Stimulus to Ease, Not Fix, State Budget Woes

Exactly how much each state will get from the $787 billion economic package that President Obama is expected to sign shortly will vary, but the infusion of federal dollars still won’t plug the gaping holes in many state budgets.

By some estimates, the deal, once President Obama signs it, could mean $26 billion for California, which sounds significant, except the state currently faces a $42 billion deficit, delays in paying its bills and the prospect of laying off 20,000 workers. More than 200,000 state employees already are being forced to take an unpaid day off twice a month because of the state’s fiscal crisis.

Officials in New York expect at least $20 billion over the next two years from the package, but the state has to close a $14 billion shortfall for the current year. Ohio Gov. Ted Strickland (D) said that the plan’s estimated $8 billion for Ohio will still leave up to a $500 million hole in his budget.

On the flip side, while the recovery package won’t fix all of Pennsylvania’s problems, Gov. Ed Rendell (D) said the estimated $5 billion the state could get would save 1,500 state workers’ jobs.

Click here for a state-by-state analysis from the Center on Budget and Policy Priorities, a Washington, D.C. group that tracks policies affecting the poor.

The action from Washington 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.

Fearing that some fiscally conservative governors would not ask for all the federal relief offered in the stimulus plan, congressional Democrats included language in the compromise giving state legislatures the ability to seek the money on their own.

While many governors and state lawmakers heavily lobbied Congress to pass an economic package that contains billions of aid to the states, support was not universal. 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 U.S. House approved the compromise plan Feb. 13 and the Senate followed later that night, meeting the goal of delivering it to the White House by Monday, President’s Day, as Obama had requested.

The president Feb. 14 called the bill “a major milestone on our road to recovery.” Obama acknowledged that some are skeptical about the plan and encouraged people to check back at Recovery.gov , the Web site where, once the plan is in action, “you’ll be able to track the funds,” he said in a statement.

It was only a month ago that Congress started working on the massive spending plan that some are comparing to public works programs under the New Deal of the 1930s.

Crucial 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.

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

• billion for increased unemployment benefits
• billion to increase the food stamp benefit
• billion for highway construction
• billion for clean water, flood control and environmental cleanup programs
• 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
• .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.