States Want $176 Billion Slice of Stimulus
Governors to Ask Obama to Set Aside Federal Funds to Boost Local Economies

By Ceci Connolly
Washington Post Staff Writer
Tuesday, December 2, 2008

When President-elect Barack Obama arrives at Philadelphia's Independence Hall today to meet with the nation's governors, the main question will be not whether he will deliver fast fiscal relief to the states, but how much?

Obama and congressional Democrats have promised that soon after Inauguration Day he will sign an economic stimulus bill that could exceed $500 billion. The governors intend to request about $176 billion of that -- $136 billion for infrastructure projects and $40 billion to bolster Medicaid health programs that serve the poor and disabled.

"The slowing economy is resulting in growing unemployment, increased demand for state services and significant declines in state revenues," said Gov. Jim Douglas (R-Vt.), who is vice chairman of the National Governors Association. "It's critical this happen as soon as possible."

As the economic downturn has swept from the housing market to financial institutions to the automobile industry, Obama has begun sketching out plans to address a recession that most experts project will be deep and long lasting. At the heart of his approach is a massive infusion of federal tax dollars.

"We have a consensus, which is pretty rare, between conservative economists and liberal economists, that we need a big stimulus package that will jolt the economy back into shape," he said recently. "Across the board, people believe that this stimulus is critical."

In a sign of the importance Obama is placing on relief to the states, the meeting with 40 current and newly elected governors will be his first trip outside Chicago since Election Day, with the exception of a brief visit to the White House.

The day before their meeting with Obama, Douglas and Gov. Edward Rendell (D-Pa.) were in Washington making the case for immediate federal aid. Already, 43 of the 50 states face budget shortfalls, they said. Gov. Arnold Schwarzenegger (R-Calif.) yesterday declared a fiscal emergency, estimating a gap of between $11 billion and $28 billion.

"Without immediate action, our state is headed for a fiscal disaster," Schwarzenegger said.

Unlike the federal government, which can run a deficit, most states are required to balance their budgets. In tough financial times, Medicaid often faces a double squeeze, said Diane Rowland, executive director of the nonprofit, nonpartisan Kaiser Commission on Medicaid and the Uninsured. Just as the money is drying up, more people are in need of assistance.

"When the economy is bad, the social service net demands grow," said Rendell, who is chairman of the governors association.

On average, the federal government pays 57 percent of Medicaid costs and states cover the rest. That means that for every $1 a state trims from its Medicaid budget, more than $2 is lost in health-care services.

Conversely, pumping money into Medicaid "has a double impact," Rowland said, by providing care to the neediest citizens and keeping local medical providers in business.

In response to the last economic downturn, Congress in May 2003 temporarily increased its Medicaid grants by $20 billion. A survey by the Kaiser commission found that the money "helped states to both balance their budgets and maintain Medicaid eligibility."

But a report by the Government Accountability Office concluded that the increase came too late after the 2001 recession to serve as an economic stimulus.

Steven Malanga, a senior fellow at the market-oriented Manhattan Institute, said it is unwise to bolster a program that has already stretched beyond its intended target of the very poor.

"Why don't states plan for this when the economy is good?" he said. "Why do they expand their subsidized health programs?"

Obama has taken a different approach, arguing throughout the campaign that expanding enrollment in government-subsidized health programs such as Medicaid and Medicare is one step toward ensuring that every American has health insurance.

In its most recent stimulus legislation, the Senate requested an additional $40 billion over two years -- an 8 percent increase -- in Medicaid funding. The bill died, but congressional Democrats and sources close to Obama said they expect to see a similar figure in legislation that will be debated shortly after the new year.

Similarly, it appears there is growing support for a sizable federal investment in infrastructure, which Rendell and Douglas said goes beyond the traditional road and bridge repairs to include public transit, water and sewer projects and even broadband Internet. The two governors said states have $136 billion worth of "ready-to-go" projects.

One voice of dissent in the Philadelphia meeting will likely come from Gov. Mark Sanford (R-S.C.).

"We're just putting off the day of reckoning," he said in an interview. "A problem created as a consequence of too much debt probably will not be solved by issuing more debt."

Rendell countered that there are different kinds of debt.

"This is the type of debt that actually produces something -- it produces an investment in our states and our economy," he said. "It produces jobs, it produces orders for businesses."

If Congress passes an economic stimulus bill of $500 billion to $700 billion, as Sen. Charles E. Schumer (D-N.Y.) expects, then $150 billion for infrastructure is "not outlandish," Schumer said.

"If we want to avoid a steep downward spiral, we need a strong injection quickly," he said. Spending on infrastructure "has a multiplier effect; it causes other people to be employed."

By Rendell's estimate, every $1 billion in infrastructure spending generates 40,000 "good, sustaining" jobs.

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