Transcripts For CSPAN Tonight From Washington 20110210

hatch. later, the their reserve chairman dan bernanke on the economy. >> this weekend on booktv, the predictions for u.s. foreign policy for the next decade. also this weekend, donald ross fell system -- rumsfeld talks about his memoirs. abbas milani on the shah of iran. vides full schedule on booktv.org. >> house speaker john boehner says he and president obama want to find common ground on education, these tax code, and trade. the speaker and other republican leaders spoke briefly with reporters outside the white house. >> we had a very nice lunch with the president and vice president and the president's chief of staff. our number-one issue is getting the economy going again and getting people back to work. we believe that in order for that to happen that we need to cut spending, stop unnecessary regulations that are tampering with small business's ability to hire people. there are some places where we can find common ground to address the needs of the american people. it was a very good lunch. we were able to find enough common ground, i think, to show the american people that we are willing to work on their behalf and willing to do it together. >> we did have a robust conversation about the need for all of us to work together to send a signal that we are serious about cutting spending. we had an agreement on that. the particulars will be in the -- in where the disagreements may lie. we are committed to do that because the economy definitely needs us to work together to send a signal that we should start growing again as america. that is when america it does best -- women it innovates and it leads. we can begin to make the foundation where dr.." norris and small businesses can grow again end where we can see an economy that is still here in a healthy weight for our children and theirs. >> i would say the main portion of the entire lunch we talked about the economy, ways in which we could grow the economy, regulations, reforms to unleash the shackles of government polls on small business. we looked into places where we could work together, from jobs to cutting government spending. it was a beginning and a start. we look forward to having the president on his word so we can move legislation and create new jobs. >> can you elaborate on what you said about trade? did you talk about animal and columbia? >> i made it very clear that the house would like to consider all of these bills. there is a lot of support for south korea. there is also quite a bit of support for colombia and panama. i take it is clear there is an interest in moving all three. i would hope the sooner the better. >> can you talk about the effort you put for tomorrow in terms of the spending bill? is there a possibility of the course of the year for spending cuts and tax reform? >> we talked about the need to cut spending. we talked to the president about the fact that we are moving forward tomorrow with the continuing resolution that is going to cut spending. we have a lot of work to do. the american people expect washington to cut spending in order to grow jobs in america. >> did you discuss the budget? >> no. >> did you speak to the president about reaching out to republicans? >> it is clear the president was to find some common ground with us. we will disagree on some things. all of us know there are some issues in which we can work on. whether it is education, tax policy, trade, or even cutting spending, i think we can find common ground ensure the american people that we can work together. thank you, you all. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> the patriot act passed after the 9/11 attack. it made it easier to conduct surveillance on terrorism suspects. lawmakers are trying to renew its provisions. the house try doing that this week, but failed to get the votes needed to pass. all the history of the bill today online with c-span's congressional chronicle. there are time lines and transcripts of every session. find a full video archive for every member at c- span.org/congress. >> the house will try for a second time this week to extend sections the the paycheck act. that begins at 10:00 a.m. eastern time. live house coverage here on c- span. >> corey boles, house appropriators say they will cut programs by how much? >> it depends on the use the tube. they say they are on track to cut spending by $74 billion. that is compared to the president's fiscal 2011 budget, the budget he delivered to congress last february that promptly went nowhere. the only real comparison that can be made is comparing them to the current spending levels. despite the fact we are midway through the federal government paltry fiscal 2011, we are looking at the current spending levels -- the proposed gop cuts. it only yielded about $35 billion. >> house appropriators released a list of programs they expect to be cut. what are some of them? >> we have a list of about 70 programs that would either see rolling back in funding or be cut out right. the environmental protection agency, the internal revenue service would seek cuts. in terms of the high-profile programs which would seek funding cut entirely, the proposal to increase funding for high-speed rail projects is one. this is what the president has last on to in recent days. we were not expecting to seek further funding request in his budget next week. there are also cuts to the department of energy's loan guarantee program. that was a high-profile way to increase money to renewable energy sources. if you add up because they unveiled today, we only get to about $23 billion. that is short of the $35 billion or the $74 billion they are targeting. earlier today, the guy that's from the leadership is that we would see a final plan tomorrow. because of what we are hearing is some pretty aggressive reaction for the conservative house members, this final version could be delayed as the leadership tries to move further cuts to mollify those members. >> the top democrats on the appropriations committee also reacted. they released a statement about the plan. what does it say? >> they are saying they are more than willing to work with republicans to reduce government spending, but that it needs to be done in a carefully targeted and careful way. not just across the board cuts or radical up front cuts. they do not want to jeopardize the economic recovery. >> what kind of debate should we expect to see of these cuts? >> the most interesting debate is going to be within the republican party itself. you have a large number, in fact, a majority who style themselves as very conservative when it comes to fiscal issues. they are aggressively pushing the leadership to do more on the spending cut front. the most interesting debate will be between the leadership of the republican party and its own members as they try to make a deal that all members can live with. >> thank you. >> any time. >> many state and local governments are facing growing debt. in 2009 and 2010, states have been able to postpone some of their budget shortfalls by using federal stimulus funds. a house oversight subcommittee heard testimony on state debt and the use of municipal bonds. it is chaired by congressman patrick mcenroe. -- patrick mchenry. >> i will begin by making an opening statement. i appreciate the panel of witnesses being here. today's hearing is an opportunity to discuss growing concerns over the fiscal crisis limning for states and municipalities. of the past three years, we have seen a culture arise where every institution claimed it was "too big to fail." taxpayers were put on the hook for trillions of dollars. debts have reached an all-time high and the national debt is crippling our economy. we are facing the consequences of bad government policy in another way. state and municipal governments who are preparing for budget shortfalls totaling roughly $135 billion this year. they are struggling under a burden of unfunded pension liabilities, tax revenues, and upper giving bond measures. we must understand the magnitude of this problem to avoid the reactionary at hot decision making that has fueled the federal action of the 2008 federal crisis. this is not about one analyst. looming bout eight a fiscal crisis and a lack of transparency in the pension obligations. the perfect storm is brewing. state and municipal governments are coming to washington expecting a federal bailout like so many others. but the era of the bailout is over. that does not mean, however, that congress must turn a blind eye or a death i -- deaf ear to the crisis unfolding. the beauty of federalism whitens the fact that the federal government does not tell states out to manage their own affairs, at least ideally. the burden of federalism is that when one state or all 50 states are in a crisis, we must work together to solve them for the good of the country. state and local government spending has increased 70% faster than inflation. the vast majority of the states now find themselves in a fiscal straitjacket caused by the burden of paying out trillions of dollars in public sector pensions and health care. for the last three years, funding from the stimulus at has amassed the severity of the state's fiscal challenges. there was $140 million in transfers from the federal government to the states included in the stimulus. states now say more money would help them through their current rough patch. the reality, however, is that states -- is that money states receive from the stimulus act made them worse off. a lot of the money comes with "maintenance of effort" requirements. more money from washington with just delay the day of reckoning and further complicate the state's fiscal situation. besides, we do not have any more money. beyond that, the simple fact is the government has outgrown our capacity to pay for it. there will be severe consequences for not changing course. young teachers and fresh out of college and ready to get back to the community will be told that their school districts cannot provide them with reasonable retirement benefits because they have to pay for the exorbitant benefits of others. firefighters, policeman, and other public servants are facing the reality that their jobs offered the promise of higher standards of living for their families. in the end, people will recognize that their government has failed them. not only that, they believed that their government is actively -- has actively hurt them. while we have an opportunity to change that, we are responsible to try. this is why we are here today, to come to a better understanding of the crisis on the state and local government level, because is, and the available solutions. with that in mind, i intend to shed light on how states arrived at their current predicament, what is the current extent of their fiscal distress, and what needs to be done in terms of available solutions. my friend and colleague from california has a proposal that will require greater transparency on the pension problem. i have been happy to work with them on this legislation. i look forward to hearing from both sides on any and all possible solutions. that is why we had this great panel here today. but there be no mistake, much is required to get our fiscal house in order, not just that the state and local levels, but here in washington, d.c. spending guarantee by angeles bailouts is an unsustainable course. -- by unsustainable bailouts is an unsustainable course. >> thank you for holding this extraordinarily important and timely hearing. congratulations on your new post as chairman. the record should reflect that you and your staff have been extraordinarily accommodating and cordial to myself and my staff. obviously, the issues are too important to divide us. i also thank you -- any time i take complement -- pay a compliment to you should not take from my time. [laughter] i want to thank the witnesses for testify today. this is not about bailouts or bankruptcies. i do not think either of those options can work or are optimal. i am from illinois. you do not need to tell me about how bad its finances are or how bad the situation is. illinois with three decades of bad financial decision making bows by democrats and republicans. they have a backlog in payments and a gaping $136 billion hole in the pension system leaving its pensions less than 50% funded. the rating agencies have downgraded illinois bond issuance in the last 12 months. last year, bonds carry the worst credit risk of any u.s. state and were only slightly worse than bonds from iraq. this bad rating is costing illinois taxpayers $551 million a year extra in interest payments. total debt service in illinois is expected to increase by 33% between now and the year 2017. the only way illinois it will climb out is to raise state income tax is a whopping 56%, and out, no one wanted. this tax increase brought up,nois' bond rating back but only by passing on the cost to allen boyd taxpayers. illinois has to reform its way of doing business. it has left retirees will marble and taxpayers on the hook. -- vulnerable and taxpayers on the hook. we forgot the story of joseph in genesis. during the seven goodyears, he saved for the several lean years. illinois it did not say that for the several lean years and now it has to pay for the consequences. what is going on in illinois is not necessarily what is going on everywhere else. recently, states have run up large deficits due to decreases in tax levels. the real problem actuarial problems unique to eight states, including illinois. the culprits are rising health costs, underfunded pension plans, and poor financial management. some of these pension plans looked particularly bad because of the collapse in the value of pension assets. even an appreciation in asset value will leave several state pension plans underfunded. the municipal bond market is responding to legitimate concerns about the long-term structural imbalances in these six to eight states. it would be correct to distinguish these bad apples from the other 47 states that have been well managed and only have temporary datasets. that is why a one size fits all approach could do more harm than good freed we have to avoid any rash actions that would introduce a new risk factors to the bond market. state and local governments need to continue building roads and bridges. we do not want to make the financing any more expensive than it already is. although there are national interest at stake, it is up to the state governments to reform themselves. they need to reform sooner or later. a default on payments would made it -- would make it hard for all states to borrow. mr. chairman, i do not want an lh -- problem or a new jersey problem to become a national problem. these states need to institute common-sense reforms. at the same time, the government mission matters. all we need is the political will to get it done. i look forward to hearing from our witnesses on this matter and the discussions for the next possible steps. thank you. i yield back. >> i thank mr. quigley. you have done wonderful work. we certainly appreciate that. this is not a republican versus democrats issue. try to understand the depth of this problem behooves both parties and the american people and their right to know. before we introduced the panel, we had the mission statement of the oversight committee. at the chairman's request, i would like to read that. we exist to secure two fundamental principles -- first, americans have a right to note that the money washington takes from them is well spent. second, americans deserve an efficient, effective government that works for them. our duty is to protect these rights. our solemn responsibility is to hold government responsible to taxpayers because taxpayers have a right to know what they get from their government. we will work tirelessly in partnering with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy. this is the mission of oversight and government reform committee. with that in mind, i would like to introduce today's panel. nicole gelinas from the manhattan institute. she is a contributing editor to "city paper." she is a chartered financial analyst and a member of the new york society of securities analysts. her most recent book was about the financial crisis of 2008. it was published in november, 2009. david skeel is a professor of corporate law at the university of pennsylvania law school. he is the author of a book published in 2005. he wrote a history of bankruptcy law in 2001 as well as numerous articles and other publications. eileen norcross is a senior research fellow with the social change project and lead researcher on state and local public policy project. her work focuses on the question of how societies sustain prosperity and the role of civil society in economic resiliency. her areas of research includes state and local governments and economic development. iris lav is a senior adviser with the center on budget and policy priorities. prior to joining the center, she was an assistant director of public policy for the american federation of state, county, and municipal employees. thank you for being here today. members will have seven days to submit opening statements for the record. it is the policy of this committee that all witnesses be sworn in before they testified. we please rise and raise your right hands? do you solemnly swear the testimony you are about to get to this committee will be the truth, the whole truth, and nothing but the truth? >> we do. >> thank you. the record will reflect that all answered in the affirmative. we will begin with you, ms. gelinas. at one minute remaining, the yellow light will come up. if he will summarize your statements. >> good morning, chairman mchenry. >> bring the microphone closer. >> good morning, chairman make henry, ranking member quigley, members of the subcommittee. thank you for having me testify on this topic. congress is right to worry about the choice between bailing out the states and watching as they risk repudiating their long- term obligations to bondholders and other creditors, including union members. the good news is that congress can still act to avoid this choice. the bad news is that a state bankruptcy statute is not one to be the answer. sometimes arriving at a solution means eliminating the bad solution. i will talk about some of the answers. the proposed bankruptcy statute for states say that special interests have taken over the state budgeting process, that there is no prospect of states getting their long-term pension obligations, a health care obligations to retirees, and debt obligations under control unless there is an outside force. in this scenario, states can't threatened bankruptcy to bring concessions from their creditors, specifically labor unions, affecting pension benefits, health care benefits and the likes. as a practical matter, bankruptcy is unlikely to help states solve their fiscal problems and would add new problems. one reason is hell states have structured their bond obligations. when many people think of money the state owes, they look at the state's general obligation bonds -- bonds on which the state has said they will pay back the debt. states also issue bonds to hundreds of public authorities. new york state rose nearly $80 billion in debt -- only about $3.50 billion of that is true obligation debt. the remainder is through the hundreds of authorities. each of these authorities is its own corporation. it is not an agency or an arm of the state. it has its own legal and contractual agreements with bondholders, employees, and retirees. there is no practical way for a state to pull all this debt together in one place. they cannot handed over to a judge and pare it back without violating thousands of pre- existing cut the nets, contracts with bondholders in state laws. congressman quigley points that changing the rules would affect not only states that have gotten themselves into trouble with their own decisions, such as new york, california, a new jersey, but also states not running the long-term deficits. introducing the bankruptcy statute would allow us to all states to question and sort out the uncertainty. during that time, it is unlikely the states would have to pay more on their debt. another practical problem is that seats are not like corporations where one person can be authorized to speak for the state. in a corporate bankruptcy, you have be ceo, an agent of the ceo, and a small board of directors. in a state bankruptcy, hundreds of state lawmakers could not give their power to a governor to speak in one voice. bankruptcy would not equipped the normal prophecies of democracy. you still have hundreds of lawmakers speaking in different voices before a judge. now wait for a judge to take over this process and solve these obligations from on high. another problem is that states do not bow pension benefits, they administer pension benefits on behalf of local governments, cities, and school districts. bankruptcy for the state would not take care of pension obligations. municipalities can do that the changes to the state law. municipalities can already declared bankruptcy debt that is a wait for them to deal with their pension obligations. this is not a benefit to municipalities to a pension and health care benefits. what are some of the other solutions congress can look to to help states pare back their benefits? one thing is making sure that congress understands that states already have the tools to deal with this themselves. they can change their laws that govern pensions. states can govern laws that govern contracts and health care benefits. they do not need to look at congress to do this for them. thank you. >> thank you. mr. skeel? >> it is a great honor to appear before you. it is tempting to say that everything the kohl just said, i will not. i would just make one comment at the outset. we have lots of experience dealing with complicated bankruptcy's. there are a multiple -- multitude of entities. that is not news. i would be happy to address questions about that or the other issues that were just raised it you are interested. currently, we really only have two options. the first is that a state might simply default on some of its obligations, declaring itself unable to pay. the second option is for the federal government to bail out one or more of the states as it bailed out financial as the stations like fannie mae, freddie mac, an aig during the recent financial crisis. i believe that both of these alternatives are deeply problematic and that congress should enact a bankruptcy law for the states, not as a first resort, but as an absolute last resort in the event everything else fails. the claim that we do not need a bankruptcy law strikes me as a little bit like saying there is no need for a fire department because most homeowners have never had fires in their houses and if one starts, the homeowner can probably stop it before the crisis gets out of control. age of these things are true, but we still need fire departments for the rare case when the fire does run out of control. i would like to make three simple points. first, bankruptcy would provide several enormously important benefits that we do not have a in the absence of bankruptcy. second, it is constitutionally permissible, in case you are concerned about that. the law could be tailored to address any particular concerns you may have about things like it being too easy for a state to file or the bankruptcy law being too harsh with particular kinds of constituencies. >> let me say a brief word about each. first, the benefits that bankruptcy would provide for a troubled state. one of the main benefits bankruptcy would provide is a way to restructure some kinds of obligations that probably cannot be restructured outside of bankruptcy. i would include patients in that. there are real limits of what can be done with pensions outside of bankruptcy. the other huge benefit of bankruptcy is if it is necessary as an absolute last resort, it brings everybody to the table. we do not just have one or two constituencies to get singled out to make sacrifices, we get everybody to the table and asked, "how can we distribute the sacrifices so that it makes sense that we can put our finances on a fiscally sustainable course?" my next point is that bankruptcy is constitutional in respect to states. all that needs to be done there -- there are state sovereignty concerns, but they can be honored so long as we make sure the bankruptcy law is entirely voluntarily and that a state cannot be thrown into bankruptcy against his will. the bankruptcy law would also have to ensure that state governmental decisionmaking functions are not interfered with. all these are things we already do with municipal bankruptcy. my final point is that the law can be tailored to deal with any concerns you may have. a lot of the criticism of state bankruptcy seems to us than there is only one possible state bankruptcy law we can have and it will require us to cut everything down to zero. that is not the case. if you are worried about states being too anxious to file for bankruptcy, i do not think that is a serious worry. if you are worried about it, all you have to do is buy some entrance requirements on bankruptcy. we already do this with municipal bankruptcy. if you are worried about the bond markets and that they will be afraid that bonds will be written down to zero, he put restrictions as a prerequisite to doing anything with bonds. we can tailor the bankruptcy a lot to address any concerns we may have. my bottom line is that bankruptcy is not a perfect solution. it will be messy. it is an absolute last resort, but it is better than the other last resort which is states simply defaulting on their obligations for a federal bailout. >> mrs. norcross? >> thank you for inviting me to testify today on this important topic. the recent recession exposed problems in state budgets that, if left unaddressed, are certain to worsen state's of prague risk -- prospects for growth. it reformed today, they can mitigate the worst. the recent downturn is only one cause for state budget gaps. state and local spending has gone faster than state's own revenues. the fastest-growing area of state budgets is medicaid. states have avoided deficits in part through federal funds and have increasingly relied on debt finance by deferring the contributions to pension systems, not funding health care benefits, or borrowing to make pension payments. these days help states passed the costs on to the future. without any changes, we anticipate state and local governments will require an annual and sustained reduction of 12.3% or an equivalent increase in revenues between 2009 and 200058 to close the fiscal gap. in addition, state and local governments face a large funding gap in their pension system. government's report the unfunded liability at $1 trillion, but economists estimate it closer to $3.50 trillion. according to government accounting standards, the discount rate may be based on what the assets are expected to return, an average of 8% annually. this violates economic theory that says a value of a liability is independent of how it is finance. this will require matching that rate with what is being valued. in this case, a public sector pension. it should be matched with a rate that reflects the safety. the circular logic of government pension accounting standards and have had several consequences to pension funding. it has led to the undervaluing of pension promises and the amount necessary to set aside. investment risk has been suggested. an economist at northwestern university estimates that the state's i -- the assumption is an 8% return on assets. illinois it will require $11 billion annually beginning in 2019. new jersey will require $10 billion annually in 2021. another scenario is offered. illinois will require 13% of its budget to ensure solvency. the jurors and see where require 4.5% of its budget. this requires [unintelligible] other economists and accurate -- * have released other scenarios. it is incumbent upon state governors and treasurys to ask actuaries to stress test their pension systems under a range of assumptions. the biggest government the federal government can have is in the medicaid reform. i have two recommendations. first, transparent and accurate accounting. governments must stress test their pension systems and determine what will be needed to set aside to pay these promises. these scenarios should include the risk-free state. secondly, stabilize public- sector pension systems. pay what has been promised but while minimizing the budget on taxpayers -- states said defined benefit plans to the cost-of- living adjustment. they should increase contributions from workers and moved workers to defined contribution plans. the last reform will allow workers more flexibility, shift wrest away from taxpayers, and and manipulation of worker benefits which has turned what has been a safe investment into a gamble for employees and taxpayers. delay will only ensure what is a big problem will turn into a crisis. thank you and i look forward to your questions. >> thank you, mrs. norcross. mrs. lav? >> thank you for the invitation to appear before you today. i believe that predictions that states will have to bailout localities or that the federal government will have to build up the stakes are exceptionally -- are substantially exaggerated. i believe they are signaling an unnecessary alarm. i would like to untangle some of these claims. first, states are projecting a large operating deficits. about one of the $25 billion for the 2012 fiscal year. unemployment remains high. revenues remain below recession levels. there is rising demand for public service abjuring -- due to the weak economy and growing population. figure one, please. the fiscal relief is ending. that is not right. is that someone else's? it is -- it has been enormously helpful in allowing states to put off tax increases. states have used it to cover about one-third of its budget shortfalls. only about $6 billion will be available for next year, covering less than 5% of the shortfalls. as a difficult and painful as these choices are, states and localities will balance their upcoming budgets through budget cuts, tax increases, and use of reserve funds. that is what they do. it is a cyclical problem that will shrink in size as the economy continues to recover and state revenues continue to grow. there is no credible evidence of a bubble or crisis in state or local bonds. could we get to figure three, please? interest payments from state and local bonds and absorbed by% of state and local expenditures, the more than they did in the 1970's. the default rate has been about one-third of 1%. finally, there is no large increase in bond issuance more exotic securities to hide the underlying value of the assets as was the case with the subprime mortgage bonds. third, pensions are a little more complicated. there are shortfalls in pension funding for state and local retirees. states will have to address this over the next three decades or so. pensions were fully funded in 2000. that was by using standard accounting. the recession reduced the availability of assets and some did not make the required deposits. states and localities have about $700 billion in unfunded liabilities. that implies they will have to increase their contributions on average over the next 30 years from 3.8% of budget to 5% of budget. that is on average. to reduce that cost is not a crisis. the major controversy is over whether these traditional accounting standards are appropriate. that $3 trillion number calls from economists that measure assuming a riskless rate of concern, such as in treasury bonds, of about 4%. pension funds and to invest in a diversified basket of private securities. the historical rate of return has been about 8%. it may or may not be a little lower going forward. the $3 change in number is a contract that does not recommend what has to be put into the pension funds. to summarize, fiscal problems are serious but will debate as the economy improves. pensions are not in crisis. i see no need for federal intervention in these areas. states do not want or need the power to declare bankruptcy nor is there a need for federal legislation to require states and localities to report their pensions on a riskless rate as a condition for issuing tax-exempt bonds. there is a process going on to reform the way pensions are reported that to put all states reporting on the same basis, which would be a transparency improvement. we can see what is going on and have a reasonable actuarial method for reporting. a proposal with short circuit that. thank you. >> i certainly appreciate that. we will begin the questioning with the vice chair of the subcommittee, mr. gantt the of new hampshire. >> thank each of you for testifying for us today. i have a couple of questions for each of you. i will try to be quick. the first is for ms. lav. hell with you define a crisis in what we are seeing with the states and their obligation requirements at the levels they are at? how would you define a crisis? >> i would define a crisis as something in which they had no way a big in themselves out. states have many tools in which to do this. if you have to raise your pension contributions, you can accommodate that, particularly after the economy recovers. certainly, states are finding ways of closing their cyclical deficits. we do not appreciate a lot of the budget cuts they are making which are harming a low income people and residents, but that is what they do. states manage their finances. >> i think the concern i and others share is that as states manage their finances, they are spending a higher amount of money percentage wise of borrowed dollars to get us to these challenging economic times. new hampshire has done that to pay expenses. new jersey has done that to pay expenses. it is not good business standards of practice. i do not note that you had a chance to touch upon it in your verbal remarks, but i in your written remarks you talk about standards. my concern is that there is a potential of states wanting to come to the federal government for a bailout because what they define as an economic challenge they are having, i would argue is something a little bit different. any responsible governor, legislator, or administrator should be anticipating these challenges. it does not appear that that has been done in a responsible way. i understand your point, but can you speak to the state's borrowing money essentially to pay for ongoing expenses? i am not talking about stimulus money they have received. i am talking about borrowing money. >> it is a very bad practice. states borrow money for infrastructure. you not see in the data any run up by an of borrowing -- you do not see in the data in the run up by and borrowing. -- run up in borrowing. it makes sense economically for them to borrow for infrastructure. in the locker paper that i referred to in my written testimony, we do have the last section that suggests that states do have some structural deficits, such a mismatch between their expenditures and their revenues. they do need to take some steps to fix those mismatches. there is no question about it that a lot of that mismatched comes from the rate of growth of health care costs. states spend a lot of their money on health care. health care costs are growing faster than the economy. states, which had revenues that grow somewhat lower than the economy because of the structure of the tax system, have a hard time in meeting their responsibility to provide health care. >> i would agree that states need to better manage the pie and the budgetary challenges they are having, but it sounds like you are making an argument for bankruptcy when, in your comments, you said it was not necessary because of the li ooming challenges they are having. i would like to ask ms. norcross if you would comment on the testimony we just heard. >> i would like to explain the discount rate controversy a little bit more. it has informed decades of policy within the pension systems. i believe we are seeing the results of that today. the reason you cannot achieve a discount rate is that if you consider you have a mortgage and you have a mutual fund. your broker says it will return to% annually on your mutual fund. that does not enable you to slash your mortgage in half. what that logic has produced over the years -- in the '80s and '90s, some of the pension plans were trying -- they have undervalued the size of the promise. we -- expecting that rate of return to take care of the contributions they are supposed to be making to the system. when plans are underfunded on paper, it led to some states to generate anestrus without doing the math. in 2001, new jersey granted a 9% benefit increase without figuring out what it would cost them. that is one of the things the governor is trying to adjust right now. you can secure a guaranteed investment with a high risk stream of investments. in the short term, you'll realize more volatility in your investments. they are basically trying to secure a guaranteed payout with a high risk investment. that is the flaw that logic. joshua row uses the 8% discount rate. he says that even if we grant that, we are looking at funds starting to run out of assets by the end of the decade. new jersey's actuary released a paper using the 8.25 pause -- a point to 5% discount rate in the police officer's plan. -- 8.25% discount rate in the police officer's plan. >> mr. cummings, you're recognized for five minutes. >> i want to thank you and are ranking member for working but are simply to address this problem. ms. lav, it is interesting after listening to the vice chairman of our subcommittee, that the national governor's association -- that is the republican and democratic governors to their chairman and vice-chairman -- said on february 4, 2011, "allowing states to declare for bankruptcy is not an authority in the state leader has asked for or would likely to -- or would likely use. the reported bankruptcy proposals suggest that a bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage the finances of the states. these assertions are false and brendan state and local finances -- and that threaten state and local finances." de you agree that the state bankruptcy proposal threatens the fabric of state and local finances? >> if yes, i do agree. states pass all of the tools they need to manage their finances. occasionally, one state does not, but they have the tools they need. >> what you would you recommend as to how the states might improve their fiscal situations? >> i think there are many ways states can improve their fiscal situations. they can move to taking a longer-term look. many of them only look one or two years ahead. they can improve their revenue systems to make sure their revenues matched with their expenditures. they can have processes in place where there are consequences for stiffing a pension contribution, which has caused a lot of the problems we are talking about today. there are many things they can do to make it clear to policymakers and the public about their own situations and allow some oversight. i believe states themselves have the ability to do that. this recession has been so long and deep, that some of the flaws and become apparent. it will not be forever. i think they will adjust their revenues and expenditures to manage these problems. >> the house budget committee chair, paul ryan, proposed cutting the federal budget by approximately $40 billion this year and much more in the future. with this significantly worse than the state and local government's fiscal problems? it is not a gift to the states. >> no, it is not a gift. it is a penalty for the states. about a third of spending that mr. ryan was to cut goes to state and local governments. we do not have the exact number, but probably $13 billion would be money the states would have to scramble on top of their existing deficits -- additional deficits they would have to close because of cuts. >> is not most underfunding of state pensions due to recent dramatic declines in the stock market that hurt domestic -- that hurt investment portfolios of almost all americans? given the recent emerging recovery, a market upturn, and projected future gains, do you not agree with the analysis that long-term gains will smooth out today's long-term problems? when the storm is over, i do not want to see situations where our employees -- by the way, a lot of them are working in this room to date -- may have lost their pensions and their state pensions have been diminished. states come out of recovery, and because some states fail to make their pension payments on time -- you have to keep in mind, the employees have to pay. one of my concerns is when the storm is over, these folks have been locked out of a lot of money they were due. maybe some of the others may have a comment on that. >> the improvement in the economy and the market will have a lot to do with improving the outlook of tensions over time. for most states that have not provided retroactive benefits without funding them or have not made pension payment contributions, they will be fine. the vast majority of states will be fine when that occurs. >> the investments have been treated as a gamble and unsecured as they should have been secured. the investment strategies have not been appropriate for the plan. i shared the view that people have worked for this and contributed to it. every state pension system and every local pension system as a little bit something different going on. i would caution that joshua row's paper is important. if there is no change to these policies, the plants will run out of assets. >> this is a representation of the difference between the represent -- the blue line would be private spending increases since 1950 until now versus state and local government spending. private spending has increased five times, but local and state government spending has increased 10 times. so it is not a matter of an increased cost per problem, but a spending problem, would you agree? >> yes. >> understanding the problem is one thing we want to understand today. if it is noble. -- not knowable. how -- if it is knowable. is there a range on the spending program? >> a range would be $700 billion to $3 trillion. as you can see, that is a large range. this involves predicting things that are very impossible to predict. you have to predict the performance not only of the u.s. stock market, but of global equity and bond markets. you have to predict the course of future inflation and also predict how long people and their survivors are going to live. >> ms. norcross, do you concur with that range? >> under a range of assumptions, yes. meaning, the $700 billion would be under the current assumptions of the 8% discount range. that is why i am advocating for stress testing the pensions and granting economists how they would value the plan. >> what is up word? >> $3.50 trillion. under currentnt lahoo, government accounting standards, is it sufficient? do we have an of transparency in understanding? >> no, it is not sufficient. i would advocate asking the states and the large municipalities to report oho the liabilities under a range of assumptions, reported under a lower -- were used to be called a risk-free trade, maybe 3%. , allow investors to make up their mind. there is a problem with disclosure, but it is not the biggest problem. investors can do their own calculations on these liabilities. we have seen others do it on their own. if investors to not like what is reported, they can simply not invest in the debt. again, we should have more disclosure, but the problem is not that we do not understand the magnitude of the issue. it is getting the political will within the safe to change state constitutions, which govern pension benefits for future workers, people who have not been hired, change state laws, collective bargaining, collective healthcare and so forth. >> would you concur with that, miss norcross? >> hi agreed. >> the simple enough. agree. >> simple enough. government a accounting standards, similar or dissimilar? >> they are a bit different in the private plans. they use something close to a risk-free rate. >> would you like to add anything to that? >> no. >> wow, going pretty smoothly. mr. norcross, in your testimony you discussed that state spending grew faster than state own revenue forces -- state- owned revenue forces from 1977 to 2007. point, can you explain the danger of states reporting budgetary imbalances when they are actually using federal funds and an daetz to fund these expenditures? >> i think that just highlights the high. you have the state's own revenue and federal and other. if you are just looking at what the state can support on its own, that can be papered over. if you discount that they are getting federal funds, which can discount for their spending across the states to raise taxes. i agree that is not a very large portion of budgets, but we have seen recently where states will dump a trust fund, bonds and replace it to develop spending. >> have states change the nature of what they used bonds for? rather than building a road, are they using it to plug a pension fund? has that changed? >> we see more bonding, and also the definition of capital can be pretty flexible. >> my time has expired. mr. quigley, the ranking member, is recognized for five minutes. you, mr. chairman. so far, the problems that we have seen with these 8 to 10 states in particular that are troubled, they seem to be self- contained. i would like to ask any one of you, if you can, what the potential systemic risks are. the last economic crisis taught us that everything is interconnected. in terms of the market or what have you, if there is a big kick up, and certainly there is a threat which some of these states defaulting are having other problems with payments and so forth. the impact on other states, the impact on bond rating list, but also the bond market itself. and while it may only be 8 to 10% -- 8 to 10 states, that is 20% of the country's population. what is the impact on the rest of the states? >> i think their risk of contagion is much less severe than it was in 2008 with the financial institutions creed i think the bond market's know the difference between the states that are in real trouble and those that are not. >> can you tell the difference? >> i think we do. there is some ability in the markets to make a distinction. that would be my first point. the second point is that a lot of the problems with the financial institutions is that they depended heavily on short- term financing, which was subject to immediate withdrawal. they have tax revenues coming in and they are likely to continue borrowing. i think it is a different kind of crisis. >> you violated our role. >> [laughter] but in the long run, people realize what the fundamentals are and there is beginning to be some improvement in that market now that has been put to rest. i think that there are distinctions among states. the last time the state the fault was in the great depression and even in the great depression only one state, arkansas, defaulted. only four cities or counties have defaulted since 1970. i do not think we are going to have a major default crisis. i think there will be ways -- you know, you are going to have some sewer districts and some revenue bonds that were tied to the housing bubble and so forth that will have trouble and those districts will have some problems and the states will probably step in and try to sort that having a reasonable way. but i cannot see a scenario of major fault in contention. >> if i could just say, one issue that risk courting a bond market crisis would be changing the statute to allow for federal bankruptcy. if i am a bond holder, for example, take your opposing metropolitan transportation authority was $30 billion in debt -- take a new york's metropolitan transportation authority with $30 billion in debt. as long as these bonds are outstanding, this entity will not declare bankruptcy. that is what new york lawmakers have determined under the democratic process. if there is any question that you have a statute that would somehow supersede that, where this idea that you could take right promises made to these bondholders to give to bondholders or unions at another state entity, this risk would take many months to sort out. i would also add, maybe not the potential for an acute crisis that we saw in september of 2008, but the potential for the risk of losses at banks. if you do not need a default where the market for value of the securities is in decline. if you have $200 million in municipal banks and a similar amount in money-market funds. if a bank, -- if banks worry that the value has declined, they may pull back on lending to the rest of the economy. again, not a panic, but it makes the bercow -- recovery more difficult. what benefit are you getting? you are not getting much benefit because the states have the .ools to fix these problems >> this is all assuming that the states would not default on these bonds. the questions that we have to ask our, what are the possibilities? the bankert simply default completely. >> you ask about the -- the bank would simply the fault completely. >> you talk about the rate of return and what you judge is a much more realistic figure. the same sort of question -- a quick shift from perhaps 8.25 to four would be pretty dramatic. the contributions would have to be increased. but again, the market that looks at this, would you see this being done all through a slower time frame, and adjustment time or how would you see that work? >> i agree that you would have to have a range of assumptions. but the liability is the liability. simply targeting a rate that makes it look a little better only masks over the underlying reality of what is owed. also, if you are going to pay this out over 15 years, my concern is that in cases like illinois where they are going to take on more risk for the investment strategy to make up for what was lost. that would be my concern. >> thank you. >> i thank the chairman for organizing this panel and all of the panelists for their testimony. i would like to gain a deeper understanding of the magnitude of the challenge. i would first like to ask you to qualify and expand on the statement in your testimony where you stated.net states and localities devote 3.8 -- were you stated in testimony that states and localities to devote 3.8% of their pensions. i would like to know where you got this number from and is this universally accepted? and based on this number, how can you suggest that public pension costs are the large costs of the state and local financial problems as -- problems? as we know, we are just beginning our way out from the recession that has impacted our entire country and there are many costs there. could you comment first, ms. norcross, and then miss laos? >> what her estimate is, what states have been contributing on average. that would be all plans. then she estimates that accuse the 8% discount rate you would have to raise that to 5% of budget on average. >> that is correct. and we worked with the boston college people who using your expertise on statement -- stake unlawful figures to come up with that statement. >> how can you suggest that this is the cause of the state and local financial problems if the contribution is just 3.8%? >> it is not. it is not the cause. pension contributions come from general funds. if the big deficit numbers, $125 billion you are hearing about, it is a general fund number. but neither contributions, nor interest on bonds are the major component. the major component of the deficit is the expenditures that states have in health care and education and so forth. that is why i said, you know, it is not a crisis to raise this from 3.8% to 5%, you know, in the way that state and local budgets are put together. you can do that over time. it is not a big crisis. there is all of this talks about -- and this talk about the riskless rate. one paper says he would have to go to 9%, which would be a big problem. but there is a distinction in value windy liabilities and how much you have to -- of valuing these liabilities and how much you have to make to the pension as a whole. i would say those are different things. >> the number of you testified on it. i would like some clarification. is it true that this rate is different from the private sector plans? >> private-sector pension plans admit they have a little bit more risk as a company can go bankrupt. they use a corporate bond rate and reflect the risk. >> it is higher than the riskless rate. the corporate bond rate is 5.6%. >> why should there be a different rate for public pensions and private pensions? >> because private pensions have to be a bit more conservative because a private company can go out of business and they dump their liabilities for their pensions on the public benefit guaranty corp. so the federal government does not have to bail out the private company and pay those liabilities. it insists on a more public -- more reasonable rate. but the public can adjust its taxes and expenditures. it is going to be an ongoing entity. there have been gao reports and most people who have looked at this say that you do not need as stringent standards for a public company has to do a private. >> would be riskless rate precede the tent -- the pension shortfall? >> yes, substantially higher -- with the riskless rate increase the pension shortfall? >> yes, substantially. >> how would it raised its? >> 60% of return assets come from investment income. if you say you are only going to get 4% from that investment income, and you are projecting that 30 years into the future, you make up a much larger hole that you have to fill. but if you say you get 4% and you continue to invest in equities, then you are saying something that is not true. you are saying that you have to overfunded pension because you are saying it is only going to be 4%, but if you get 7% or 8%, you will actually have more in it. i hate to say it, but it could end up with even more pentemptan to not have consistent contributions every year. it is much more realistic to say what you are going to gain and consistently contribute the amount you need, rather than have feast or famine. >> my time has expired. would anyone else like to comment? >> i like to have, if i may, the logic behind the discount rate is that you have saved the risk of where you are valuing. the private sector plan reflects some of their risk. if the company is guaranteeing 100%, if you are going to get paid. it goes back to the idea that you have 15 years off and the majority of your obligation has come due, your lessening the likelihood that the money will be available to pay it out. >> if i could comment to the magnitude of pension liabilities, the reason why they do not show up as much at the state level is because these are often the responsibility of the local governments. they are set by state law, but paid by the localities for example, nyc will pay about $8.5 billion in pension obligations this year. that is 10% of the entire budget, including funding for the city. it's a much bigger problem at the local level rather than the state level. >> thank you. mr. quigley is recognized. >> i ask unanimous consent to enter into the record a statement from the government of massachusetts. >> without objection, so ordered. you are recognized for five minutes. >> i would like to ask unanimous consent to win set -- insert into the record an article by jeb bush. >> without objection. >> in finance hearings it is important to keep things simple. it is my understanding that almost 80% of municipal bonds are owned by individuals in some form. is that your understanding? >> the tax-exempt bonds, yeah. >> with most investors hate is a nasty surprise, a down side surprise. in markets that function well, you have transparency and you have a heads up on coming bad news, usually, people are less alarmed. i want to ask a couple of questions about the transparency of these markets. what are we missing today in comparing these obligations between states that would enable an investor, an individual investor, to better evaluate these investments? is my and understanding that some of these get package and an and they just want the tax break and that is the way they diversify their risk. you do not want the bond fund to be harmed either. what we're missing in terms of transparency with the state's exports with respect to bonds, i do not think there is anything. -- with respect to state bonds? >> i do not think there is anything with respect to bonds. i am not aware of anyone complaining about transparency of bonds among the states. moody's just put out a new kind of analysis where they have added together the outstanding hawes bond debt -- the outstanding bond debt and pension obligations are you can look at it in one place. i think that is a good thing. with respect to pension obligations, there is a problem of not being able to look at state by state pensions on the same basis. >> exactly what are those problems? >> the use of standards -- there is a range of actuarial standards as to how you measure future liabilities and so forth, and states can choose which ones they want. i mentioned at the beginning of this hearing that the government accounting standards board is very close to issuing a new standard that will no longer allow that and will require -- >> ben after gasb has a new standard, then we will have apples to apples in comparing the state? >> i believe so. >> do all of the panelists agree? >> i believe so. if i might clarify, is that a world that will require them to be abo over pbo? because gaddy is also working on the discount will, but i do not know if they will have them together. >> in the next few months we will have greater comparability between the dates of an individual investor can evaluate the risks involved. >> that is landers standing. they have not put out the final will get, but -- that is my understanding. they have not put out the final will be yet, but that is the goal. >> they have taken all of the drought since of timber and they are very far down the line. i think is appropriate because of the stakeholders have had a chance to comment. various people object to the various parts of the royal. but it is going to be standard rules. >> does the manhattan institute and the pennsylvania law school concur in this? >> i am not following this that closely. i will be agnostic on it. >> i will as well. i have no prediction on how that will come out. >> off you mentioned earlier, rating agencies analyses. the rating agencies do not have the credibility they had before the housing crisis. favre the rating agencies on top of these developments -- are the ragerating agencies on top of these developments? >> i think they are. there are the rating agencies and a host of other financial analysts out there that are specializing, and they are not the rating agencies, which i agree has brought some credibility. but they look at this and they have specialists who spend all their time looking at state and local finance. i do think they have a pretty good handle on what is going on. and i cite that in my report. if they are saying that there is no major -- they are saying that there is no major chance of a contagious defaults. a couple of the faults are expected to be in things like non-store districts and the like. >> i see that my time has expired. >> i thank the gentleman. if it is ok but the panel, we have the opportunity to go with a second round of questions. if there are no question concerns this morning. with that, i recognize myself for five minutes. the definition of the fall -- of default is to fail to perform, pay, or make good. if we look at the fault in the bond market, does the bond market define that narrowly? which is to make good on your payment to me. or can we, as policy makers, to find it more broadly? which is, failure to fulfil an obligation to the people you are serving. pension holders, for instance. and not being able to pay pension orders. or could it be not making good, so you have to sell a city or state assets in order to pay bondholders, which is an interesting piece here. but beyond that, as federal policy-makers, are we making the matter worse through our transfer payments to the states? there has been some point of reference in testimony today that that is, in fact, the case. mr. norcross, your written testimony includes some discussion of this. but to the tune of hundreds of billions of dollars a year, there are federal transfers to states. there are also federal mandates on states that our cost drivers to government. -- that are cost drivers to government. can you touch on this? >> of course, the most well- known maintenance of effort would be with current medicaid requirements on the state. and there are many other grants in aid that are handed out to the states that occasionally come with maintenance effort requirements, or may encourage the minister how the government to raise taxes and support spending. i do not know if i answered your question. >> there are certain states that are in different fiscal situations. i noticed some research has been done on this. the difficulty of policy makers to balance the budget, does that have a bearing on their credit rating? certainly, it does, one would believe. in your discussion of various sub groupings of the state, not the general obligation bonds, but the dormitory authority for road authority, does that have a bearing? the state revenue sources, whether they are not -- whether or not they are sustainable. can you touch on that? >> yes, and without saying whether these 80-the rating agencies are right or wrong -- without saying the rating agencies are right or wrong, they have a good understanding that each bond is different. in california, for example, they have said very clearly paying debt service on general- obligation bonds, this is one of two top priorities for the state. even if california has masses -- massive budget deficits, they pay these bonds before anything else. the rating agencies will get that and see the structure of the lot and that goes into the analysis. other states, it may not be as high a priority, but it is a very high priority in every state. and when you look at things that -- like bonds that are tax secured. the state says, we will pay this on tax before we pay anything else, that is actually higher than a general-obligation bond. that gets triple a rating. you have to look at the character of this day, the willingness of the state to pay the debt, and sometimes the willingness of the state to make bad decisions. we saw in illinois, state raised taxes or to give comfort to the bondholders. trying to get more discipline in getting the bondholders to care more about the fundamentals, it does not necessarily get you good, long-term decisions for the stake if the response of the state is to raise taxes. it may make the long-term situation worse, not better. >> we certainly appreciate that. in today's "wall street journal" there is a story about this hearing. their reference california borrowers barrault mebazaa millions of dollars -- borrow millions of dollars per year. there is a $3.7 billion bond to make required pension contributions to the pension system. there is a larger discussion here about whether the states will be able to afford higher interest rates to these bonds, following the end of quantitatively easing and the impacts that will have on their pension fund gaps. i would just ask you to make comment on that briefly. >> higher interest rates are certainly risk. not only having to do with the fundamentals of the municipal- bond market, but also, how do global investors feel about the prospects of inflation in the u.s.. if treasury bond rates go up, it is likely that municipal bond rates, will go up at the same time. >> i will just add that those are already disproportionately borne by the states that are in big trouble. california's interest is much higher than other states interest rates. if that is what we would expect and in the long run, that is what we want. that is what we want the bond markets to be doing. >> i concur with what the professor said. i would distinguish those different things. in california, the participation notes, they pay them back within the same year. that is not borrowing back, but is changing the timing of the borrowing. of course, the expenses will go up. -- will go up as expense rates go up. it is only used to get it 4% or 5% of state and local expenditures. this is not something that will break the bank if it goes upon from 4% to 5% to 6% of expenditures. it is on the margin. we do not have to accommodate it, but it will not break the bank. >> thank you. >> again, thank you to our panelists and the chairman of ford is abating. this is an important issue. -- for participating. this is an important issue. from my point of view, the mission matters. we often hear it so much that people did not like government, but when it comes to local government, when they call 911 they want a fireman or an ambulance for a police officer to respond. -- or a police officer to respond. and they want to know when they cross a bridge is safe. so much of local government its close to home. what we are talking about today is so important because the poor financial management can put all those things at risk. beyond the financial management dealing with pensions and so forth, it is really the notion that governments need to look at themselves and reinvent themselves. i am not just speaking to the congressman. if i was a cook county commissioner for 10 years. call the local governments need to invest in themselves and streamline and consolidate, not because they do not matter, but because they've left -- the matter very, very much. there's a lot at stake here. it is still the big question that the public wants to know, what to what extent -- that the public wants to know. to what extent could there be significant bond defaults in the year 2011 or 2012? >> i do not think there will be a city where a county debt defaults. i think there will be some defaults in this special districts for revenue bonds. as an example, in florida, there were bonds issued for sewers in a development that never got built because the housing bubble burst. you cannot pay back those bonds because there is no sewer revenue coming in. it is those kinds of things around the country that are th going to be a bit of a problem and are going to be defaults or restructuring. as the chairman said, the term "default" is being used in different ways. i use it as, you cannot make the interest payment on the bond, not they do not find another way. but there always projects that go bad in a bad economy. but i do not think there will be any major large city or county that defaults. by and large, even for smaller ones, the states will step in. we have a control board now in nassau county, new york. there will be quite a few control boards where states come in on localities that are in trouble and make them figure out a plan for working their finances out. >> i will just add, i also do not think there will be too many defaults. " it is important to keep in mind that we do not know. there will be states, that survive, but if only 48 states survive the current crisis, we are in trouble. we need to plan for that. we need to plan for surprises in a way that in 2008, we did not plan for surprises. >> as a democratic people in each state, we do not have to wait for the bond market's to make common-sense decisions today. we know state-by-state, and s -- and for the nation as a whole, we have cost. retiree, pension liabilities, these are things that if we do not get a handle on them, we will not be repairing or building roads because we will be paying these growing retiree costs. these are things we can fix today. if we should not wait for bond markets to tell us what we should be doing already. >> i would concur with what miss gelinas said. >> thank you and i yield back. >> mr. cooper is recognized for five minutes. >> thank you for this excellent hearing. back to the question of individual investors. if i am an individual or bondholders today, or a local tax bear thinking about maybe during some of these bonds, what is the easiest way to find on the web or another source of credit rating or financial soundness of the entity in which i'm investing were living? >> bond prospectuses have a lot of information. >> prospectus is a long, legal document, sometimes hundreds of pages. that is why, the consumer may be at the broker's office saying, i want a tax-free bond, tell me what to buy. how can you tell whether you are living in a credit or the jurisdiction or not? -- creditworthy jurisdiction or not? this is the information age. you can find out with relative ease, small-town u.s.a., is it worth it or not? >> it is fairly difficult. if you have to piece together information, but all of the brokerage's published reports on individual bonds. if you go to a broker, you can get the kind of information. but to assemble it yourself is still a little bit difficult. >> that is why most people do rely on the financial advisers and brokers rather than make their own decisions, or at least in looking for information. kollhofand as miss gelinas saidt depends on what kind of a bond is. you may be looking at the tolls to pay back a bond on this highway, or maybe it is credit, in which case you need some sense of the budget of the entity and its long-term prospects. >> but if miss gelinas said earlier that it is hard to get ahead of the bond market. you really have to be a student to understand what is going on. >> it is just like when i go to a lawyer or a doctor. not everybody is a finance person. >> before the individual investor, it should be made it relatively easy. some of the investment workers have an interest in making bonds will good. >> that may be the case. there is not a lot of a way that an individual can investigate. most towns have their budgets on the website. i can find them, but it may not tell you what you want to know if -- everything you want to know. >> we can care if -- compare almost everything in life through websites. why can't we get uneasy handle on these? >> there are 80,000 jurisdictions in the u.s. and some people say 90,000 that issue bonds. it is quite a large undertaking and maybe, something and someone would want to undertake, but it would be a big deal. >> i guess the more relevant question is, if someone buys a hot fund that may have a few bad apples in it, -- if someone buys a fund that may have a few bad apples and it, how can you understand what you have purchased? it is my understanding that a few things painted the whole package. >> those rings called sliced and diced securities were people did not know -- and those were things called sliced and diced securities where people did not know what the things work. >> in this case, there is at the something there, unlike when there is a collateralized debt built on the mortgage bonds built on mortgage bonds. some of these things were rated aaa and ended up being worth literally nothing. i do not see how that would be the case here, even if we did a small scale, a municipal -- the small-scale municipal and project defaults. it is hard to see a municipal bond fund, waking up and it's been worth nothing. individuals own the sponsor, but not directly. they own them through money markets, $300 billion in state and local debt in money market funds. and there is a financial intermediation and the dealers responsibility that this is the large investment banks. they've run these funds. they hold many investment on their own books. if we have not succeeded in getting financial discipline in these firms, who in many cases think they are too big to fail, they will not be working -- worried about local debt. they think congress will bill the mouth. >> would any of you investigate any bond fund in the hunt for yield with higher tax-free interest rates in nevada, southern california, florida? would you put your life savings or a pension fund in a fund like that? especially since it is quite difficult to find out how the merits of each project. >> i would be careful, but i certainly would not steer away from the media market. >> i asked about project. that would be the most likely to have problems. >> he would have to look at the project. >> but apparently, that is almost impossible to do unless you are a bond lawyer and willing to read 200 pages per project. >> if you are going to invest in a particular project -- >> but that would be a bond fund with lots of these projects. it seems to me we are not giving consumers an individual investors enough information, at least, that is easily accessible. but i see that my time has expired. >> i certainly appreciate the gentleman's line of questioning. the question was, would you invest in state and municipal bond funds, you yourself. yes or no? maybe? if you want to answer that, that would be great. >> i think there is a very real problem with people's trust in the financial industry entrusting their financial advisers and trusting of managers of these bond funds, and that issue is not going away anytime soon. >> ms. norcross? >> i would probably ask my financial planner. [laughter] i have never actually invested in municipal bonds. it is not my style. >> ok, thank you. i thank the gentleman from tennessee. and with that, we'll go to mr. walsh from illinois. >> thank you, mr. chairman, for holding such an important hearing. like the ranking member, i am from illinois as well. illinois is a mess. we all know that. in no way is the federal government going to bail out my state. our constituents and not allowing an accurate if i feel like i left the movie right before the good parts. if i am sure the case was being made that bankruptcy is not feasible. so, no bailout, bankruptcy is not feasible. let me start out with a quick round robin question. give me your 20-second solution so i can walk out of here with that take away. we are not going to bail you out. bankruptcy is probably not feasible. what are the state's going to do? just a quick one lot -- of a quick one to that. >> a thing voters in many states are already doing the right thing. we have new governors from both parties that are starting to address what we do about pensions for future employees, what we do about medicaid costs. it is certainly, something that employers can help with. these are voters for individual states pressuring their lawmakers to change state laws and in some cases, state constitutions. it is not something that the federal government should do for them. the system is working, is in perfect -- if him perfectly. >> i guess my question is if we are literally going to fall off the cliff, we can change laws for the future, but what you do for the state that has fallen off the cliff? >> my answer is going to be, i think we need to put a bankruptcy regime in place to deal with precisely that problem. that is the only problem we absolutely need bankruptcy for. and i will add one thing to that, which is, i think that states are doing the right thing. i hope the optimism we have heard today is correct, that most of them can model their way through. -- can model their way through. but some states have pension reform issues. there's a lot of debate in illinois about what can and cannot be done in many states it does require a constitutional change and i think that is unrealistic. some options are more feasible than others. >> i would say, close the defined benefit plan and see how and can pay out what has been accumulated. >> i think states can use their normal processes of dealing with their taxes, and their expenditures to set themselves on the right path. illinois has a particularly deep hole. if i have been writing about illinois -- i have been writing about illinois posing problems for the last 25 years. -- i have been writing about illinois's problems for the last 25 years. in need to do those things it needs to do to get out of it and bring itself in balance. it has the tools. >> thank you. in my remaining time, let me ask one question about market risk. bill gross, who manages pinko, one of the largest mutual funds in the country -- who manages pimco, one of the largest mutual fund the country, he stated that -- he said that if the fed lowers interest rates, it helps our debtors, but harms all of those who work hard and save money. it is, in effect, allowing debtors to reduce their debt on the backs of those that save money. is that right? >> i would hesitate to sadek right now. >> the states and cities have borrowed a very low rates, not just in the past couple of years in extreme conditions, but for two decades now. if rates go up, including possibly way up, you will have to get used to a very different environment very quickly. >> could you argue that the fed's quantitative easing program has, in effect, been a bailout for states and municipalities? >> sure, this is a bailout for anyone who owes money. states and municipalities may not be the disproportionate benefit of this, but it certainly helped them. >> mr. norcross, do you concur? >> i concur. >> mr. chairman, i yield back. >> thank you, mr. chairman and thank you for hosting this very important meeting. and i come from new york state and you can imagine in this is a concern on many of our minds. i apologize for being in and out, but i appreciate your time this morning. the first question i want to ask is regarding the stimulus money and the fact so much was paid to states. how do you think that was a way for the states to -- a a sort of to put the state of? they did not have to hit these issues face on. and it was the late and now they have to reckon with it. >> i am happy to respond to that. when the money for canada in 2009, we would have seen -- when the money first came out in 2009, we would have seen very sharp cuts in education and health care. we would have seen millions of people losing their health insurance and the states were poised to cut people. we would have seen many, many more layoffs of teachers and other public employees, which would, in fact, have potentially delayed recovery. take that demand of the economy and other stimulus, actually provide the boost to the economy that was very important. now, as the stimulus is ending cannot at least state -- as the stimulus is ending, at least state revenues are beginning to grow again. they are at low levels, but at least they are beginning to grow again. states have more ability to absorb the end of the stimulus. they're proposing mary -- a very major cuts in budgets hall this year, but is probably better that they are doing in now than in the death of the recession, which could have been very damaging to the economy. >> it seems to me that those decisions that they are making out, they should have made a year ago and got their fiscal houses in order. it appears that the stimulus just delayed reckoning with the situation. >> i agreed. there is some case for some of the stimulus money going to states, but there is no question in my mind it has delayed the restructuring. >> yes, i would agree with that. there was a missed opportunity in that congress might have considered saying to the states, we will give you a dollar today in 2009 if you take steps to cut your future liabilities by $1.10 years for now. so, -- by $1 10 years from now. so, take the money, but use it to fix the problems. that has not been done. >> expanded spending has led to cuts being taken today. and of virginia and new jersey were not making the tough choices. >> while i still have some time, if i could ask another question. regarding the possibility of bankruptcies and some of the states that are so financially strapped, if they did not declare bankruptcy, would that affect the abilities of health your state? does that impact a state that kept its fiscal house in order and now they are going to be impacted by another state that did not? >> i think the impact will be very limited. as i was saying a few minutes ago, the bond markets have the ability to distinguish between states that are in good physical shape and states that are not. it is really not like the big banks in 2008, which were connected to each other. they have the same kinds of assets and problems. if the states are really independent. i think a state that is in good physical health would be able to continue to borrow just fine. >> thank you. miss gelinas i think in your opening statement you addressed this. if you could address it now as well. >> i would respectfully disagree. markets can distinguish among states, but not instantaneously, or even a few weeks or months. at changing the law in this way, in a release sweeping way, half tscentury's worth of precedenc would be swept away and not states would suffer as well. >> when you look countries that have run into trouble, argentina for instance, which is about as profitable as you can get, it is remarkable how quickly they can go back to the market. i believe markets respond a lot more quickly than people tend to think. >> thank you. i yield back. >> thank you for your line of questioning. if i have three more questions that i want to pose to the panel. if that is all right with you all. if you look at the public sector employees unions versus private sector employee minnick -- employee unions, the public- sector unions now account for more than the private-sector unions. an interesting crossover we have had in just the last few years. on average, public-sector workers make $14 more per hour in total compensation, wages, and benefits than their private- sector counterparts. ms. gelinas, you have written about this, i know, but if you could testify here today and say that it seems to me that the public sector employees and private-sector employees are living in two separate economies. what are the ramifications of that and what is the root cause of that disparity? >> yes, and i should be clear that it differs from state to state. particularly the northeastern states, illinois, -- northeastern states. illinois and california offered bargaining that is commensurately who much higher. it looking generally have the problem, it would not be so much of the wages. these are open-ended liability is that states and localities are taking on. right now, they are uncontrolled. one aspect of getting these zainuddin -- under control is to start to switch employees into 401k-style pension plans. you are getting rid of an open- ended liability for the state in the future. standing between us polities. -same thing with municipalities. workers in manassass adis -- in municipalities do not pay anywhere near what the private sector does. why would do much to help these pension liabilities. >> he mentioned changing the plan to raise -- and you mentioned on changing the plan to 41 k-style plan. that is one policy change that the states could enact. what are the prescriptions that the federal government can take action over to help stem the tide that we see coming? one of you talked about the loss of revenue and the fact that stimulus funds or sort of relieved the burden of having to lay off workers, but if you look at local school boards right now, with the loss of the stimulus funds your having hundreds of people showing up at school board meetings because they are talking about layoffs. i believe the day is coming, the day of reckoning is coming when the stimulus funds run out. and rather than realizing it two years ago and making changes, they're having to do it now. what are the things we hear in congress, what policy changes can we make to help stem this crisis? i will pose that for every one. " we will start with massawa gelinas. >> one area where it may be most straightforward for congress to help states is with medicaid, because this is not an issue where congress would be telling states, you have to change your pension plan, you have to change the way you govern yourselves. medicaid is currently a program that encourages states to spend more, because when they spend a dollar more, sometimes it gets more than a dollar back from washington. gradually changing medicaid into a block grant program where you offer a set amount of money that increases on a set formula and states are encouraged to innovate and costs and that would reward them, rather than raising costs. this would encourage them in the future. >> i agree that medicaid is the most obvious place to do things there are real limits on what you can do with pensions and things of that soared because of pension -- and things of that sort because the pension issues. >> i concur, medicaid and other areas, such as k-12 education and other areas where there are mandates. >> i do not think in the areas that we are talking about today that there is any need for federal intervention. >> other than money? >> i'm not asking for the extension of the stimulus. it is unfortunate that it was designed so that the economy would already be recovered when this did -- the stimulus and it. revenues are already below their 2008 level. states are not able to get back to where they were. helping the economy, there's not much you can do to help the economy right now either. but with respect to medicaid, in many ways it is similar to private insurance. i think the best in would be to figure out how to control the rate of growth of health care costs half in the economy. all of the scary gao if they continued to grow faster than gdp, the state is going to have trouble coping with that. the federal government is a major driver of the federal deficit. >> this is something that i ever intended to ask -- intend to ask feature panels as well. we will have a series of hearings about the fiscal crisis. and the ramifications of not addressing it. they want to hear from informed individuals to start this process. i would like for you to tell us who we should hear from next did credit rating agencies, a pension holders, unions. tell me one, two, three people or entities that we should hear from. we will go down the line. >> that was a pretty good list. financial analyst, there are several that have a very good handle on this. i could suggest a few. unions have a major stake in this. you should also listen to the government. >> thank you. >> that is a good list to start with. also consider calling those who are involved in education finance. >> i would just add, i think you should talk to pension lawyers. these issues are both economic and legal. >> of all those people and i would suggest speaking with infrastructure people. the other side of this is that states have to grow. private sectors can not create jobs we have the infrastructure that is decaying. these liabilities can be better controlled from that end as well. >> thank you. i appreciate your testimony. i appreciate the opportunity to hear from you. thank you for your time. thank you for spending the morning with us. thank you so much. this meeting is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] we continue our look at the economy tonight on c-span. up next, interviews with treasury secretary tim geithner. utah senator and virginia governor. later, a federal reserve president ben bernanke testifies about the economy. on tomorrows "washington journal, we will get an update on the federal budget with house budget committee member. later, historian on the lincoln presidency and the 150th anniversary of the civil war. "washington journal, each morning at 7:00 eastern. later, the heads of the cia, fbi, and the director of national intelligence testify about u.s. security threats. live coverage at 10:00 on c-span 2. that is live from the house foreign affairs committee. next, but tim geithner is interviewed by a journalist to be woodruff. the treasury secretary talks about the u.s. debt ceiling and give us a preview of the president's budget. we will also hear from utah senator. this forum was hosted by atlantic magazine. >> welcome to this town hall. finding work and finding our way. i am judy woodruff. there is no issue americans care more about than the economy. in fact, in a recent poll, 63% of those surveyed said is extremely important that president and congress to deal with the economy in the next year. unemployment is next. more than half of all of those surveyed, 54%, said that is extremely important for the white house and congress to deal with the issue. they are a topic around the country. president obama paid a visit to the u.s. chamber of commerce this week and urged businesses to begin hiring. >> if i have one message, of my messages now's the time to invest in america. now was the time to invest in america. [applause] today, american companies have nearly $2 trillion at set -- sitting on their balance sheets. many of you have told me that you are waiting for demand to rise. with millions of americans out of work, demand has risen more slowly than any of us have liked. we are in this together. many of you are forecasting a healthy increase in demand. i want to encourage you to get in the game. >> in a minute, i'll be joined by the secretary of the treasury. later, we will hear from a leading republican senator. we will hear from senior editors from the atlantic. they will take us to the global economy and they will talk with three young entrepreneur is to are carving out a new niche in the field of education, pharmaceuticals, and baby food. joining our conversation will be students onto campus -- college campuses. the university of north carolina at chapel hill and miami university in oxford, ohio. the microsoft corp. has set up seven watch parties to follow this conversation. we also want to hear from you. derek thompson will be live blogging. what is the best way for viewers to submit their questions? >> for those of you joining us at home, i am joined by tareq talk -- derek thompson. he is going to be live blogging our event today. for those of you who would like to participate in our discussion on twitter, i would encourage you. if you have specific questions, you can submit this to me on line. .jobsweb address is www go and economy.com. >> thank you. i want to welcome our first guest. he is the secretary of the treasury. thank you for being with us. i want to come at this from the perspective of those college junior setter watching a run the country. they will be graduating next year in 2012. what is the economy going to look like? what will the employment situation be? >> the economy is getting stronger. they feel more confident. they can look ahead now and see a growing economy. you are starting to see them bring more people into the labor force. americans are coming out of college and will see a stronger economy with more opportunity. >> what about young people were watching will be graduating from high school? high-school juniors right now. the ones who are maybe not going to be able to go to college. what is the picture looking like for them? >> we're still coming out of the worst recession in generations. it will take this economy a while still to repair the damage. we have been gone now for a year-and-a-half. the private sector has created more than a million jobs. things are gradually improving. they think the u.s. economy is going to grow between 3-4% over the next two years. we would like to be stronger, of course, but that is pretty strong given the trauma caused by the crisis. >> what do you think the best case scenario is for unemployment? >> it will come down, but it will come down more gradually than we would like. this is a crisis caused by a country that to borrow too much. when you have recoveries that follow financial crises, it takes time for people to adjust the amount they borrow to the level then come they have. the recovery is accelerating. if you listen to help people think about the future in the business community, they forecast a community growing -- an economy growing between 3-4%. >> mr. secretary, u.s. corporations are doing very well right now. their profits for the third quarter last year are highest on record, over $1.60 trillion. earnings are way up from a year earlier. sales are up, but they're not hiring. at least not here in the united states. 8.3 million jobs lost in the recession. the president is urging -- he said, it did endgame. is there any evidence that they will? >> it is more than a million jobs by the private sector over the last year. that is more jobs sooner than happened in the last two recoveries. millions and millions have lost their jobs in the crisis. we are at the beginning of getting those people back to work. growth normally comes before employment starts to increase. you have to have growth first. i was talking to one of the major species in the country. and the country. people cut so deeply in the crisis, there were so panicked, frankly, by the scale of the crisis that they cut deeply into the muscle of the american business community. they spent the last two years improving productivity. they are at a point where as the economy starts to grow, they will not be able to meet growing demand. that is encouraging. >> they have gotten accustomed by getting by with a lot fewer employees. what is the incentive? >> you should see basic optimism and confidence. we can to adjust very, very quickly credibly to interdict the weakest parts of the system out of the business quickly. use of productivity growth very strong through this early stage of the recovery. that cannot continue. businesses will have to bring more people back to work. we wanted to accelerate. >> i spoke with a friend of mine in new york yesterday talked to a number of ceo's. one of them said to what -- they said, we will hire when it makes sense for us. >> what we need to do in washington is to make sure we are creating a better environment for businesses to act with a little more confidence about the future. to really important things happened. congress passed a tax package with $100 billion payroll tax cut for individuals. the most generous business expensing tax provision in american history, 100% expense in the capital investment for all american businesses. those two things provided a very helpful spark to the recovery. you saw people in washington, to gather on a bipartisan basis and do something productive for the economy. that helps confident the little bit. and people look at washington and they think about the future, they want to be more washington. -- they want to be more confident. >> let's talk about the kinds of jobs. the jobs were lost, many of them were high-paying jobs. the jobs that error coming back -- the jobs that are coming back, health care, leisure, wholesale, retail, the pay typically is notably less. the top three occupations that grew last year, retail sales, cashiers, and food preparers. they're all important jobs, but the hourly wage is less than $10. all are high-paying jobs a thing of the past? >> if you look at what is strong and the american economy, there are still parts of the economy that are suffering. housing is very weak still. construction is very weak. parts of the small bank community are still having a tough time. look at what is strong. high tech is really quite strong. manufacturing is quite strong. export growth looks strong across the board. you listen to where people are having a hard time. they are for people in high- tech, high end manufacturing. fundamentally, that is encouraging. look around the globe today. look at where we are. you see china emerging markets and brazil, not really strong growth out there. they need the things that americans are good at producing. we are going about twice the rate of growth than most of europe and japan. not as fast as china and india. we stand at a point or we can affect dramatically from this human the boom and growth we are saying. good jobs, high-paying jobs in high-tech, high end of manufacturing. >> we do know now that half of corporate revenues come from overseas. there is a disincentive for these companies to bring that money back home. they have to pay tax on it. the labor leader has talked about having a tax holiday. is that something the administration is looking at? >> is a very important issue. we work with congress to shape a comprehensive reform that would lower the very high statutory rates, but do so in a way that is revenue neutral. the dominic strategic imperative for the economy today is to make sure that the largest possible share is meant by investment in the united states. with luck to have a tax system that is better for growth, better for investment. >> what about that specific proposal? >> we are not going to look at a holiday outside the context of comprehensive reform. >> win is the corporate tax reform coming? we are in the process of trying to shape a consensus and among the broad cross-section of the community. we want something that lowers rates and broadens the base, improves investment incentives. i think we can do that. i was talking to the head of the major technology company. the people say they will leave -- they believe doing this in a fiscally responsible way as possible in a way that can help improve their competitiveness. --y like the certainties' the certainties. >> there are also business leaders who say that they want a tax cut. >> they will always want that. >> revenue neutral is not good enough. how do you reconcile? >> let's be realistic. we're not going to ask americans to pay higher taxes so we can lower taxes on businesses. it depends on banks and governments have to do. it depends on the quality of education. we have to do so in a way that demonstrates confidence to investors. the task of governing is to make sure we balance the competing priorities we can do that. >> you unpersuaded -- >> even the ones we have persuaded say they want their taxes lower. >> let's talk about another and the love that. the government's role in this. government spending. republicans say this is not nearly enough. in order to get long-term growth, you have to cut a lot more. he is the chairman of the house republican conference said this during the weekly republican address. >> this month, we would put forth a continuing budget revolution that outlines billions of dollars in spending cuts because we pledge to cut spending back to the pre stimulus, a pre bill level. in order to get americans back to work and create jobs, there is no limit to the amount of spending we will be willing to cut. americans know you do not simply when the future. you have to plan for it. washington spending binge is not distorting our workers. it is threatening our children's future as well. we have reached the tipping point. in other words, loss of the american dream. >> that is the message. his good friend paul ryan, has put forward $35 billion in cuts. the republicans say is necessary to get the economy growing. what would that mean if there were $35 billion in cuts? >> it is good to see across the political spectrum a broad consensus on a fundamental reality of economics. we have been living within our means for a long time. if we are going to grow, we have to bring down our long-term deficits. beloved great debate now about how to do that. it will require the government spending less and spending more wisely. the test of a credible plan is going to be what will bring down the deficit to the point that the overall burden of debt to starts to come down. the test will be, how to make sure we are spending more wisely, that we are preserving room to invest in education and infrastructure, but did that in a way that brings in the deficit. this is a test of governing. it is a test of credibility. you need to see people laid out a path. the president will do that next week. you will see his proposal, a very detailed proposal. how the government can spend less in areas where we need to spend less. >> the president feels strongly about that. republicans are saying the spending, the investment is digging the country deeper into a deficit hole. >> that was too dark a vision. these are fundamentally manageable challenges. they require that we make some choices here in washington. brain that same the cooperation -- and bring that same cooperation without sacrificing the things that aren't essential. it's the look at the things that the president is proposing. they add that very broad support across the political spectrum in the past. we can preserve that as we bring down this deficit. the test should be not the simple question of who can be more austere, who can go deeper, the question should be, who will be smarter, more pragmatic and a deficit reduction plan that preserves incentives for innovation. >> you are winning converts from the republicans? >> we had a decade where people said deficits do not matter. we did not have to pay for things. that has changed. that is changing. the world is watching. they want to see whether washington can find a consensus. >> one of the people watching as a student at miami of ohio. we have is still the question. >> i'm elizabeth. my question had to do with u.s. treasury bills. considering our latest level of national debt, when interest rates rise again, could the u.s. government be at risk of default? >> there is a risk free assets around the world. everyone relies on them as the basic store of value and liquidity. one of the most promising things about how the u.s. responded to the crisis -- when the world was at the edge of depression, at the edge of financial panic, people still saw the basic safety of treasury u.s. financial assets. we are still paying exceptionally low interest rates. the world is confident that ultimately america has to deal with the challenges. we want to make sure that we are learning that confidence. it is selling a portion that we will have this debate. >> we are talking about the debt. there is this debate over the debt ceiling and whether it should be raised. it is coming up in march. the administration is saying that it has to happen. it would be a calamity if it were not raised. the number of conservative republicans are saying, no way. the republican leadership seems to be prepared to make this happen. are you worried that the treasury secretary, this debate, could upset the market? debbie massey. -- it will be a messy. >> the u.s. will meet its obligation. congress will act as it always has. the debt limit is not about things that congress has authorized us to do in the past. there is always -- congress will act. it is very encouraging that you have seen the republican leadership recognized and america will do the right thing. the right debate is about how to find a strategy to bring down our fiscal deficit over time that is not going to hurt the expansion, not going to hurt future growth, not going to hurt our basic competitiveness. you see really encouraging signs of support for that strategy across the political spectrum. ultimately, america will do the right thing. washington will figure out how to get through this. we recognize that there is no alternative. >> i was looking at the polls. most of the polls are showing that the public is favoring the republican proposal to cut deeper now. to deal with that deficit. >> you will see the president laid out in his budget next week very detailed proposals for where we can reduce spending, where we need to preserve some investments, and how to do that in a way that brings down the deficit over time. you want to ask people, where will they cut? what is -- what will they do to the broader deficit? you are not going to solve that broader debt problem by just focusing on cutting deeply into discretionary spending. we will not support cuts that undermine our capacity to grow in the future. >> the have another question from a student. it is from the university of north carolina at chapel hill. >> i have a question about investment in the future. how does the government plan to do that without investing in education? >> i think he made the right point. part of what is important is how fair we are as a country, it is the quality of education we give our citizens. we think it is fundamentally important to make sure we are making smart investment in support of reform to include the quality of public education. we want to see more americans complete college, community college, so that we have an economy more equipped to meet the much more challenging demands of competition. >> you are dealing with a political argument. republicans believe the government should not be in the business of handling college loans. are you going to face push back? >> it is a good debate for us to have. it seems self-evident that there is a good economic case for trying to make sure that people have a little bit of help in afforded college education. very, very high return for the economy. all the evidence suggests that people who are able to go beyond high school have a much more earnings growth and contribute to the economic nature of the country. it is one of the great defining strengths of the american economy. we will make sure that we preserve that. >> let's talk about the world that these students will be working 10 years from now. the atlantic had a cover piece the other day in connection with all of it. jaws future is all about freelance. -- jobs future is all about freelance. it will be much more about individual entrepreneurs, small business, people working out of their homes. that will be the fundamental underpinning of the economy. as you think about what the economy will look like, is that we see? >> that will be a fundamental strength of the u.s. economy. we have an economy where we have some of the great global corporations on the planet. they were built in the united states. they are defining frontier innovation. that is supported by incredibly dynamic innovative small businesses across the country. but the government's job should be is trying to make sure we are maximizing incentives for more of that innovation to happen. it is the government's job not to kick the technology of the future, not to decide where it should go, but to create the incentive so that the market can read those investments. -- counteract those investments. that was the great strength of our economy. >> you have to be optimistic about this. last friday, we saw unemployment numbers. the rate went down, but only 30 some thousand jobs were created over the entire country. how do you feel as somebody who is sitting in a place to make a difference when you see a report like that that means there are still millions and millions of americans out there who do not have a very bright future? young people keep coming back -- they are wondering what kind of the country they will live in. >> we still face very difficult challenges as a country. this crisis did traumatic damage to the basic economic security. the tragic reality is that it takes time to come out of it. it is very important that we remember we have a long way to go to dig out of this whole, a long way to go to give those people a chance to get back to work and to be more secure and more confident. the number on friday was probably -- the unemployment rate came down dramatically. i think the private sector jobs created understated the strength. most people you talked to today, they see a picture of steadily improving job growth. we think it will continue. we have to make sure that in washington, we are doing things to reinforce that, not jeopardize it. >> holiday you -- how do you remember to stay in touch with the flesh and blood reality of this economy? how do you keep that in mind when you are dealing with a lot of statistics and numbers? >> the statistics do not tell you enough. most important thing we can do is to make sure that we are listening to to businesses across the country. we're listening to people whose jobs are to help people get through these markets. we're talking to community banks, community development institutions. we hear from them or things are getting better, and where they are still very hard. we have great people across the administration who are out there every day trying to listen. people are pretty direct with us. they have a lot of advice. >> you feel like you are getting a sense of what people are going through? >> yes. the great obligation we have here in washington is to make sure that we recognize that even though things are getting better, we have a lot of work to do and a long way to go. we need to make sure that to -- that we are recognizing the most important thing for us to do is to make sure we are reinforcing this recovery, getting more americans back to work. >> treasury secretary tim geithner, thank you very much for being with us. >> nice to see. -- see you. [applause] >> we are back here and the studio. orrin hatch is now the ranking republican on the senate finance committee. a senator who has spent 34 years in the united states senate. we are -- thank you for being here. >> it is always nice to be with you. i heard you were looking for someone with charm, wit, and charisma. >> we are here to talk about jobs today, about the jaws of the future. what do you see right now? you represent the state of utah, but you have been in washington forever three decades. as you look out ahead, what is the outlook? >> if they are going to school, they have excellent opportunities. those it did not finish high school, they will drag behind. they will have very difficult times. it pays to get an education. it pays to go to college. the will have to do a lot of things to resuscitate our country. our country has been the greatest country in the world. we are in danger of losing that. we are in danger of losing that position. we are spending up to 69% of gdp. some said the gross national debt is as high as 90%. if it is 90%, we are in real trouble. we've got to get to where we spend less on government and more on attracting businesses and creating businesses and opportunities. that includes everything from cutting corporate tax rates to helping our young people to find jobs. >> what is the government's role in doing that? >> just keep their hands off and keep taxes low, i try to get spending under control. we are spending 25% of our gdp right now. the of not spend that much sensince world war ii. our revenues are something like 14.8%. they used to be around 80% or maybe a little higher. when you are spending 25% above your revenues and 25% of the total expenditures and you only have 14.8% coming and, that is putting the country in great jeopardy. we also have a huge national debt that we have to bring down. the only way we can do that is to be competitive and being competitive means that giving business an opportunity to grow and to ignore high-tech world. -- and to keep our high-tech world. it is second to none. >> people have looked back and analyze what happened to job growth over the last decade. we now understand, looking back, that job growth was starting to slow in the decade of 2000. we were not saying that kind of automatic growth that we had seen before. those ingredients were already there. my question is, what are the fundamentals in our economy that need to shift beyond just tax changes? >> this country is the greatest country in the world. it would be catastrophically stupid for us to fill a down the drain. we can do it with too much government, too many restrictions, too many controls, and by not giving incentives. when the administration first a man, -- are we going to avert -- tax the overseas profits of our large corporations? if we do, they are uncompetitive. other countries do not do that. we're able to win on deferral, but our laws are still not very good in that area. >> that would be a tax break. >> it is a tax break if they do not tax over six profits. if they bring them back to this country, they would tax them. that still means a lot of the jobs here. that company -- >> that has not always gone hand in hand. >> that is true and that is not true. a lot of these -- in the 1980's , we had 37 based in the united states. because of our tax policies and some of our other approaches to everything, we now have 16. that is pretty pathetic. this is the most innovative country in the world. who can compare with what we have done? microsoft, oracle, hewlett- packard, intel. here is a young man that is 26 years old to is now worth $9 billion. because of the innovation. he had the incentive to be able to go and do some of the things he has been able to do with facebook. we want to encourage that. we can tax too much, over regulate too much the point for businesses do not feel comfortable here. they will go overseas. we're also not balancing our budget. we are spending 25% of our gdp. >> the administration, the president's thinking, yes, there is a deficit. it needs to be addressed. but we also have to worry about the jobs of the future. we need to invest in education, medical research, infrastructure. you are saying that is not as important as getting the data -- >> i am not saying that at all. that is still important. we do invest a lot of money. do we do it efficiently? do we do it in ways that encourage businesses? are we encouraging our small businesses? are we taxing them to much? the president said, he will reduce corporate tax rates. we have tax expenditures where they did certain breaks in certain areas. they want to do away with the tax expenditures. i think we can reduce those rates. the g-7 are 27%. the g-20 is 22%. we're a 35% we have to get in the real world. we need to do things, everything from expanding visas -- >> you are saying cutting the corporate tax rate to what? >> i would like to get it down to 25%. we are the authors of the research and development tax credit. it keeps our people competitive. we liked ours lapse for over a year. we should make it permanent. companies could plan and count on its and do a lot of things that they're not doing today. >> we have a question from the audience. the know what the effect on the deficit would be? >> the only way we will ever get out of this deficit is to strengthen business. strength in opportunity and strengthen the success in this country. if we do that, we will have enough revenue to take care of the country. and we have to stop spending. it is off the charts. it is costing us every step of the way. we've got to bring spending down bread is the almighty federal government -- the almighty federal government is not the answer to anything -- to everything. >> we hear a lot about controlling discretionary spending. but the real threats to our fiscal soundness is entitlements. when president bush tried to take on social security, it is fair to say that he was attacked by the democrats and abandoned by his own party. i suspect that president obama, who is afraid of the same thing, how do we have a serious adult conversation about entitlements without becoming a party warfare? >> they are afraid. you cannot solve the problem without presidential leadership. we have to have the president standout. we also need the chairman of the financial committee. i intend to be chairman for 2013. i am not only praying for it, i am working toward it. >> you are up for reelection. >> i intend to get reelected so i can do this. whether i am chairman or ranking, i intend to see what we can do. these are all in the finance committee. i intend to do everything in my power to try to resolve these issues and get spending under control. if i am the most hated person in washington, i will get that done. but i will need to be chairman of that committee. i now have to do -- i know how to do it. there is another aspect to this. international trade. we have three treaties that the president said he is for, but he is only for the caribbean free- trade agreement right now. -- korea free trade agreement right now. we also have colombia and panama. they are already negotiated and already done. columbia has a free rights, but we do not have the rights and columbiombia. >> what would the job impact be? >> it would help us to create jobs. we are at a loss export wise. the president has the right feelings about it, but he has not lead. we will have to get the big entitlement programs under control. >> we have a question from a student at -- from miami of ohio university. >> while the united states has a combined federal and state corporate tax rate of around 39%, the actual burden falls on corp. is substantially lower. the united states ranks around 124th for actual corporate tax burdens. what is the role of corporate tax loopholes that reduces the burden? >> that is a clot -- that is a good question. all these other nations have tax expenditures and they have various tax benefits. a lot of them have permanent research and development tax credits that we do not. we do not -- we cannot give our companies the consistency. we are still a the highest corporate tax the nation in the world, next to japan. we need to bring those down so that we can get the incentives to hire more people. we can do that. it is a difference in philosophy. my friends on the other side believe that the federal government is the last answer to solving these problems. i think it is an impediment to solving these problems. we have too much determination and to law allowing the free market system to expand and grow. it is a classic combat that has been going on in my 34 years. i am the most senior republican in the united states senate. in all our years, we have never had a fiscal conservative majority. that is why we are spending so much. frankly, we have won battles. >> how many moderate republicans are left in the senate? >> we hope we can diminish if you more. we need more fiscal conservatives. we do not need not in the united states senate. we need fiscal conservatives. we have some nuts on the other side, and once in awhile, we find some on our side. >> i would ask you to name names. i would pursue that, but this is a young audience and i do not want to disillusion them. >> young people are so bright today. findare all on line you'll most of them on the democratic side. >> thank you very much for joining us. good to see you. [applause] >> more from the atlantic magazine forearm. next we will hear from virginia gov. bob mcdonnell. this interview is 20 minutes. >> from the commonwealth of virginia, right across the potomac river, the republican governor of the state of virginia, bob mcdonnell. thank you for joining us. >> nice to be here. >> the focus is all about jobs. in the state of virginia, what is the picture? what is the employment picture? what does it look like down the road for the next few years? >> this is our top focus in virginia. for most republicans -- for most governors, focusing on economic development, getting people back to work is their top priority. i am still focused on that. is what people are concerned about. jobs give people the sense of dignity and reduces the reliance on government. because of our tax and regulatory climate, a virginia has fare better than most states. we are at 6.7% unemployment right now. >> why is virginia in a better spot? >> several things. the fundamentals of the virginia economy -- we have this focus on keeping taxes and litigation of lower. we are a right to work state. we have some of the best universities in america. long term, we are always developing workforce development. we are in close proximity to washington, d.c. there has been a fairly stable market. we have just focused on it. economic developments takes work by the government, not to create jobs, but you can reduce the barriers for economic development and bring the kinds of incentives that will allow you to attract -- i have done a lot of -- i've spent a lot of time traveling to different states and countries to talk about the virginia story. >> tell us a little bit about -- that is something that people find interesting. you traveled overseas. tell us about the process of how that works. how successful has it been? >> right now, we are fourth in the country of net new jobs created over the last year. we're behind texas, california, and pennsylvania. on a per-capita basis, we are fourth or fifth. to me, if you are going to close a deal, you have to look a customer in the eye. here is what we can offer you. i made a couple of trips to california. if they are going to exit, i want them to come to virginia. i asked for a major economic development package. i gave them about $63 million in new incentives. money to open trade offices in england, china, and india. i went to england last year. i will go to china in may. india and israel this november. open the offices, meet with potential investors, and people would be new customers. >> how many jobs have to be at stake for -- to get the governor himself to show up for one of these meetings? are we talking thousands? >> we have multiple meetings during those times. i will meet with a lot of potential investors. we put together a strategic plan. defense contracting, aerospace, technology, advanced manufacturing, the film. we know what we are good at. i want to go and tell people in other states and in other countries what we are good at, what the incentives are that virginia has to offer. one of the bigger issues, we and is stillture our biggest market in virginia. i want to open up a new market in china and india. there is a lot of benefit to doing this. i have spent a lot of time on the phone. sometimes that personal relationship means as much as the money. they want to know that they have an ally babel be pro-business. -- and not lead -- and allied that will be pro-business. >> we have a question on line. you can virginia's budget by $4.2 billion. was there a net effect on jobs as a result of that? >> we made the tough choices with no tax increases. the message to the business community is that we will not balance the budget on you. same message to the virginia families. we will find ways to reduce spending. to say, we want to grow our budget to be able to fund services and the future, not with tax increases, but by economic growth. virginia is open for business. we are saying great things about business. jobs are created by the private sector. there were some public-sector jobs that were lost. we have reduced the size of government by about 1500 employees over the last couple of years. we have made that up in private- sector jobs. >> we have a question. >> thank you for being with us today. increasing trades with china a priority for your state. why? should other states the following your lead? >> we are going to china and japan and korea. they have shown an interest in doing more trade with states. secondly, there is over a billion people there. there are enormous markets for virginia products. you go to china. that is where the potential consumers are. we think there is some opportunity there. you have to look people in the eye. >> we will come back to you in just a second. if you had more money, you would make new investments in education, higher education, transportation. those sounds like some of the same things that president obama is talking about. how are your ideas different

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