Budget-Strapped States Pin Hopes On Stimulus

California lawmakers ended five days of round-the-clock wrangling Thursday, finally bridging the state's whopping $42 billion – yes, billion – budget shortfall with a drastic plan that will slash state services and raise taxes to the tune of $12 billion.

In Kansas, where state tax refunds had been delayed and state paychecks were threatened, the governor and legislators this week finally ended their pitched battle over how to plug a $225 million hole in the state budget. Residents and state workers were assured they'd be getting their money.

It's bad out there — and not just in the states getting big headlines.

According to one analysis, at least 46 states face or are already grappling with budget gaps, from modest to severe. Those teetering on the brink of insolvency have been slashing school budgets, ordering unpaid furloughs and planning layoffs.

New Jersey is reporting a $2.1 billion budget gap.

Although South Carolina Gov. Mark Sanford has been among a handful of Republican governors making noises that they may reject some stimulus money, his state faces a shortfall that could reach nearly $1 billion. The state has imposed a 7 percent across-the-board agency budget cut and has tapped money from its capital reserve fund.

Virginia's short fall is estimated to reach $2 billion, or about 11 percent of its overall budget, according to an analysis by the bipartisan National Conference of State Legislatures. In Arizona, legislators are estimating a $1.5 billion revenue gap equal to nearly 16 percent of their spending needs. Wisconsin figures it has to come up with $528 million to fill a revenue hole equal to nearly 4 percent of its overall budget. The list goes on.

Stimulus A Glimmer Of Hope

As legislators wrestle to fashion new budgets while facing plunging tax revenues, climbing unemployment and record low housing starts, they are counting on help from President Obama's $787 billion stimulus package — and the nearly $145 billion that will flow directly to state and local governments.

That stimulus money largely targets state education and health care funding, and temporary aid to unemployed workers.

Sanford and other GOP governors, including Sarah Palin of Alaska (estimated budget gap: $358 million), say they object to rules attached to spending and warn that the influx of funds could create "unreasonable" future budget expectations. But it's unclear how their political calculation will play with increasingly alarmed constituents.

Nearly half of Americans surveyed in a new Associated Press-GfK poll say they worried about losing their jobs. That's up from 28 percent a year ago.

Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a budget and tax research organization that analyzes how public funding affects low- and moderate-income families, says the stimulus plan is the only glimmer of hope right now for states facing great financial crises.

"We are expecting it to make a difference," she says.

Shot In The Arm For Ailing States

But whether the injection of money into state budgets will translate into a durable recovery remains an open question.

"The stimulus dollars are a patch for the revenue that the states should be collecting and aren't," McNichol says. "It gives them the ability to maintain the programs over the next year or two."

It's "the hope," she says, that the economy will be authentically stimulated by the spending and infrastructure projects.

The fiscal pain is real. A recent analysis of state budgets by McNichol and colleague Iris Lav found that at least 46 states are facing budget shortfalls and that the "severe fiscal problems are highly likely to continue" until 2011.

The estimated budget gap nationally? About $350 billion, they say.

A similar analysis by the National Conference of State Legislatures says that 2009 will be remembered as a year when lawmakers were blindsided by "a collapse of the magnitude that has stricken state finances."

Budget gaps that prudent lawmakers thought they'd adequately addressed when planning for the current fiscal year have grown in some states and opened up in others. According to the McNichol and Lav survey, only four states — Montana, Wyoming, North Dakota and West Virginia — report that they do not have current shortfalls and are not projecting any in the coming fiscal year.

Key Funds To Stabilize States

Though "shovel ready" infrastructure projects have been touted as the job-making part of the stimulus package, only about $27.5 billion has been designated for such fast-track projects.

State officials are looking more eagerly at what is being called "fiscal stabilization money" — $53.6 billion that states will be able to use to maintain education funding at current levels through the fiscal year ending in 2011.

The money, says David Shreve of the National Conference of State Legislatures, which analyzes federal budgets for its state members, "is probably going to ensure that a lot of teachers and a lot of teachers' aides aren't laid off."

States will also see about $13 billion to shore up programs funded under Title I, which distributes money to local school districts based on their number of low-income families.

About $87 billion will also flow to states in the form of health care and unemployment aid, largely to shore up Medicaid programs and to fund other efforts that aid the jobless, including one that would subsidize so-called COBRA health care premiums for laid-off workers. Under the terms of the stimulus package, the government would foot 65 percent of an individual's cost of COBRA premiums for up to nine months.

Too Many Strings?

Governors like Sanford say they object to having "strings" attached to some of the stimulus assistance.

States that accept money, for example, are barred from making Medicaid eligibility more restrictive or putting the money in a rainy day or reserve fund. And they are required to maintain education spending at current levels through the fiscal year that ends in 2011.

There is concern among state legislators that most, if not all, of the money is for a limited time, says NCSL Deputy Executive Director Carl Tubbesing.

"I don't think legislatures will just assume they will get this kind of assistance in the future — it's never been guaranteed," Tubbesing said in a briefing with reporters.

The stimulus legislation is one of the "most complex, biggest, hugest, most complicated, confusing pieces of legislation ever passed," he said.

States are expected to embrace the help, though with trepidation in some quarters. But with the economy continuing to sink, even Sanford qualified his opposition to the stimulus package, which he termed a "horrible idea."

That opposition, he insisted during a round of the morning talk shows Thursday, doesn't mean he won't take the dough.

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