Tracking the Recession: Lowering Expectations

By: - February 23, 2009 12:00 am

One of a leader’s jobs is to manage expectations. President Obama has been careful to say that the mammoth economic stimulus package is only a step towards addressing the overall financial crisis. “The road to recovery will not be straight,” he has warned.

But now that a big chunk of the $787 billion is flowing to states, it’s up to governors, state legislators and other officials to prepare their constituents for what the federal legislation can – and cannot – do for states. When the money runs out in two years, many states still could be spending more money than they are taking in.

Governors, many of whom are attending the annual winter meeting Feb. 21-23 of the National Governor’s Association in Washington, D.C., already are knocking down expectations that the federal money their states are getting will dig them out of their budget holes. They are planning to meet with Obama today (Feb. 23) at the White House.

“There’s not a state in this union that will be able to use this stimulus money and wipe away all their problems and all the challenges we face,” said Pennsylvania Gov. Ed Rendell (D), chairman of the governor’s group, noting he recently cut $1 billion in spending from his state budget and raised some taxes $218 million. “States are not off the hook.”

Rendell and Vermont Gov. Jim Douglas (R) were particularly miffed that some critics have characterized the stimulus package as a bailout for states. “We’re not just getting a handout here. We’re doing the heavy lifting” by making cuts, Douglas said.

Before the governor’s meeting in Washington, Massachusetts Gov. Deval Patrick (D) had said “the stimulus package will not be a panacea” for the state’s deeper budget troubles. Iowa Gov. Chet Culver (D) said the federal money “will not be an excuse to ignore the need to reduce state spending.” First year North Carolina Gov. Beverly Perdue (D) said despite the stimulus money, more spending cuts will be needed to cover a $2 billion budget gap. “I’m going to have to dig deeper,” she said.

Governors in the states battered the hardest by the recession are even more pointed because they have a greater need to dampen assumptions. California Gov. Arnold Schwarzenegger (R), whose states faces long-term budget problems despite closing a $42 billion gap Feb. 18, said residents “have to be very careful not to look at (the federal government) as the savior.” New York Gov. David Paterson (D) said the $25 billion the state is getting “does not absolve us of our responsibility at the state level to bring spending in line with what our government can afford over the long term.”

State lawmakers are equally cautious. Rep. William Lippert, a Democrat from Vermont, and Sen. Dean Cameron, a Republican from Idaho, worry that the size of the federal package may raise expectations that cannot be met. “There is a perception that this is going to balance our budget. It’s not,” Cameron said, according to the Idaho Statesman .

The Nelson A. Rockefeller Institute of Governmentat the State University of New York warned in a report issued Feb. 19 that although the federal aid is massive, it is temporary.

“When citizens look at the massive size of the stimulus package, they may think that states have dodged a bullet. But they haven’t dodged it – they’ve just gotten a little farther ahead of it,” Donald Boyd, a senior fellow at the institute, said in an interview.

The report said the hope is that state tax revenue will rise as the recovery takes hold b ut even under optimistic assumptions, the additional revenue will not come soon enough to avoid the need for significant budget cuts or tax increases. In two years, the report said, states still could collectively face a budget gap of about $70 billion.

Boyd said after the stimulus money is spent, ” The budget gaps will… be smaller than before, and further delayed, but they’re still there and will grow. States have breathing room and an opportunity to plan for the loss of stimulus aid – governors certainly know this. But if they don’t manage expectations – if they don’t make sure that voters understand that reckoning has been softened and postponed, not averted – they may find it hard to get the political support they need to phase in spending cuts and/or tax increases that can ensure balance over the longer term.”

The challenge for many governors is managing those expectations at the same time their own political futures are at stake. This year and next, 38 governor’s seats are up. Many of those contested races will amount to referenda on how the chief executive has steered the state through one of the worst recessions in U.S. history.

Many governors and state lawmakers say the worst thing they can do is build the temporary stimulus money into their budgets. When the one-time money runs out, they say, the state could have to cut spending or raise taxes to make up the difference.

“This is one-time money,” Indiana Gov. Mitch Daniels (R) recently told reporters. “It’s a heck of a lot of it, but it is one-time money.”

But governors, such as first-year Missouri Gov. Jay Nixon (D), say the federal money will help stabilize state budgets until tax revenues increase as the economy recovers. The federal legislation even calls some of the money “fiscal stabilization funds.”

Nixon has ignited a partisan debate in Missouri by recommending the state use more than $800 million of its federal stimulus money to balance the budget for the coming fiscal year. Republicans say the plan is irresponsible because it could escalate the state’s fiscal crisis in two years if there isn’t enough state revenue to replace the federal funds. Nixon counters that the GOP-controlled Legislature wouldn’t want to slash $800 million from such programs as education and health care. The immediate priority, he said, is creating jobs – and revenue.

“When this thing (the stimulus) is over and we’re in the same place we were before, we’ve missed a great opportunity,” Nixon said in an interview.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.