Stimulus funds at the center of state budget troubles

Amanda Seitz Contributor
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As the federal dime dwindles down, the end of stimulus funds may be partially to blame for tough decisions legislators are forced to make in state budget showdowns.

Some states are nearing government shutdowns because state lawmakers simply can’t agree on what and how much to cut, while others face heat on big cuts their state has been forced to make.

California’s lawmakers aren’t getting paid this week because they couldn’t agree on a budget in the time state law requires. In Minnesota and Iowa, state shutdowns loom as state lawmakers have continued to spar over where to appropriate funds.

Meanwhile, for those states like Ohio, Florida, Michigan and New Jersey where Tea Party favored newly elected governors are slashing budgets, constituents and opponents are making noise.

Former state budget adviser Donna Arduin attributes this string of troubled and slimmed down state budgets to an unusual set of economic circumstances that states have been presented with.

Arduin, who’s worked on troubled state budgets for Republican governors such as California, Florida, New York and Michigan, said the federally sponsored funds in the American Recovery and Reinvestment Act have further burdened states’ budget battles.

“When the stimulus was passed, they knew the money was going to go away, the strings that were attached increased their spending requirement,” Arudin said. “Because they used the stimulus money, they didn’t make budget reductions that they would have made the last two or three years. They’re facing a situation that is somewhat unusual, the stimulus money is gone; the economy hasn’t recovered.”

(CBO: Stimulus law will cost $43 billion more than estimated)

And the states are up against a clock—they’ll be facing what many experts call the “Medicaid Cliff” on July 1, when extra, stimulus-backed Medicaid funding ceases and states are left to pick up the bill virtually on their own.

About $48 billion in federal Mediciad assistance to the states will evaporate, at a time when Medicaid needs continue to grow, Moody’s Economist Daniel White said.

(Greenspan: Stimulus contributing to lagging recovery)

“Obviously states are cutting other places to fund this,” White said. “A lot of the layoffs will start to happen in July and August; we’re going to see state and local government employment decline.”

At a time when many states were already spending too much, adding stimulus funds to the mix may have been hurtful rather than helpful, says American Enterprise Institute Resident Scholar Andrew Biggs.

“The states are in a difficult situation for a lot of reasons of their own making,” Biggs said. “Giving them more in this situation is (not) the answer.”

The Office of Management and Budget argues that stimulus funds were the right answer to fixing state budget woes.

“Today, as federal, state and local governments make tough cuts to get back on a sustainable fiscal path, there’s no doubt that they are in a better position to do so because of the Recovery Act,” said Meg Reily, a spokesperson for OMB.

But for Florida, some of the heavily criticized cuts Gov. Rick Scott has made are the result of slashing government services that were once paid for by stimulus funds. Soon, some of those projects will no longer be cost effective after the stimulus money is drained later this year.

“Education is one example where federal stimulus that was in the budget the previous year, was no longer available this year,” said the governor’s spokesperson Lane Wright.

Florida’s budget, finalized under Scott in May, included $1.35 billion in education cuts.

Wright said costs associated with stimulus projects, such as the high-speed rail train which Florida also cut from its budget in May, have driven the state to refuse further stimulus dollars.

“High speed rail federal stimulus dollars would have obligated Florida’s taxpayers into debt down the road, (it) can hurt the state in the long run,” Wright said. “We have committed not to accept any new stimulus money.”

However, $370 million dollars of stimulus funds somehow managed to find its way into Scott’s budget.

Actions like these highlight hypocrisy in politicians’ willingness to critique stimulus funds while gladly using them, Florida Democratic Party spokesman Eric Jotkoff said.

“Rick Scott’s hypocrisy is matched only by his determination of his extreme agenda and to destroy jobs across Florida,” Jotkoff said.

With heavy spending restrictions placed on states that took the recovery money, the decision to make deep cuts during a time of economic difficulty wasn’t an easy one.

“Those (stimulus) dollars were obviously used to fill the gap the last two years, so states wound up putting off difficult choices,” Rick Hess, director of education at AEI, said. “So, now the states are in a situation where they have to deal with the consequence.”

This limit in state lawmakers to cut in a time where money was evaporating has resulted in a difficult situation for states, even as Obama’s administration continues to boast an economic turnaround.

“The result is now that stimulus dollars have tapered off, states are left with the same challenges they had a couple of years ago and no new influx of cash,” Hess said.

And the requirements associated with taking stimulus money from the federal government are pretty much never-ending, Hess said, specifically, of education stimulus money.

“Essentially, the states promised to do these things forever,” Hess said. “They were severely limited in the kind of cuts they were permitted to make for taking federal aid.”

North Carolina, a state that was stalled in a budget showdown between legislators and the Democratic governor up until a few weeks ago, is already wondering how it will keep up with the demanding costs of stimulus-funded projects in years to come, says North Carolina’s Speaker of the House spokesperson Jordan Shaw.

“The stimulus projects we had came with obligations from the state,” Shaw said. “Say, a transportation project, that may be paid for up front (by the federal government), the state incurs yearly obligated costs, the state economy is just not in a position right now to take on a lot of those costs.”