BOSTON – U.S. governors this weekend called for greater fiscal discipline in their states to calm bond market fears over their debts, but they offered little consensus on efforts to extend certain federal government stimulus programs, specifically Build America Bonds.

Governors traded war stories from the fiscal 2011 budget writing process as they met here over the weekend for the three-day annual National Governors Association Conference. The governors touted various efforts to save education spending or cut taxes amid the worst recession in a generation that spared neither political party. Many of the governors said they see a weak economic acceleration, meaning renewed fiscal conservatism will be needed going forward.

They agreed that the tepid economic recovery has made them more fiscally prudent.

“I think the main word you use today: ‘discipline,’” said Gov. Joe Manchin III, D-West Virginia, who this weekend became chairman of the NGA for the year, in an interview. “It will pay tremendous dividends if you are disciplined,” he said.

Though governors agreed on fiscal conservatism, they disagreed over federal aid to states.

Manchin said there is no consensus among governors on a lobbying effort to extend the BABs program, which will expire at the end of this year.

NGA “has not taken a position on that,” he said.

“Governors feel very strongly about the debt level. Some states have no other alternative but to get all the help they can. I sympathize and understand that,” he said.

On Friday, six state and local groups sent a letter to Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa, urging them to extend the BABs program.

The governors are closer in agreement on an extension to the Federal Medical Assistance Percentages program, which Manchin called NGA’s “No. 1 priority.”

The program, which provides more federal matching funds to states to offset the costs of children’s health insurance and other programs, was created by the American Recovery and Reinvestment Act and is set to expire at the end of this year. The Senate last month failed to extend FMAP through June 30, 2011. The FMAP extension was included in the same legislation that had the BABs extension.

“So many of our Democrat and Republican states that are hurting so badly to balance their budgets that now they are going to have to make severe cuts if that money runs out on Jan. 1,” Manchin said.

Some governors said the growing fear among municipal bond investors has forced them to make painful spending cuts or risk being shut out of the debt market.

“Bondholders want to hear from each one of us in a separate way to bring back fiscal constrains into our budgeting process,” said Gov. Luis Fortuno of Puerto Rico.

“We have to stick to our fiscal discipline, and we will,” he said.

New Jersey Republican Gov. Chris Christie put it more bluntly: “If we don’t have access to capital markets, we are dead,” he said.

Christie said he hopes to pass this Monday a 2.0% cap on property taxes, which will have an exemption for debt service. The state senate passed the plan last Thursday.

Christie said New Jersey’s property taxes, which are the highest in the country, have limited state businesses in recruiting workers and hindered its economy. But he acknowledged the need to ensure bondholders are protected under the tax cap.

The exemption allows for local governments to raise taxes beyond the cap to make sure debt service gets paid, he said.

“We do not want the capital markets to be concerned,” Christie said about the property tax cap in an interview. “We have to assure markets that if we are going to cap property taxes in a high property tax state like mine that you are going to have the exemption for debt service,” he said.

Christie agreed with Manchin that an NGA consensus approach on BABs “might be difficult,” he said.

“Each state is going to take its own approach to it,” Christie said of the lobbying effort for a BABs extension. For other states, “my policies might not be their cup of tea,” he said.

Governors also discussed the state of the economy. Many said that the national economic recovery has dimmed and that they are concerned for their budgets in 2011 once stimulus funds from the American Recovery and Reinvestment Act have expired.

The economic “recovery has slowed,” said New York Democratic Gov. David Paterson in a panel discussion.

Republican Gov. Mark Sanford of South Carolina said the country is “bound for a double-dip recession” and that fiscal 2012 will be the “mother of all inventive years” as states are forced to cope without stimulus aid.

Governors agreed that they need to create jobs to grow their states out of the recession. But the consensus broke down over a debate to cut taxes to encourage business development or protect education spending.

In a briefing on the economy governors heard from  Yolanda Kodrzycki, Vice President and director of the New England Public Policy Center at the Federal Reserve Bank of Boston, said the economy is “nowhere near” as bad as it was in 2008.

She said states next year will be pressured for more aid from local governments, which are more reliant on property taxes. As property values have dropped amid the recession, local tax collections have also fallen, she said. These tax revenues lag the economic recovery making 2011 “just as tough” for local governments, Kodrzycki said.

At least 24 sitting governors will not be returning to their posts next year, either because of term limits or because they are not seeking reelection.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.