Stateline Story

GAO Critical of Last Year's $10 Billion Bailout for States

  • June 09, 2004
  • By Pamela Prah
The $10 billion budget bailout that states got last year from the federal government was ill-timed and wasn't targeted to states hardest hit by the recession, congressional investigators concluded in a new report.

The General Accounting Office, a congressional watchdog organization, criticized Congress' emergency steps last year to help states facing their biggest fiscal crises since World War II by sending federal dollars to help plug their budget deficits. States, in the aftermath of the technology bust, terror attacks and the resulting economic downturn, have closed $200 billion in budget deficits since 2001.

The GAO suggested that Congress may want to think twice before signaling to states that Uncle Sam will rescue them each time a recession hits, warning that routine bailouts hardly give states an incentive to sock money away for tough times.

The report, released June 8, said that unbeknownst to Congress at the time, the U.S. economy already was rebounding when it approved the bailout, raising questions about its effectiveness. "[I]t is doubtful these payments were ideally timed to achieve their greatest possible economic stimulus," GAO said in the 18-page report. The GAO, which looked at 12 states, also said no one really knew how states spent the money.

The GAO also concluded that Congress should have targeted the money to states that were hit hardest by the recession, rather than funnel the money to states based on population. By not targeting the federal money more carefully, the bailout gave more money per capita to states such as Wyoming, which escaped relatively unscathed from the national recession, than to states hit hard, such as Indiana, Kentucky and Michigan, the GAO said in its report, "Federal Assistance: Temporary State Fiscal Relief" (GAO-04-736R).

"The general fund transfers to the states were not effective in growing our economy," wrote U.S. Sen. Don Nickles (R-Okla.), chairman of the Senate Budget Committee, who requested the GAO study. In a written statement, he said the report "represents a call to Congress to be more responsible when it comes to taxpayer dollars."

The report comes as Congress is working on the massive money bill for all federal agencies and programs for fiscal 2005 that begins Oct. 1. Unlike last year, when groups such as the National Conference of State Legislatures and the National Governors Association lobbied hard for the fiscal relief package, states' financial pictures have improved enough this year that another bailout isn't in the works. James Brown, who heads the Council of State Governments' Washington, D.C., office, said that states know last year's fiscal relief package was a "one-time shot" and that states are not clamoring for a similar deal this year.

"This clearly was the worst fiscal situation [for states] in 60 years," NGA Executive Director Raymond Scheppach told Stateline.org. GAO faulted some states for having "little or no" funds in reserves, but Sheppach noted that states went through nearly $50 billion in "rainy day" reserve funds to get through the fiscal crisis.

NCSL's Molly Ramsdell said the fiscal relief package "was critical in stopping additional cuts in programs and avoiding tax increases."

GAO only looked at one portion of the package that Washington sent to the states. Last year's $10 billion bailout was part of a $20 billion relief package for states. The other $10 billion was in additional Medicaid funds. Medicaid, the federal-state health insurance program for the poor, has seen double-digit increases in recent years. States would have faced throwing more women and children off the Medicaid rolls without the additional money from Washington, Scheppach said.

As part of last year's bailout package, Congress increased the money the federal government would give for each $1 the state spends on Medicaid. That higher "matching rate" ends July 1. Sens. Gordon Smith (R-Ore.) and John Rockefeller (D-W.Va.) are looking at ways to increase the federal Medicaid match for states, a GOP aide said.

While states are not pushing for another bailout, states still may seek greater assistance to help with their giant Medicaid commitments. Brown of the Council of State Governments said Medicaid funding is one area that states would like Congress to tackle long term. "What states would like to see is a long-term structural reconsideration of the federal programs that we are dealing with."