States Eye Their Share of Federal Bailout

By: - November 25, 2008 12:00 am

With President-elect Barack Obama and the Democratic Congress pledging quick action on a proposed multi-billion dollar fiscal package to boost the U.S. economy, states are banking they will get a cut of any federal rescue plan.

“We’re optimistic,” said Michael Bird, the National Conference of State Legislatures lobbyist in Washington, D.C., referring to the plan that could include money to help states rebuild roads and bridges and cover growing health care costs as more people lose their jobs and private health insurance.

Obama announced in his Nov. 21 weekly address that he had directed his economic team to draw up a two-year “Economic Recovery Plan” that would create 2.5 million jobs patching crumbling infrastructure, modernizing schools and building wind farms, solar panels and fuel-efficient cars.

Obama didn’t specifically mention states or a dollar-figure in his remarks over the weekend or during his Nov. 24 press conference in which he unveiled his economic team, including New York Federal Reserve President Tim Geithner as treasury secretary. But before he was elected, Obama called for at least $25 billion in nonspecific state relief and another $25 billion to help states build and fix highways, roads, bridges, airports and rail systems.

Democratic leaders on Capitol Hill have pledged to have legislation ready for Obama to sign shortly after his Jan. 20 inauguration. By some estimates, Obama’s stimulus plan could cost $700 billion over two years. That’s on top of the $700 billion lawmakers approved Oct. 3 to prevent a collapse of the financial markets.

Staying clear of the term “bailout” and “handout,” states and governors for weeks have been pressing Congress and the incoming administration for billions of dollars in direct aid.

States had hoped the outgoing Congress would wrap up a second economic stimulus package in November, but instead had to settle for more federal dollars to help laid-off workers while they look for new jobs. President Bush Nov. 21 signed a measure that extends unemployment benefits by seven weeks for those whose benefits have run out and by 13 weeks for workers in states with jobless rate higher than 6 percent.

But states collectively face $30 billion in gaps in their current budgets and that number could climb even higher. These deficits are on top of the $40 billion states have already cut to balance their budgets for this fiscal year that for most states ends June 30.

“The cruel irony is that at the time when citizens need their state governments the most, state governments are least equipped to help them because of plummeting revenues,” New York Gov. David Paterson (D) said in testimony last month before Congress. The state, which generates 20 percent of revenue from Wall Street, faces a $2 billion gap for its budget that ends March 31.

“States need this relief now, not later,” North Carolina Speaker Joe Hackney (D) and president of the National Conference of State Legislatures said in a letter sent Nov. 12 to Obama.

In his own letter to congressional leaders, California Gov. Arnold Schwarzenegger (R) also urged Congress to provide states with money for Medicaid, the state-federal health program that serves 59 million needy, and/or direct grants to states. Facing a $28.7 billion shortfall in California over the next 20 months, Schwarzenegger said, “It cannot wait until next year.”

California, New York, South Carolina and Utah are among the states that have called lawmakers back into session to deal with budget gaps, while Connecticut lawmakers met Nov. 24.

But once states dig themselves out of their current fiscal holes, they are looking at shortfalls that could reach more than $80 billion for fiscal 2010, according to estimates from the National Governors Association.

“Recovery for states is at best in fiscal 2011,” said Scott Pattison, executive director of the National Association of State Budget Officers.

While state officials have avoided asking for specific amounts of money from Congress, the National Governors Association has outlined $126 billion of “potential recovery programs” that would help states, including:

  • Health care: $20 billion per year for two years in federal funds for Medicaid .
  • Infrastructure: $57 billion, including $27 billion for highway and transit projects; $6 billion in wastewater and drinking water projects and nearly $5 billion in affordable housing.
  • Job training and education: $5 billion, including $1.5 billion in job training and $3.5 billion for Pell Grants for needy college students.

The infrastructure request includes more than 3,000 “ready to go” highway projects that the American Association of State Highway and Transportation Officials estimates could be under contract within 30 to 90 days. The trade group said that every $1 billion invested in transportation projects creates about 35,000 jobs.

“Already states have made cuts to education, public safety and Medicaid and may be forced to make more as the downturn persists,” the top leaders of NGA, NCSL, the Council of State Governments and other state and local groups said in an Oct. 27 letter to Congress. “Providing federal funds directly to state and local governments allows them to reduce cuts and continue services.”

Some states didn’t wait for help from Washington, D.C., to boost their economies. The governors of California, Michigan New Jersey and Wisconsin are among a half dozen who have passed or proposed their own state stimulus packages designed to reinvigorate local businesses with new construction, loans to hometown banks and other job-creating activities.

An infusion of federal money to help states weather a faltering economy is not unprecedented. Congress in 2003 gave states $20 billion to help patch budget gaps after the 2001 downturn. Half of that amount was in federal funds to cover Medicaid costs, but to receive the federal Medicaid money, states had to avoid deep program cuts and preserve eligibility.

Not everyone agrees, however, that the federal government should dole out money to states and localities.

“State and local government budgets should not be balanced on the backs of federal taxpayers,” 59 conservative groups led by National Taxpayers Union and the Competitive Enterprise Institute said in a letterto Congress this month. “Clearly, some states and localities allowed themselves to be caught up in the borrow-and-spend mania,” they wrote. “We believe that if troubled state and local entities seek lasting relief and stability, they should restructure their activities the way millions of families have had to restructure their budgets.”

South Carolina Gov. Mark Sanford (R) likewise balks at a “blanket bailout” and in testimony to Congress urged for “freedom from federal mandates instead of a bag of money with strings attached.”

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