Tracking the Recession – Much Ado About a Small Stimulus Pot

After weeks of speculation and intense political pressure, a reluctant Republican South Carolina Gov. Mark Sanford on Friday (April 3) became the last governor to formally notify the White House that he plans to accept at least some federal dollars from the stimulus package – but the controversy is far from over.

He and several other Republican governors may still turn back a portion of their stimulus money, as the debate continues about whether the federal handout would do more harm than good. But in the big picture, the portion is less than $2 billion or a faction of the states’ total $275 billion share.

Sanford delayed his decision until the deadline for governors to send letters to the White House certifying that their states will request federal stimulus dollars and use the funds “to create jobs and promote economic growth.” Governors weren’t required to spell out in these letters which funds they may or may not take – although some have – only that they promise to spend the money on creating jobs, not on building swimming pools, aquariums or golf courses.

Even in his acceptance letter, Sanford said he still may not take $700 million in education funds of the nearly $8 billion in stimulus money headed for his state despite pleas from members of his own party in the statehouse and on Capitol Hill to do so. “As you may be aware, our administration continues to have reservations about accepting those funds,” Sanford wrote to the White House.

Sanford had previously said he would accept the money only if the state could use it to pay down the state debt, but the Obama administration has twice rejected Sanford’s idea, saying the law stipulates that those funds must be used on education and public safety.

Overlooked in the frenzy of headlines about Sanford and the other Republican governors rejecting federal stimulus dollars is how small the financial stakes are.

While governors will be held accountable for ensuring that the federal money is used wisely in their states, they control spending – or not spending – a very small slice of the total $787 billion economic stimulus pie aimed at jolting the country out of recession. Only $135 billion of the states’ $275 billion is discretionary, while the rest is funneled into specific projects and programs.

At issue for a handful of governors is whether to accept their share of money from a $7 billion fund to expand unemployment benefits to a half-million more people across the country, including part-time workers. Six Republican governors, including Sanford, are arguing that using their share of this stimulus money to extend unemployment would bankrupt their states’ unemployment trust funds and lead to higher business taxes when the federal dollars dry up.

With unemployment reaching double-digits nationally and state budget deficits expected to plunge by $350 billion through 2011, politicians of both parties are leery of leaving any federal dollars on the table. California Gov. Arnold Schwarzenegger (R) said he would gladly take funds a fellow governor doesn’t want.

Besides refusing unemployment funds, Alaska Gov. Sarah Palin (R) also has staked out positions against taking education and energy funds while Louisiana Gov. Bobby Jindal (R) said he will decline money to provide health insurance coverage for people leaving welfare and for the state charity hospital system.

Still in question is whether state lawmakers will try to invoke a provision in the stimulus law that seeks to allow legislatures to get funds that a governor declines and, if any do, whether it will hold up in court.

Here a summary of action taken by governors to decline stimulus money:

Alaska – Palin has backed off her initial position to turn down $288 million of the nearly $1 billion allotted to her state, including $170 million for schools, $56 million for weatherizing homes and $15.6 million for unemployment, but she is still negotiating the issue with state lawmakers there. ” It is possible that there will be areas where the state will not choose to apply for funds,” the former Republican vice-presidential candidate said i n her certification letter to the White House. Top Alaskan legislators, including conservatives, have said “they’re likely to accept” at least most of the federal economic stimulus money that Palin does not, The Anchorage Daily News reported.

Alabama – Gov. Bob Riley has turned down $99 million in stimulus money to expand unemployment benefits, saying it would lead to a million tax increase when the federal dollars stop coming. State lawmakers have moved to pass a resolution that could help them accept the funds, The Birmingham News reported.

Louisiana – Jindal has said he will reject $98 million in federal funds to expand unemployment benefits besides $9.5 million for health insurance coverage for people leaving welfare and $58 million for the hospital system. “We will continue to examine fund-specific requirements to ensure that we are not growing government in an unsustainable way,” he wrote in his certification letter to the White House.

Mississippi – Gov. Haley Barbour (R) has said he will refuse $56 million in stimulus money for expanding unemployment benefits because it would cost business owners an additional $16 million each year once the federal government’s money is spent. The state House has passed a resolution to get the money, but the Senate has not.

South Carolina – The White House in a March 31 letter said that only the governor – not the Legislature – can apply for the $700 million from the state “fiscal stabilization fund” that is specifically to help South Carolina avoid cuts in education and public services. Even if Sanford doesn’t apply, Education Secretary Arne Duncan said he would work with Congress to find another way to get the money into South Carolina schools, The Greenville News reported.

Texas – Gov. Rick Perry (R) rejected $555 million in federal stimulus money that would expand state jobless benefits to part-time workers. While Perry will accept other funds from the stimulus, he is opposed to using these funds to expand existing government programs, “burdening the state with ongoing expenditures long after the funding has dried up,” he wrote in his letter to the White House. Perry’s decision has come under fire from U.S. Sen. Kay Bailey Hutchinson who is expected to challenge Perry for the GOP nomination for governor in 2010.

Gov. Rick Perry (R) rejected $555 million in federal stimulus money that would expand state jobless benefits to part-time workers. While Perry will accept other funds from the stimulus, he is opposed to using these funds to expand existing government programs, “burdening the state with ongoing expenditures long after the funding has dried up,” he wrote in his to the White House. Perry’s decision has come under fire from U.S. Sen. Kay Bailey Hutchinson who is expected to challenge Perry for the GOP nomination for governor in 2010.

Some of these governors have been criticized for political grandstanding and using the federal stimulus money to score points with fiscal conservatives at a time when the GOP is looking for new national leaders.

But while these governors have been rebuked for refusing the federal stimulus dollars to expand unemployment, Congress never expected all the states to tap into this fund. Congress gave states the option, not a requirement, to expand their unemployment systems to include part-time workers. Currently 28 states would have to change their unemployment laws to get the federal dollars, including the six where the governors have balked at taking the funds.

Budget experts on Capitol Hill figured only 38 percent of the money would be spent because some states have already debated this issue and opted not to expand their systems while other states might be reluctant to change unemployment benefit eligibility rules for fear of headaches down the road after the stimulus money runs out.

But the battles over taking stimulus money may not be over. The next battleground may focus on the U.S. Department of Education’s new rules for states to qualify for the second round of money from the “state fiscal stabilization fund.” That’s the same pot of money that holds $700 million for South Carolina.

To get the education funds later this year, governors will have to provide the administration with proof that they are working to boost academic standards and improve teacher performance, according to an April 1 letter Duncan sent to the 50 governors. The question will be whether any governor thinks the requirements are too onerous, or potentially too embarrassing, if the data the state collects show their students are woefully behind.