Four Ways States Could Squander the Stimulus

When President Barack Obama signed the $787 billion American Recovery and Reinvestment Act (ARRA) into law Feb. 17, he underscored how state governments would be largely responsible for implementing the legislation. Edward G. Rendell, the Democratic governor of Pennsylvania and chair of the National Governors Association, said at the time: "All of us, whether we supported the bill wholeheartedly or whether we had questions about it, intend to be good stewards of the money we spend. All of us intend to do it in an effective and efficient way." While the stimulus bill has unquestionably eased some of America's economic pain just a few months after its enactment, already four main roadblocks have emerged that threaten the success of the legislation's state-focused aspects: state budget shortfalls; political dysfunction in many populous, economically important states; limited administrative capacity, exacerbated by budget cuts, at the state and local level; and state resistance to new programs that are only temporarily funded at the federal level.

Huge, relentless state deficits
So far the stimulus legislation has helped narrow budget gaps, preventing layoffs and reductions in services. For example, ARRA money closed 31 percent of New York's budget gap and 37 percent of Virginia's, with similar outcomes in states like Utah, Washington, Georgia, and Maryland, according to the Center on Budget and Policy Priorities (CBPP). In Virginia, the federal assistance helped avert the closing of three mental-health facilities, cancel a planned cut in Medicaid payments to hospitals, reduce a planned reduction in university aid, and saved 310 deputy sheriffs' positions, according to the Center.

But while the stimulus has aided state budgets, at least 39 states and the District of Columbia have still had to slash their work force, 22 states are cutting or proposing to cut K-12 and early education, and 19 states have reduced health-insurance protections to low-income individuals, the CBPP reports. That broad retrenchment is unlikely to abate soon, even with most of the stimulus funds still in the pipeline. Huge pension obligations, combined with rising educational and health-care costs, will squeeze state budgets -- almost all of which are required to be balanced annually.

Any rebound in state tax revenues that may occur after the current collapse ultimately subsides, whenever that may be, won't stave off deep cuts. Scott Pattison, executive director of the National Association of State Budget Officers, told The Wall Street Journal, "There are so many issues that go way beyond the current downturn. This is an awful time for states fiscally, but they're even more worried about 2011, 2012, 2013, 2014." Forty-five states that have estimated their fiscal 2010 deficits collectively project shortfalls amounting to $133 billion -- or 19 percent of state budgets -- according to the CBPP.

The upshot is that for the duration of ARRA and most likely years after as well, most big- and medium-sized states will almost certainly be in the mode of cutting government jobs, reducing other spending that flows to state residents, and raising taxes. That will have a dampening impact on the economy, albeit a somewhat less soggy blanket than in the absence of the stimulus bill. A much bigger federal allocation to states would have been needed to deliver an overall positive jolt to the economy from the state and local sector.

Political dysfunction
One example of state politics derailing perfectly sensible public policy relates to the stimulus bill's provisions to increase the number of jobless who receive unemployment insurance. That increase would cushion economic blows for hundreds of thousands of Americans while helping to reduce the huge state-to-state gaps in coverage, which range from a low of reaching 19 percent of the unemployed in South Dakota to a high of reaching 67 percent in New Jersey and Idaho. Twenty-five states have enacted coverage expansions that the stimulus bill encouraged, according to Maurice Emsellem of the National Employment Law Project. However, Republican governors Mark Sanford of South Carolina, Bobby Jindal of Louisiana, Bob Riley of Alabama, and Haley Barbour of Mississippi, joined Texas' Rick Perry in flatly turning down the extra support for their states' unemployed. In Florida and Virginia, the state legislatures blocked unemployment-insurance expansions, defying their governors. The lack of a logical rationale for declining the stimulus money unfortunately hasn't deterred ideologically driven Republicans from blocking, in essence, costless support for their state's jobless.

The pervasiveness of unusually intense political acrimony, exacerbated by the severe economic pressures and intransigence of right-wing ideologues who hold varying degrees of power from state to state, make it difficult to be optimistic that wisdom will prevail as states consider how to respond to much more complex and politically controversial "reinvestment" provisions in the stimulus bill.

Weakened administrative capabilities
Beyond political dysfunction are concerns about states' ability to administer some of the major stimulus projects that lie ahead. Most of the ARRA money that has flowed so far provides a bolus through well-established lines of funding like unemployment insurance, food stamps, Medicaid, and road repair work. Those kinds of activities don't require too much additional administrative capacity.

The much more daunting challenges for the states will come with the reinvestment phase of the stimulus package -- introducing major new educational, transportation, and energy projects and activities. Even the most competent government agencies have difficulty starting something new, and many state offices squeezed by budget cuts lack enough experienced civil servants to reliably avoid pitfalls.

One of the stimulus bill's most generous allotments boosts what had been a $200 million annual federal outlay for an existing, (and largely successful) weatherization assistance program for low-income families. That will leave states with anywhere from 20 to 55 times as much money to spend on what formerly had been modest programs mainly managed by nonprofit community organizations. surveyed how different states are planning to implement the program and found a wide assortment of approaches that often differed dramatically from past strategies.

For example, Texas plans to give half of its funding to mayors in cities with populations of 75,000 or more rather than to the community-action agencies that did the work previously. Indiana, where Gov. Mitch Daniels, a Republican, has long championed privatization of government services, plans a bidding process that will include its depressed homebuilding industry. But as Leslie Page of the group Citizens Against Taxpayer Waste told Stateline, "Some states don't have any idea how they are going to do this."

Moreover, most states lack the auditors needed to adequately oversee the big reinvestment elements of the stimulus package. After state officials complained that the legislation allocated no money toward oversight, the Office of Management and Budget issued a memo on May 11 authorizing states to spend up to 0.5 percent of their stimulus money on oversight, auditing, and reporting. But there is no guarantee that states will make that investment; many have already cut back on auditing staffs because of cost pressures.

Stimulation withdrawal
Because most ARRA money evaporates after 2011, states have been wary of launching initiatives that would fall back onto state ledgers after the federal money runs out. For example, stimulus money to extend the school year may not find many takers because it would be left to states and localities to pay for additional weeks beyond the next two years. Lillian Lowery, Delaware's secretary of education, told Education Week, "What we cannot do is hire a lot of new people or [develop] many new programs at all, knowing in two years that falls off a cliff."

If the stimulus bill fails to produce impressive new transit systems or improve educational outcomes, right-wing critics will surely claim that government spending doesn't solve problems. Gary Compton, superintendent of the Bentonville, Arkansas, school district, told Education Week that he worried about conservatives saying, "'We gave public education $100 billion and have ACT scores gone up? Have we closed the divide between rich and poor kids?'" Compton concluded: "That's always your biggest fear, that this will just be fuel for that fire."

A better stimulus bill would have provided more money to states to stabilize their budgets and increase safety-net spending. But the real problem is that America's Balkanized system of financing and providing public services no longer works. With so many big states financially strapped, politically paralyzed, and wedded to ineffective policies, rebalancing federal-state roles needs to become a long-term goal for progressivism. Beyond that, preventing the need for future state bailouts by shifting responsibilities for social insurance from states to the federal government should be the progressive answer to future complaints that that the stimulus bill turned out to be less than it was cracked up to be.