Promise and Peril of the Stimulus

Congress and the Obama administration appear to have avoided at least one pitfall of previous economic stimulus packages: sending funds to states too late to help. In earlier plans to rescue a slumping economy, the recession had ended in some cases by the time Congress enacted legislation and states got funds. Urgency is the catch word this time around, with billions of dollars already in the states.

But current stimulus architects seem to have learned other lessons from earlier programs, as well, as they now target much of the money for specific programs, set deadlines for spending it and demand that states publicly account for dollars spent to ensure the money is being used wisely and without delay.

States are entering unchartered territory as they try to implement the largest public works program and infusion of federal dollars since the Great Depression, while plugging $145 billion in red ink in their own budgets for the coming fiscal year.

In the last 50 years, Congress and presidents have tried to jumpstart the country out of economic downturns with at least a dozen anti-recession or public works legislation.  None, however, had the breadth of the $787 billion package that Obama signed into law Feb. 17. The 2009 American Recovery and Reinvestment Act combines tax cuts and massive new government spending aimed at creating millions of jobs, staving off deep cuts in state and local social programs and laying the groundwork for a new high-tech economy.

A frequent criticism of previous stimulus packages is that Congress acted too slowly. Consider this:

• In the 1970s, federal money from the “Antirecession Fiscal Assistance” act came to the states so late that it may have contributed to higher inflation since the economy had already entered a period of strong recovery.
• In the 1980s, half of the $9 billion “Emergency Jobs Act” had yet to be spent by 1985 – three years after the 1981-1982 recession ended.
• The $10 billion in direct fiscal relief states got in 2003 to help patch budgets arrived 19 months after the end of the 2001 recession, when the economy was already beginning to grow, and after many states had already used money in their reserves to close budget gaps.

Facing mounting job losses and bank failures, Congress and the Obama administration acted in record speed. This year’s stimulus program became law just 14 months after the recession officially began in December 2007 – faster than the average 27 months between the beginning of past recessions and the enactment of anti-recession job creation programs.

“The package is at the right time. We haven’t hit bottom yet,” said Scott Pattison, executive director of the National Association of State Budget Officers.

Federal funds are already flowing to states. The Obama administration this month announced: $8.4 billion for states to fix and build public transportation; $2 billion in funding allocations for state and local law enforcement; $44 billion in education funding to prevent cuts in education and teacher layoffs; and the first installment of $165 million to help states provide more funding in food stamps.

But Congress didn’t write states a blank check, fixing what some experts say was a flaw of anti-recession programs in the 1970s that gave aid to states with no strings attached. Studies later showed the unrestricted aid got delayed in bureaucratic wrangling.

Much of the $200 billion that will flow through state governments under the current stimulus is for specific programs, including education, benefits for the unemployed and transportation. The stimulus also sets out specific deadlines and largely uses existing formulas to compute each state’s share and get the funds out quickly. The law gives priority to projects that can be up and running without delay. For most projects, funds are available only until Sept. 30, 2010, so states need to act quickly.

States also are under unprecedented scrutiny to show they are spending the money wisely – another difference from previous packages that made it difficult, if not impossible, to track how the states used the funds. Some 45 states already have set up their own stimulus Web sites and all states will have to document where the money will go and how many jobs are created. The Obama administration has a state-specific page on its Web site www.recovery.gov. The Council of State Governments recently launched www.staterecovery.org and the National Conference of State Legislatures also provides state-by-state information.

President Obama and Vice President Joe Biden have repeatedly warned that states’ stimulus spending will be closely watched and that future federal funding hinges on whether the money is spent wisely. “If we don’t get this right folks, this is the end of the opportunity to convince the Congress that anything should go to the states,” Biden said March 12 during a gathering of state officials at the White House to discuss the law’s implementation.

One pitfall that could be unique to this stimulus package may not be so easily avoided. Experts are warning about budget shortfalls after the stimulus ends, if states aren’t careful in how they dole out the funds.

“When this stimulus ceases, we are going to fall off a cliff, and I don’t know if we have figured out how we are going to address that,” said Warren Deschenaux, director of Maryland General Assembly’s Office of Policy Analysis, who expressed concern about what will happen when the federal government turns off the spigot. “We appreciate the money. We appreciate being able to support more of the programs they’ve established, but it’s hard to get anyone to focus on the after,” he said.

Other experts agree. “States should use the breathing room provided by the stimulus package to mute and spread out baseline spending cuts and/or tax increases they will need to make, to restructure programs, and to allow for orderly decision-making,” said Donald J. Boyd, a senior fellow at the Rockefeller Institute of Government in a recent report.

Boyd warns as the stimulus aid goes away in 2011-12, states could face a fiscal gap of 4 percent of general expenditures, roughly comparable to annual gaps totaling $70 billion.

A handful of conservative governors, led by South Carolina Gov. Mark Sanford, chairman of the Republican Governors Association, is considering rejecting a portion of the money precisely because they fear their states will be left holding the bag a few years down the road.

Texas Gov. Rick Perry (R) March 12 rejected $555 million in federal stimulus money that would expand state unemployment benefits to part-time workers. He said he feared employers in his state would have to pay higher taxes to make up the difference once the stimulus money runs out. The question remains if any state legislature, on its own, will try to get funds that a governor rejects, which the stimulus legislation allows.

“The fear of fiscal conservatives is that if the states expand programs like Medicaid with the stimulus money, it won’t be temporary, it will be permanent. That would worsen the long-term structural programs the states already have,” said Chris Edwards, director of tax policy studies at the Cato Institute. Medicaid is the joint federal-state program to provide health insurance for the poor.

Governors of both parties have stressed the importance of using the stimulus money to fund existing programs, not to create new ones. “The most important thing every state needs to do is make sure they use this one-time money in a one-time way,” Montana Gov. Brian Schweitzer (D) recently told Stateline.org.

Hawaii Gov. Linda Lingle (R) agreed. “You can’t create new programs with money that’s for a finite period of time. I think anyone who does that is not being responsible … I think the legislatures and governors in every state have to exercise some important common sense judgment. It’s not rocket science.”