States Await Flood of Federal Money

After days of bitter negotiations and intense lobbying, Congress is expected to send President Obama a $790 billion economic package in the coming days that has more state aid than most conservatives would like, but less than what some governors were banking on.

Many details of the compromise package are still unclear. But c rucial to states, the two-year package includes $87 billion to help states fund Medicaid, the joint federal-state program that costs $330 billion annually and serves 59 million needy Americans.

The final version also sets aside some $54 billion for a "state fiscal stabilization" fund designed to help states avoid cutting education and other programs, down from the $79 billion than the House included but more than the $38 billion under the Senate bill. The final package also zeroed out school construction, which under the House version would have given states $14 billion.

The massive spending plan that some are comparing to public works programs under the New Deal of the 1930s had been expected to be ready for Obama's signature by Monday, President's Day. But the timing is now uncertain. Republican U.S. Sen. Judd Gregg of New Hampshire, a former governor, withdrew his nomination as President Obama's commerce secretary Feb. 12, a day after the compromise was reached. Gregg cited, in part, "irresolvable conflicts" over the stimulus bill.

And the health of U.S. Sen. Edward Kennedy (D-Mass.), who is receiving treatment for a brain tumor, could be pivotal as Democrats need 60 votes to assure passage.

Here's a breakdown of other key components in the final package important to states:

  • $40 billion for increased unemployment benefits
  • $20 billion to increase the food stamp benefit
  • $29 billion for highway construction
  • $18 billion for clean water, flood control and environmental cleanup programs
  • $4 billion for state and local anti-crime initiatives, including at least $2 billion for the Byrne Justice Assistance, which pays for programs to battle drug trafficking
  • $2.1 billion for Early Head Start and Head Start programs for low-income infants and preschool children.

The Medicaid and education funding were sticking points in the negotiations, with the House bill more generous than the Senate version.

But some states are already crying foul that they are being shortchanged by the Medicaid formula that Congress decided to use. The package gives an across-the-board increase to all states of 6.2 percent of the state's Medicaid matching formula and gives a bonus to states with higher unemployment rates, such as Rhode Island, California and Michigan.

U.S. Sen. Chuck Grassley, a Republican from Iowa, said the bill "cheats Iowa out of $185 million" in federal Medicaid dollars. The senator had offered a proposal that would have given each state a flat 9.5 percent increase and nothing extra for states with higher jobless rates.

The amount of money the federal government pays for Medicaid varies by state, based on economic factors. So for example, if Massachusetts currently gets a 50 percent reimbursement from the federal government, it would get a 56.2 percent under the package's flat 6.2 percent increase. Mississippi, which currently has the highest reimbursement rate, would then see the federal government pick up 82.2 percent.

To get the federal Medicaid cash, states will have to keep the eligibility standards and application processes they had as of July 1, 2008. That means Arizona, California, Florida, Rhode Island and South Carolina may have to roll back new policies to cut eligibility or tighten enrollment.

Congress also decided not to offer new, temporary Medicaid coverage for laid-off workers who often are not now eligible for Medicaid, dropping the language in the House plan. But the package will offer a subsidy to laid-off workers to help cover the cost of buying into their former employer's health insurance.

An infusion of federal money to help states weather a faltering economy is not unprecedented. Congress in 2003 gave states $20 billion to help patch budget gaps after the 2001 downturn. Half of that amount was in federal funds to cover Medicaid costs, but to receive the federal Medicaid money, states had to avoid deep program cuts and preserve eligibility.

Governors, state and local officials of both parties have been lobbying Congress for months to help states. Republican California Gov. Arnold Schwarzenegger, for example, wrote to Obama that states need at least $100 billion for Medicaid costs. The Democratic governors from Massachusetts, New York, New Jersey, Ohio and Wisconsin had called for a $1 trillion in federal aid to all the states over the next two years.

Not everyone agrees that the federal government should dole out money to states and localities, however. Among the most vocal critics to state fiscal relief are South Carolina Gov. Mark Sanford and Texas Gov. Rick Perry, both Republicans. They and other fiscal conservatives argue that states should have socked more money into their rainy day funds in anticipation of downturns.

The action on Capitol Hill comes at a time when states face shortfalls that could total some $200 billion through fiscal 2010. Many states currently are drafting budgets for 2010, the new fiscal year that for all but four states begins July 1. Legislatures will have to raise taxes, cut programs or borrow the money since, unlike the federal government, most states are required by law to balance their budgets.