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Will Federal Stimulus Money for States Expire Before Recovery Arrives?

4 years ago
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When White House economic adviser Lawrence Summers testified before Congress last year to urge passage of the American Recovery and Reinvestment Act of 2009, he promised that the $787 billion stimulus would be "timely, targeted and temporary." But as David Wyss, chief economist for Standard and Poor's, observes, "the three T's did not occur."

The Recovery Act was passed late and politics trumped targeting in many states. Of necessity, federal stimulus has also proven less temporary than Summers and his boss, Barack Obama, envisioned. In an effort to spur the lagging recovery, Congress has approved and the president signed another stimulus bill, this one to give employers a break on payroll taxes and inject more money into road and bridge construction, one of the many goals of the Recovery Act.

Remember the Recovery Act? Because the media finds it difficult to focus on more than one Big Issue at a time, the health care debate has pushed economics off the stage in what is supposed to be the waning months of the Great Recession. But the Recovery Act, reminiscent of similar initiatives undertaken during President Franklin D. Roosevelt's New Deal, remains a big deal to the unemployed, to the working poor, to homeowners under water on their mortgages, and to small business owners of every description who are struggling to make ends meet.

It's a big deal to the states, too. Last week, legislators in New York were trying to close a $9 billion budget gap and weighing a proposal by Lt. Gov. Richard Ravitch that would require strict accounting standards and eliminate many of the gimmicks by which the state usually balances its budget. In California, where hard times are squeezing university enrollments and prison inmates are being released early, legislators nibbled at the latest budget gap -- it's currently about $20 billion. Gov. Arnold Schwarzenegger said he would veto a Democratic plan to save money by cutting mass transit. Michigan, meanwhile, was trying to devise an innovative program for reducing home foreclosures that would enable the state to receive an extra $150 million in federal money. Washington state legislators, meanwhile, were wrapping up debate on a budget package that includes a temporary sales tax and a rebate to the poor. It was just another week in the state capitals of America.

These fiscal battles are the latest chapters in an epic struggle to maintain a constant level of social services during a recession that has sent state revenues from sales, income and business taxes plummeting to their lowest levels since the Depression. The plight of the states was a principal focus of the Recovery Act, the signature event of the Obama administration's first year in office. As such, it is primarily a Democratic achievement but it is also true, if contrary to popular belief, that most Republicans in Congress also favored a significant stimulus bill, in the neighborhood of $420 billion.

The size of the stimulus was, in fact, a compromise; many liberal Democrats wanted a package larger than President Obama offered. (The stimulus is also a moving target -- the latest estimate by the Congressional Budget Office has moved the long-term cost of the bill from $787 billion to $862 billion.) In the end, the bill passed mostly on party lines, with both its size and design controversial, but there has always been bipartisan backing for aid to the states. It was also, with a few exceptions, welcomed on a bipartisan basis in the states, which unlike the federal government are required to balance their budgets and needed all the help they could get.

For fiscal officials in the states, Republican and Democrats alike, the stimulus package was "a godsend," said Scott Pattison, executive director of the National Association of State Budget Officers. There is a rough consensus among economists, including Wyss, that the stimulus, whatever its other limitations, averted fiscal catastrophe in the states. One measure of the stimulus' impact is that state government employment has held fairly steady, at 5.3 million, despite the high national jobless rates. A survey by Pattison of 50 states in February found aggregate layoffs in state government employment last year totaled only 18,000.

But officials in the hardest-hit states now anticipate that the flow of federal money will dry up before state sales and income tax collections have reached pre-recession levels. "We were all saying that 2011 was the year states were going to go off the cliff," said Corina Eckl, a budget expert for the National Conference of State Legislatures. "However, it's a higher cliff than we thought. States are going to be in trouble in 2012, too, because the recovery is so slow. Medicaid rates will continue to grow."

Medicaid, the federal-state program that provides health care for the working poor, is a lifeline for 60 million Americans. In the words of the Kaiser Commission on Medicaid and the Uninsured, Medicaid is "important both as a source of coverage for low-income Americans and an economic engine in state economies." The Recovery Act increased the federal share of money for Medicaid, but only until Dec. 31, 2010, in the middle of the 2011 fiscal year. Knowing this, more than 40 states are preparing to make cuts in Medicaid. A Senate-passed bill, which is expected to win House approval, would extend the more generous federal contribution for six months, amounting by Pattison's calculations to $25 billion in additional aid for states.

Some states need this federal assistance much more than others. From an economic point of view, Wyss said, "every place between the Mississippi and the Rockies received more money than they needed. California and Michigan didn't receive enough." This may overstate it, but not by much. Overall, states in the United States midland with energy or commodity revenues fared well. North Dakota, with an unemployment rate of 4.2 percent, has been virtually unscathed by the recession. Most of the well-off states are small in population, but the list also includes Texas, which used its share of Recovery Act money to balance the budget and has not looked back. Federal money has made only a small dent in the structural deficit of California, which shares with Illinois the dubious distinction of having the lowest bond rating of states.

Which states are the worst off? In terms of unemployment, the list includes Michigan, Nevada, Rhode Island, South Carolina, and California, all with jobless rates of more than 12 percent. Three of these states -- Michigan, Nevada and California -- are also among the worst five in housing foreclosures, joined by Arizona and Florida. Louisiana and West Virginia don't make any of the "worst" lists, but they are also struggling. In this struggling category, Pattison would add politically dysfunctional New York.

But these states are not alone. With revenues not projected to reach pre-recession levels, most states have found the Great Recession a Great Challenge. For them, the Recovery Act has indeed been a godsend, but they still need more federal assistance than they are likely to receive.

This article first appeared in State Net Capitol Journal, and is reprinted with permission.
Filed Under: Economy, Jobs

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