Susan K. Urahn on Federal Stimulus for States

Mar 05, 2009

Susan K. Urahn
Managing Director, Pew Center on the States

States’ budgets are getting a boost from the federal stimulus package. Here, Susan Urahn, managing director of the Pew Center on the States, discusses the impact on states’ troubled budgets.

Which states are faring the worst right now?
Nearly every state has been hit hard by the fiscal crisis, and the bad news just keeps coming.   California’s budget deficit ranked highest among the states, at $41 billion for fiscal years 2009 and 2010. (The state enacted a budget in February that closes the deficit through tax increases, deep spending cuts and borrowing.) Michigan and Rhode Island share the unfortunate distinction of leading the states in unemployment; the jobless rate has topped 10 percent in both places. Arizona, Florida and Nevada, once real estate hot spots, are now foreclosure epicenters. The financial sector, responsible for 20 percent of New York’s revenues, continues to drag that state and others down. Even “oil states” that fared well through much of 2008 have been hit hard by the drop in commodities prices. Louisiana, for example, now expects a $1 billion to $2 billion deficit and is proposing cuts to almost every item in the budget. With good reason, states continue to worry about a prolonged and unpredictable downward slide, and many welcomed the federal government’s fiscal help through the stimulus package.
 
How much money will the states get from the stimulus?
More than $200 billion of the $787 billion package will flow through state governments, but only about $140 billion will be available to plug states’ debilitated operating budgets—which fund most programs and services. Much of the boost will come from $87 billion in Medicaid funding and $53.6 billion in a state fiscal stabilization fund to prevent teacher layoffs and other cutbacks in education and other key services. The fund includes $39.7 billion to local school districts and $5 billion to states as bonus grants for meeting key education performance measures; states can apply another $8.8 billion to a wide variety of spending needs, including public safety and school modernization. In addition, the stimulus directs $27.5 billion to highway and bridge projects, $26.6 billion of which is directly apportioned to states—but these fall under capital budgets.

Will the stimulus solve the states’ budget problems?
State deficits are projected to reach a total of $145 billion for fiscal year 2010, according to the Center on Budget and Policy Priorities. The federal stimulus package is likely to prevent some serious cuts, and in a few cases, it will wipe the slate clean for states that are in better fiscal shape. For example, Arkansas is planning to use the money it receives to fund discretionary programs where possible, and expects to balance its budget without additional cuts. But the states’ fiscal problems are so severe that even the stimulus—whose total cost exceeds U.S. spending to date on the wars in Iraq and Afghanistan combined—will not come close to bringing all of the states into the black.

Which states stand to gain the most from the stimulus?
All states will benefit from the aid. Much of the money will be allocated through funding formulas for existing programs, such as Medicaid. Funds without specific formulas will be distributed based on population and competitive grants.

Using the existing formulas speeds distribution but raises some other questions. In some cases, existing formulas may not consider the magnitude with which states have been hit by the current crisis. For example, all states will receive a flat percentage increase in Medicaid funding based on the standard allocation formula, but states with the steepest unemployment increases between October 2008 and December 2010 will receive more. Rural stakeholders oppose linking stimulus funding to unemployment increases as that strategy tends to favor urban areas. Distribution methods have been disputed in education as well, where existing funding formulas generally grant more money to states with higher percentages of school-age children in poor families. This means that California will receive less education funding per capita from the stimulus than Vermont.

What will the stimulus package mean for unemployment?
The package includes $7 billion in federal bonuses to states that offer unemployment benefits to expanded categories of workers and $500 million to add capacity in state unemployment insurance offices. Several governors, including Mississippi’s Haley Barbour, Alaska’s Sarah Palin and Tennessee’s Phil Bredesen have said they will decline additional unemployment insurance funding that would require them to expand eligibility for unemployment benefits in their states. They argue that it is fiscally irresponsible for states to expand programs without having the funding to continue them beyond the stimulus. This article by Stateline.org provides additional insight into governors’ opposition to accepting stimulus money for unemployment and other budget items.

The new unemployment dollars will help the other states that do accept them, but they will not eliminate the debt that states have incurred as unemployment has risen. Unemployment benefits are a drain on states, which pay for them until funds run out. The federal government requires that states then borrow money from the Federal Unemployment Account. Through the recovery act, interest payments and accrual of interest on these loans will be waived through the end of 2010, but states borrowed at least $2.3 billion from this fund before the stimulus, the Wall Street Journal reported in early February. The concern is that in 2011 some states will be left with debt that may offset some of the budget relief from the stimulus. 

What will the stimulus package mean for infrastructure?
The new federal funds have the potential to spur both stalled and brand-new projects. The American Association of State Highway and Transportation Officials counts more than 5,200 projects across the country as “shovel ready.” The nation’s troubled infrastructure is more than just crumbling bridges and roads, however. Accordingly, in addition to the $27.5 billion for highway and bridge projects, the stimulus includes $16 billion for mass transit and about $47 billion for energy and environment projects.

Stimulus funding will not come close to meeting all of the nation’s infrastructure needs, but it should help states create jobs and related economic benefits. The “use it or lose it” provision of the bill requires states to obligate 50 percent of the highway and bridge monies to projects that can start within 120 days of enactment. Starting infrastructure projects now could boost employment after the effects of short-term fixes like tax rebates and extended unemployment benefits have worn off. With the need for speed, however, comes the danger of neglecting to plan or assess projects adequately. As the Pew Center on the States’ Government Performance Project found in 2008, many states do not adequately prioritize capital projects with a long-term perspective. States should balance the desire to start projects quickly with the need to target work that will best support their long-term transportation and economic development interests.

A comprehensive investment in the nation’s transportation infrastructure will still require separate legislation; Congress is expected later this year to consider the bill that appropriates federal road, bridge and transit funding to the states. In the meantime, many states are looking for long-term funding alternatives that could generate substantial revenue, including the expansion of toll roads, congestion pricing and public-private partnerships, in which states turn over assets to private operators in exchange for a large payment.

How will stimulus spending be monitored?
States face competing pressures to spend the stimulus dollars quickly, while maintaining transparency and accountability. To meet both goals, a number of oversight efforts have been built into the stimulus. The package allocates $25 million to the Government Accountability Office and nearly $200 million to inspectors general of 20 federal departments and agencies. Direct federal spending will be supervised by a national Recovery Act Accountability and Transparency Board to coordinate and conduct oversight and prevent waste, fraud and abuse.

A central Web site, www.recovery.gov, will publicize information on spending by states and localities.  The act requires states to use recovery.gov to notify the public of stimulus-related infrastructure spending, including such details as amount, purpose and rationale for the investment and a certification from the governor that the project is an appropriate use of federal funds. The act also requires states to detail on recovery.gov how they use non-infrastructure money, including the number of jobs sustained or created.

Federal tracking is important, but state-level transparency and accountability is needed, too. Several states are working to ensure that stimulus spending decisions are not made solely by the governor’s office. Governors in several states, including Connecticut, Florida and Kansas, have established working groups consisting of legislative and agency leaders; in Connecticut, the groups also include local government officials and members of the business community.

In other states, governors believe a single point of stimulus coordination will facilitate wiser spending and greater accountability. Several governors, including Washington’s Christine Gregoire and Ohio’s Ted Strickland, have named so-called “spending czars” who will advise the governors and in some cases oversee decisions about infrastructure investment. To promote additional transparency, some states are modeling Web sites after recovery.gov: Governor Deval Patrick of Massachusetts and Maine Governor John Balducci have unveiled plans for Web sites where they will track contracts and other spending. Visit Stateline.org, a project of the Pew Center on the States, for more details on how states are preparing for—and planning to track—the stimulus money.

Do states need a stimulus exit strategy? How can they avoid building in new expenditures that will outlast this one-time funding infusion?
The concern that the stimulus package could create new expenditures that will outlast this one-time funding infusion has sparked debates in some states about whether to accept all of the available funding. Directing the one-time funding as much as possible toward one-time spending will help states avoid the pitfall of steering money into the base budgets of ongoing programs and projects. As policy makers consider their choices, we recommend they rely on two principles: 1) invest where the proven returns are the greatest; and 2) verify results to make sure taxpayers get what they pay for. Decisions based on these principles, which are illustrated in our recent budget brief, will promote growth beyond the stimulus, help the economy recover more quickly, and improve communication with the public.

How does the Pew Center on the States track state fiscal issues?
States’ fiscal health is a core theme of the work of the Pew Center on the States. Stateline.org reports on daily developments in state economies, Trends to Watch tracks long-term economic trends across all 50 states, and upcoming Center reports will further examine states’ fiscal conditions. Visit stateline.org and pewcenteronthestates.org for continued information about responses to the fiscal crisis.

Where can I learn more about how the stimulus will affect my state?
Several Web sites provide additional valuable information about the allocation of stimulus money, including:

Recovery.gov 

The White House 

The House Transportation and Infrastructure Committee 

The U.S. Department of Education 

The National Conference of State Legislatures 

 
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