Facing Shortfalls, States Seek Emergency Aid From Washington

By Keith B. Richburg and Ashley Surdin
Washington Post Staff Writers
Sunday, November 16, 2008

NEW YORK -- First came the banks looking for a federal rescue plan to stay afloat. Next it was the automakers seeking a bailout. And now state governments say they, too, need emergency federal assistance to remain solvent.

"I believe that the crisis that is happening in the states needs to be elevated in the national discussion about restoring our economy," said California state Assembly Speaker Karen Bass (D). "California is the world's sixth-largest economy. And just as we cannot let the auto industry fail, we can't let the state of California fail."

The National Governors Association has sent a letter to congressional leaders asking for immediate action to aid states. New York Gov. David A. Paterson (D) has urged federal assistance, telling Congress in recent remarks, "We are cutting all we can, and we will cut all that we are able to, but inevitably, the deficit is too voluminous for us to address." He added, "Targeted, sensible action by the federal government could provide relief for us now."

California Gov. Arnold Schwarzenegger (R) also demanded federal action, blaming the subprime mortgage crisis for the economic downturn. "Government is really at fault, and this is why government has to get us out of this mess now and figure out very quickly how to get us out of it," he said. "And I'm talking about Washington."

The reason for the alarm is the numbers, which were bad just two months ago and look dire today. California, which has the worst fiscal crisis, is facing a $28.7 billion shortfall over the next 20 months, and Schwarzenegger has outlined a package of proposed tax increases and cuts to services including health care, education and state aid to localities. State workers would have to give up two holidays, Lincoln's birthday and Columbus Day, and many would be furloughed for one day each month.

California's nonpartisan Legislative Analyst's Office said the state's revenue collapse is so dramatic, and the underlying budget problems so severe, that the Golden State can expect large shortfalls for years to come.

In New York, where the legislature is coming back for a lame-duck session this week, Paterson has outlined a series of fee increases and spending reductions that would slash $5.2 billion from the state budget over the next 16 months. The largest cuts would come from state Medicaid reimbursements, school aid and salaries of state workers, who would give up five days of pay.

The pain is already being felt. Around the country, state-supported colleges, universities and community colleges have already increased tuition or announced plans to do so next year. Tuition has increased as much as 14 percent in Rhode Island, 13 percent in Alabama, as much as 9 percent in Kentucky and 15 percent for undergraduates in Florida's university system. California's two public university systems warned that tuition could go up 10 percent next year.

Experts said the aid cuts to higher education are coming at a time when families can least afford increased tuition, and many young people may delay going to college.

According to the Center on Budget and Policy Priorities, a liberally oriented Washington think tank, about 41 states face budget shortfalls this fiscal year or next. Half of them took steps -- cutting services and raising fees -- to bring their budgets into balance for the fiscal year that began in July, only to see those budgets fall out of balance again as economic conditions further deteriorated.

Iris J. Lav, the deputy director of the center, said shortfalls for the states could total $100 billion.

"How can a state cut that much? They can't," she said, joining the chorus calling for federal assistance. "The states have balanced-budget requirements -- the federal government does not," meaning Washington can go into deficit and borrow more to funnel aid to the states.

Governors, state officials, economists and others are careful not to use the term "bailout" when speaking of federal aid to states.

Schwarzenegger told the Greater Fresno Area Chamber of Commerce last week that the federal government gives California 80 cents for every tax dollar the state sends to Washington -- meaning there is $40 billion being held back. "So it's not like we're asking for a bailout, because it's our money. We're just saying, 'Hey, give us some of our money back,' " he said.

In New York, Errol Cockfield Jr., the governor's spokesman, said the state each year gives the federal government $89 billion more than it gets back, so Paterson prefers the term "handback."

Lav said: "It's federalism. . . . I wouldn't call it a bailout -- it's government to government."

One of the costliest problems for the states now is Medicaid reimbursements, and governors are calling on the federal government to increase its share. Paterson's plan, for example, would save $572 million by reducing New York's reimbursements for certain procedures and eliminating the automatic inflation adjustment.

But the problem experts foresee is that during a recession, many more people go onto Medicaid, typically as they lose their jobs and company-sponsored health insurance. During the 2001-2004 recession, Medicaid enrollment increased by an estimated 17 percent, or about 6 million people.

The economic crisis has aggravated another problem for some large states: funding their unemployment insurance funds.

State trust fund reserves had fallen to $36.7 billion by Sept. 30, a 10 percent decline from a year ago, according to the National Employment Law Project, a New York-based organization that advocates for low-wage and unemployed workers. As of September, five states -- Michigan, Indiana, New York, South Carolina and Ohio -- were not solvent, with reserves covering three months or less of their average monthly payments, according to the project.

Eight states -- New Jersey, California, Kentucky, Missouri, Wisconsin, North Carolina, Rhode Island and Arkansas -- are nearly solvent, with reserves to cover four to six months of average payments. And an additional six states fall into the seven- to 11-month range -- Pennsylvania, Minnesota, Idaho, Illinois, Connecticut and Massachusetts.

No unemployed people should see their benefits affected. But at least six and as many as 10 states will have to borrow from the federal government in the first half of next year to keep their funds solvent, according to Andrew Stettner, deputy director of the Employment Law Project.

States have had to borrow before, Stettner said, but not so early in a recession. Michigan is already borrowing. Indiana is on the brink. And a handful of other states are in line. "This isn't the way the system is supposed to work. The system is supposed to stand on its own two feet," Stettner said. "You'd hope states would have enough money in the first year of this kind of job market.

"The concern is really that there's going to be sustained trust fund deficits for years to come," he said.