Stressed State Coffers Unlikely to Get More Help from Congress
Policy + Politics

Stressed State Coffers Unlikely to Get More Help from Congress

The recession is forcing states to take draconian cost cutting measures

The Fiscal Times

Scores of governors and state officials are outraged by the health care law signed by President Obama Tuesday, claiming that it will further harm their economies by raising taxes, cutting Medicare and imposing onerous new regulations. Mississippi GOP Gov. Haley Barbour, venting state hostility toward Obama and the Democratic-controlled Congress, says, “I hope this health care plan covers hearing aids, because it’s clear Democrats who voted for it have not heard the majority of Americans who didn’t want government-controlled health care crammed down their throats.”

But even as officials in more than three dozen states mobilize to try to rescind or block the landmark legislation, they are about to get more bad news from Washington: Recession-battered states are not likely to see more direct aid from Washington this year even as they resort to draconian measures to balance their budgets. Such measures include:

• Arizona has begun selling off state-owned property,
• Hawaii’s public schools cut 17 days from their academic year,
• Utah’s state workers will have to continue on a reduced four-day work week.

And that’s just for starters.

States face a collective budget hole of $56 billion for the 2011 fiscal year that begins for most on July 1, including 18 states with gaps larger than 20 percent of their general funds. Many have already made sharp cuts or raised taxes in the past two years, while others have resorted to more unusual measures. Texas, for example, contracted out some of its toll roads, and Massachusetts has merged a number of state departments. Last year's huge federal stimulus package provided $282 billion for Medicaid, infrastructure projects and direct aid used for education and other services. But the federal government has been slow in doling out the funding, and most states have factored that continued trickle into their budgets.

Last week, Treasury Secretary Timothy Geithner raised the hope that it might support a new round of direct aid before the end of the year -- essentially a second round of stimulus spending. But similar efforts by House Democrats died early this year in the Senate, and lawmakers and experts on state fiscal matters say there’s no chance the Senate will go along with anything carrying a whiff of stimulus.

“We already passed the bill in December that the Senate ought to pass,” said House Appropriations Committee Chairman David R. Obey, D-Wis., referring to a measure that contained about $26 billion in direct aid -- money the Senate quickly jettisoned. Obey’s latest legislative effort is much smaller, a $5.1 billion funding measure focused on disaster relief that the House will consider this week.

"By the time the new fiscal year begins, most states will have spent all of their fiscal stabilization fund money and will still be facing major budget problems," said Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities.  Geithner endorsed the idea of more support at a House Appropriations hearing on March 16t.  But he stressed that it should be temporary.

Congressional Budget Office Director Douglas Elmendorf agreed about the potential impact: "Such aid could lead to fewer layoffs, more pay raises, more government purchases of goods and services, increases in state safety-net programs, and fewer increases in state taxes; some might be saved for future use," he wrote in prepared testimony before Congress's Joint Economic Committee on Feb. 23. But at the most, Congress will agree to about $25 billion for six months of higher Medicaid payments to states as part of a $139 billion bill that also would extend higher unemployment benefits and block a cut in Medicare payments to doctors.

Back in December, the House passed a $154 billion  "Jobs for Main Street" act that included about $26.7 billion in direct aid for public service jobs, along with billions more for highway and bridge construction, unemployment and health care benefits. The Senate pared that measure down, and the bill eventually signed into law last week totaled only $17.6 billion. It focused on business tax breaks for hiring new workers. "[The aid] never got legs on the Senate side when it went over under the guise of 'Jobs for Main Street,'" said Michael Bird, federal affairs counsel at the National Conference of State Legislatures.  "I just don’t think [there is] the appetite for what would look like 'stimulus two.'"

Republicans have shown they will portray Democrats as wasteful spenders at every opportunity leading up to the midterm elections. Even the relatively small $5.1 billion sum on tap this week drew immediate fire from Rep. Jerry Lewis of California, the top Republican on the House Appropriations Committee, who said it "continues our country down a path toward fiscal ruin."

The federal government's largesse will give states some cushion. Congress set up a new bond program to help localities raise money. Upcoming legislation would extend subsidies for low-income jobs, and the Medicaid money would help states that face climbing enrollments.  Aid on top of that, however, would face pay-as-you-go rules that require new spending to be offset elsewhere in the budget.

Some states' budgets are already counting on that next chunk of Medicaid money. But Michael Bird said: "Nothing is really going to stop the serious budget cutting that's going on right now.  There are five holes in the dike, and that would plug one of them."