Congress Set To Pass Problems On To States

Enlarge this image toggle caption Patrick Semansky/AP Patrick Semansky/AP

States are going to wind up in worse financial shape as a result of the new desire for budget-cutting in Washington.

In the wake of the worst recession since the 1930s, states are facing severe budget gaps, and they currently depend on the federal government to provide a larger share of their funds than they have for decades. That share is now bound to shrink, with funds from the 2009 stimulus package starting to run out.

"The states got themselves into their problem by profligate spending. They need to take care of that and not rely on the federal government to bail them out," Rep. Doc Hastings (R-WA) told The Associated Press recently.

As Congress looks to cut the deficit, states will be hit even harder. And not just states, but the programs they help run for the federal government -- everything from social services and education to transportation, health and energy conservation.

The House Republican campaign platform, A Pledge to America, vows to roll back most domestic spending programs to pre-stimulus levels, excepting programs for seniors and the military, "saving us at least $100 billion in the first year alone."

Not A Catastrophic Blow

"If we took our share of that $100 billion [in cuts], states would be hurt," says Raymond Scheppach, executive director of the National Governors Association.

Scheppach says that magnitude of cuts would not be "catastrophic." Still, it would be yet another blow to state budgets that are already in such bad shape that newly elected governors and legislators are faced with the task of rethinking the entire menu of services their states can afford to provide.

How States Spend Federal Funds States spend the biggest share of the funds they get from the federal government on Medicaid, education and transportation, as seen in this breakdown from fiscal year 2008.*

Notes *The latest year for which figures have been tabulated. Numbers may not add up to 100 percent due to rounding.



"This Great Recession was a game changer," Scheppach says. "We're on a different path for state revenues over the long run."

States Rely Heavily On Washington ...

The federal government has been a generous funder of state programs. States now receive about a third of their total revenues from Washington, although that number will slip as stimulus funds dry up.

The stimulus package, formally known as the American Recovery and Reinvestment Act, or ARRA, provided states with roughly $135 billion to spend largely as they saw fit -- which, in most cases, was to plug their own budget shortfalls.

ARRA additionally included more than 100 different grant programs to help states and localities fund federal priorities -- a broad mix that includes clean water, airport improvements and vocational training.

"Basically, the stimulus funding allowed states to delay a lot of budget cuts," says David Wyss, chief economist at Standard & Poor's, a bond rating agency.

But the stimulus dollars have just about run out. Congress extended some help for Medicaid and education last year, but provided far fewer dollars than President Obama had requested.

Now it's clear that the till will run empty. ARRA is anathema to the new Republican majority in the House, and Speaker John Boehner is on record calling the package "wasteful spending."

... And Washington Relies On States

Trouble In The States State finances are starting to stabilize, but they remain in terrible shape. States lost nearly a third of their total revenue last year, according to a report released Wednesday by the Census Bureau. Total state revenue was $1.1 trillion in 2009, down from $1.6 trillion the previous year. Most of the losses occurred in social insurance accounts such as public employee pensions and unemployment trust funds. General revenues — the money states actually use to pay for most day-to-day operations — dropped 1.4 percent from 2008 to 2009. Because of the increased demand for services during a recession, however, state expenditures actually went up by 3 percent. That mismatch is one reason why states continue to face major shortfalls. California alone faces a shortfall of $28 billion over the next 18 months. Revenues are starting to improve in most states, but they are not growing fast enough to solve the states' problems. States enjoyed 6 percent annual revenue growth, on average, from 1983 to 2006, says Raymond Scheppach, executive director of the National Governors Association. Now, they've had five years of essentially zero growth and will be lucky to do much better over the next few years. "There's now a realization that this is not going to be over in a year, or two years," he says. — Alan Greenblatt

Using the states to carry out the stimulus mission is in keeping with normal practice. Washington normally depends on the states to carry out most of its domestic agenda.

The federal Department of Transportation doesn't hire contractors to build roads. Instead, it sends money to state highway departments to perform that function.

Similarly, the federal health care law enacted last year relies heavily on states to implement and administer much of the planned expansion of coverage.

"When we talk about cuts, we're really talking about big cuts in big programs -- Title 1 [which provides aid to schools with low-income populations], special ed, Pell grants," says Marcia Howard, who tracks federal grants for governors and legislators as head of Federal Funds Information for States.

"These cuts, to the extent they come, they're going to flow all the way through," she says. "States won't be able to make up for cuts in federal spending."

States Face A New Paradigm

Hit hard by the recession and declining revenues, states have already collectively filled budget shortfalls totaling $230 billion over the past three years. They now face an additional gap of at least $175 billion over the next two years.

"States right now are at the bottom of a deep hole," says Jon Shure, deputy director of the state fiscal project at the Center on Budget and Policy Priorities, a liberal research group. "Federal budget cuts now would be handing states a shovel, rather than a ladder out of that hole."

In addition to their current spending problems, states face even greater shortfalls in years to come in areas such as pensions and retirement health coverage for their own employees.

Things look so grim that Washington and Wall Street analysts have war-gamed the prospect of states defaulting on their debt, although state officials insist that scenario will not play out in real life.

But no one expects a federal bailout to occur if it does.

"If we bail out one state, then all of the debt of all of the states ... is almost explicitly put on the books of the federal government," Paul Ryan (R-WI), the new chairman of the House Budget Committee, said Thursday at a National Press Club event sponsored by e21, an economic research group. "There seems to be some sort of implicit belief that these are federally backed. They're not."

Not Looking For A Handout

Governors themselves do not expect additional help to be forthcoming from Washington. "States understand it was implicit in the [stimulus] deal," says Paul Posner, director of the public administration program at George Mason University.

"They got their money upfront, but in later years, there will be pain," Posner says.

What's striking is that state officials are not just resigned to the fact that they'll see less money coming out of Washington. Many seem almost to welcome it.

There is no longer a presumption that more is better in terms of federal money flowing to the states. The largely conservative class of governors and legislators elected in November, after all, ran on platforms calling for smaller government.

It's true that plenty of governors in the past, having made similar promises, felt themselves "forced" to raise taxes when faced with the difficulty of balancing their budgets -- a constitutional requirement in every state but Vermont.

This class may be different. "Some of these new governors ran not just on not raising taxes, but cutting taxes," says Shure, the CBPP analyst.

An Ideological Shift

Shure says these governors will be reluctant to complain to Congress about spending cuts -- even as the cuts make their own jobs more difficult.

"There's this ideological switch in a lot of states," says Scott Pattison, executive director of the National Association of State Budget Officers. "They won't want to be seen as trying to protect some grant, like they've got their hand out."

Pattison says even the most conservative governors will complain if Congress attempts not just to cut grants but also to shift greater burdens onto the states by imposing mandates. They will also plead for more flexibility in spending the money that Washington does send them.

But they won't expect money to flow as freely as it has in recent years.

"We're in a new world of austerity for all levels of government," says Scheppach, the governors association director. "There's an awareness that there's not going to be more federal aid."