Congress Won’t Erase State Deficits

Even if Congress approves a massive $825 billion economic stimulus package, states would still be left with billions of dollars of budget gaps to close on their own, a new analysis released Jan. 26 shows.

The House Democrats’ version of a stimulus plan sets aside more than $300 billion for states, raising some speculation that the infusion of federal money would wipe out just about all of the states’ collective deficits, pegged at $350 billion by some estimates. But the Center on Budget and Policy Priorities says that’s just not the case. While the House plan does send more than $300 billion to the states, at least half of that money could not be spent to plug holes in their budgets, the Washington D.C., group, which advocates for policies that affect the poor, said in a new report .

States would be required to pass along billions of federal dollars in the House plan, for example, to local governments, themselves facing steep budget problem. Billions of dollars also are designated for infrastructure projects, which typically are part of state capital budgets, rather than state operating budgets. “It was never anyone’s intent [for the stimulus package] to entirely fill state budget gaps,” said Nick Johnson, who directs CBPP’s State Fiscal Project.

“The assumption has always been that states would take some degree of action themselves. It’s only appropriate.” The CBPP estimates the House plan would help states close between $150 billion to $155 billion in shortfalls or less than half of the states’ $350 billion projected deficits.

Estimates vary on how deep state budget shortfalls are right now, but the latest figures from a congressional watchdog organization show states and localities will have to close $312 billion in deficits for 2009 and 2010, nearly twice the group’s previous projection in November. “The current results represent a significant deterioration,” the U.S. Government Accountability Office said in a Jan. 26 update to Congress.

Both the House and Senate versions of a recovery package include at least $87 billion to help pay for Medicaid, the joint federal-state program that costs $330 billion annually and serves 59 million needy Americans, and at least $100 billion for infrastructure spending – two top priorities of many governors and state legislators. Democrats hope to send a bill to President Obama by President’s Day in February.

For his part, the president used his weekly radio address Jan. 24 to lay out benchmarks for jumpstarting the economy and creating jobs. While the GAO has not told Congress how much money to give states to help with growing Medicaid rolls during the recession, it urged Congress to act quickly.

“It’s not too late, but it’s something that should have been done already,” said Stanley J. Czerwinski, director of GAO’s strategic issues, who helped write the report. He said ideally, Congress should have approved the Medicaid money for states at the end of 2008.

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. U.S. Rep. John Boehner of Ohio, the House minority leader, and other key Republicans, point to a recent analysis by the Congressional Budget Office that they say casts doubt on whether the congressional Democrats’ spending plan will actually have an immediate impact, which is the aim of the recovery plan.

Just 7 percent of the proposed infrastructure spending – $26 billion out of $274 billion – would be funneled into the economy by the end of this year budget year in September. Chris Edwards, director of tax policy for the libertarian Cato Institute, said that rather than seeking federal relief, states should use the downturn as an opportunity to restructure their budgets and eliminate activities that they don’t need. He also said he was concerned about the long-term political effects of a federal bailout.

“Won’t it encourage states to be more profligate when the economy recovers? Won’t we be in a situation that for every downturn in the future, state and local governments come running to Washington for aid?” said Edwards, who has written “10 reasons not to bail out the states.”

Robert B. Ward, director of fiscal studies of the Nelson A. Rockefeller Institute of Government, has another concern. “The question that lingers is what happens when the federal aid runs out? I think states and localities will have to find ways to operate more efficiently or face chronic ongoing budget problems.”

The institute, the public policy research arm of the State University of New York, recently released new state tax data that showed “a dramatic worsening of fiscal conditions nationwide.” Groups like the National Taxpayers Union and the American Legislative Exchange Council, a conservative group that lobbies for limited government, also have argued against what they call a bailout for states.

They contend states should have socked more money into their rainy day funds in anticipation of downturns. 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.

In a 2004 report , the GAO found that $10 billion of that budget bailout was ill-timed and wasn’t targeted to states hardest hit by the recession. That report looked only at the $10 billion in general state relief and not the $10 billion in additional Medicaid funds. Governors, state and local officials of both parties have been lobbying Congress for months to help states.

Republican Gov. 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 have called for a $1 trillion in federal aid to all the states over the next two years.

States have been feeling the squeeze over the past year, even though it became official only on Dec. 1 that the U.S. economy has been in a recession for a year. Unlike the federal government, which can run up deficits, most states must balance their budgets, and when states have to cut spending or raise taxes – as many are doing now – billions of dollars are removed from the nation’s economy.