate” and have spent beyond their means, Gregg said.

He stressed, however, that the amendment would have provided an exception for states and localities that were harmed by a natural disaster.

Specifically, it would have prohibited federal funds from being used “to purchase or guarantee obligations of, issue lines of credit to, or provide direct or indirect grants and aid to” states and localities that have defaulted, are at risk of defaulting, or are likely to default on their obligations.

Prior to the vote on the measure, Senate Banking Committee chairman ­Christopher Dodd, D-Conn., warned the proposal was “draconian” and “just goes way beyond anything I’ve quite seen here.”

Dodd said the legislation was so broadly written that it would curtail all federal grants or funding to a state or locality that was in financial trouble but had not yet defaulted on any of its obligations. Such a prohibition would only exacerbate the state or local government’s financial troubles, he said.

He rattled off a list of federal programs that would be closed to the state or locality, such as Medicaid payments and unemployment benefits.

Democrats also claimed the amendment would have been retroactively effective, with Dodd warning that it would have applied to states and localities that have previously defaulted on their obligations but have since emerged on more stable footing. Even though Orange County, Calif., emerged from its bankruptcy filing in 1994, would it, too, be barred for future federal assistance, Dodd asked.

In pushing for the amendment, Gregg had tried to argue it was consistent with provisions in the Wall Street reform bill that would provide for an orderly resolution of financial institutions deemed too big to fail.

Ahead of the vote, the Government Finance Officers Association, the National Association of Counties, the National League of Cities and the U.S. Conference of Mayors sent a joint letter to lawmakers urging them to oppose the measure.

“In the current economic climate, we believe this amendment will only magnify the budgetary problems state and local governments now face,” they said. “This amendment could adversely affect billions of dollars in direct grants and aid to state and municipalities, including payments for Medicaid and education.”

The amendment process is scheduled to wind down in the next day or two, with the Senate expected to vote on the  overall bill — submitted as a substitute amendment — by Friday.

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