Tracking the Recession: Lawmakers Dreading End of Stimulus Dollars

By: - July 27, 2009 12:00 am

Whether they welcomed or snubbed the federal economic stimulus package, state lawmakers took advantage of the bailout dollars this year to help patch their state’s shaky finances.

Now, as they start thinking ahead to next year’s budget and the 2010 elections, lawmakers are increasingly apprehensive about what will happen when the stimulus money dries up. They predict even deeper cuts in services, higher taxes and raids on rainy day funds to balance budgets.

“What’s the exit strategy when this is over?” asked state Rep. Steven Costantino, a Democrat from Rhode Island who heads the House Finance Committee. “The stimulus is really a one-shot infusion that at some point ends.”

Most of the billion that states will receive from the billion package will be spent in fiscal 2009, 2010 and 2011 budgets, with fewer dollars available in fiscal 2012.

The role of stimulus funds in helping soften the recession’s blow on state budgets this year is clear from a newly released preliminary survey of half the states by the National Conference of State Legislatures. All of the 25 states surveyed said they used federal stimulus dollars for more than 20 percent of their gap-closing solution. The survey also shows how vulnerable states are as many start preparing for fiscal 2011 budgets.

Texas lawmakers, for example, have pointed with pride to the fact they kept taxes low, made modest spending cuts and built up a rainy day fund this year. But that was possible, the survey showed, because Texas used nearly all (96.7 percent) of its stimulus dollars to close its budget shortfall for the fiscal year beginning July 1, the highest percentage of the 25 states.

Nebraska (88 percent), Kentucky (68.4 percent), South Carolina (64.3 percent), Vermont (62 percent) and New Mexico (61.4 percent) also used a large percentage of stimulus dollars to balance their budgets. Alaska used only 3 percent of its stimulus money to cover its budget gap, the lowest percentage of the 25 states.

Because of the federal money, Alabama, Iowa, Minnesota, Oklahoma, South Carolina and South Dakota avoided a year-over-year decline in spending between fiscal 2009 and 2010, according to the survey and a recent NCSL report . Had there been less money to spend, those states would have had to make more severe cuts and or raise taxes. In Alabama, spending between the 2009 and 2010 budget years would have dipped 15.1 percent but, because of the stimulus, it went up 7.6 percent. South Carolina was facing a 3.2 percent decrease in spending but came out ahead by 10.6 percent.

The stimulus funds also helped keep at least four states – Alabama, Kentucky, Washington and Wisconsin – in fiscal 2009 from having to live on fewer operating funds than the year before. In Alabama, fiscal 2009 spending would have fallen 4.8 percent without stimulus money but instead rose 8 percent – a 12.8 percent swing.

But states probably cannot avoid a drop in spending money when the stimulus money stops coming, the survey said, because the growth in tax revenue will be too slow. “State revenue performance is not expected to rebound strongly enough to make up for lost (stimulus) funds,” said the survey, which was presented July 22 at NCSL’s annual legislative summit in Philadelphia by NCSL fiscal specialist Corina Eckl. She said she hopes the completed survey, with results from all 50 states, will be finished this summer.

Standard & Poor’s chief economist David Wyss told the summit that although the economy is improving slightly, states won’t feel it for several years because of the lag time between a recovery and increases in state tax revenue.

“The good news is we’re not in a free fall anymore,” Wyss said of the overall economy. “The parachute is open. It doesn’t mean we’re on the ground yet.”

Some states will take longer than others to grow revenue. The drop in revenue in Michigan between fiscal 2008 and 2010 is “unprecedented in modern times,” according to the state’s most recent economic outlook .

Many state officials told NCSL that they are forecasting shortfalls in fiscal 2011 and 2012 even if the economy rebounds.

The survey, which is the first to canvass state officials about how they used the federal bailout to shore up their budgets, warned that states will “face a cliff” if tax revenues do not start growing significantly by the time the stimulus money stops flowing next year.  Economists and other tax and budget experts are predicting several more years of flat or declining revenues for states.

Photo by Stephen Fehr,

From left, MIT economist Simon Johnson, Standard & Poor’s chief economist David Wyss and Comcast executive David Cohen spoke about the condition of the economy at the annual legislative summit of the National Conference of State Legislatures July 22 in Philadelphia.

“We are definitely one of the ‘cliff’ states,” said Maryland Del. Sheila Hixon, a Democrat from the suburbs of Washington, D.C. “I don’t know what we’re going to do when the federal funds leave.”

State Rep. Phillip Owens, a Republican from South Carolina, said the stimulus money helped the state avoid having to close four prisons and lay off hundreds of schoolteachers. “The consensus is that in two years, if we’re no better off than we are today, we gave ourselves a two-year window for the economy to try to recover,” he said.

Wyss and other economists, lawmakers and policymakers attending the conference said it is too early to talk about a second stimulus package. MIT economist Simon Johnson told the lawmakers that the stimulus was not targeted enough to states. “If there is going to be a second stimulus, it has to be better targeted.”

Wyss said the money was targeted well to states, but too much of it is going to rural areas instead of urban areas that need to create jobs. “I would say we don’t need another one,” he said. “We need to get this one spent.”

G. Edward DeSeve, the Obama administration’s chief adviser on implementing the stimulus package, said the money is being spent at the rates that Congress required in the legislation. About 30 percent of the billion has been spent in about 25 percent of the days that the program will be in effect, he said. “This is the way the spending was designed,” he said.

See Related Stories:

Weekly wrap: Health care reform takes center stage (7/24/2009)
Q&A: What would make you push for a second stimulus? (7/23/2009)
Q&A: What is the next big budget concern for states? (7/23/2009)
States’ budget pain eclipses last recession (7/21/2009)
Report: State tax revenues see record drop (7/17/2009)
Financial crisis torments states (7/1/2009)
Tracking the recession: Budget deadline looms (6/29/2009)
Reports: State income levels plunge (6/19/2009)
Recession pounds states’ budgets (6/15/2009)
Reports: Bleak state budgets through 2011 (6/4/2009)
State budget gaps top billion; fees, tax hikes in the works (4/24/2009)
Report: Sales tax collections hit 50-year-low (4/14/2009)
Stimulus tax breaks threaten state revenues (4/7/2009)
Report: State tax revenue takes a dive (3/12/2009)

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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.