Stimulus for States Worked—But They Need More

In almost every state, President Obama’s Recovery Act prevented catastrophic cuts in education, health care, and a variety of other programs—at least temporarily. This federal aid not only protected state and local services for millions of Americans, it shored up local economies and saved both public and private jobs. But disaster looms next year.

Last week, I visited the annual meeting of the National Conference of State Legislatures, held this year in Philadelphia. Usually it’s like riding on a luxury ocean-liner—several thousand people with unlimited food and a celebratory atmosphere. This year, it was like riding an ocean-liner, but one where everyone knew that icebergs ahead could sink us.

In this case, the icebergs are gigantic state budget deficits caused by the worst recession in 70 years. Budget offices from the various states have warned their governors and legislators, but the coming debacle across the states has received inadequate attention.

Our friends at the Center on Budget and Policy Priorities [1](CBPP) have been trying to warn policymakers about the states’ dire fiscal problems:

Combined budget gaps for the next two years—state fiscal years 2010 and 2011—are estimated to total at least $350 billion.

CBPP explains that state budget shortfalls will exceed $163 billion for FY 2010 and are likely to equal $160 to $180 billion in FY 2011. Because general fund expenditures of all the states combined total about $685 billion [2], CBPP points out that a $163 billion deficit is tremendous—about one-fourth of the states’ general fund budgets.

CBPP also describes [3]how the federal Recovery Act has been mitigating state budget deficits:

The American Recovery and Reinvestment Act includes roughly $140 billion in fiscal relief for state governments, enough to close 30 to 40 percent of state shortfalls. States are using these funds to help balance their budgets while minimizing harmful cuts in public services.

So, federal stimulus money has been crucial to keep states afloat. But the money was front-loaded. Here’s how the $140 billion in federal relief breaks out over the years:

Stimulus dollars available to fill state budget shortfalls
(for notes and sources, see below)

(in billions of dollars)……………....FY 2009……..FY 2010……..FY 2011
Stimulus dollars
--Additional Medicaid funds……….$25.2 B………$40.5 B………$21.5 B
--State Fiscal Stabilization funds....$16.4 B………$29.2 B………$6.7 B
Total……………………………….....$41.6 B………$69.7 B………$28.2 B

When state legislators come back into session early next year, they will have to draft budgets for FY 2011. While deficits for that year are projected to be as bad or worse than FY 2010, there will be less than half as much in federal stimulus money to plug the gap.

In 2009, governors and state legislators had to make horrible program cuts, enact painful tax increases, and draw down rainy-day funds to balance state budgets. Unless Congress appropriates at least another $30-$50 billion (which, right now, no one is even seriously considering), the state legislative decisions of 2009 will seem like a pleasure cruise compared to the legislative sessions that begin next January.

* * * * * * * * * * * * * * * * * * *

Notes about the chart:

1. The breakdown of additional Medicaid (FMAP) funds can be found in this document [4]from CBPP. Support for Medicaid is cut in half because this section of the Recovery Act only supports the states to December 31, 2010—halfway through fiscal year 2011.

2. The breakdown of State Fiscal Stabilization Funding (SFSF) is based on percentages provided by the Education Commission of the States (ECS). The last ECS paper [5]published on this subject said that based on the first 31 approved applications, states planned to spend 36% of the funds in FY 2009, 53% in FY 2010, and 11% in FY 2011. The author kindly sent me an update: based on 49 of 50 states (all except Pennsylvania), they plan to spend 31.4% in FY 2009, 55.8% in FY 2010, and 12.8% in FY 2011. My numbers are based on those percentages.

3. There are other stimulus funds that pass through the states, especially highway infrastructure investment funds (a total of about $27 billion). But the FMAP and SFSF funds are the only major sources of money that fill state budget shortfalls. CBPP’s analysis also focuses on these two funding sources.