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States on The Brink

By David Ignatius
Thursday, February 19, 2009

Media coverage of the $787 billion stimulus package signed Tuesday by President Obama has had an air of unreality -- as if people were reporting on a baseball game or a tennis match. Is Obama up or down today? Did the Republicans gain or lose momentum? Meanwhile, as Washington obsesses over the political box score, the economy has been going down the toilet.

You get a better sense of what the crisis feels like -- and the real impact of the stimulus package -- when you leave the miasma of federal spending and examine state and local governments. Here, the impact of the downturn is severe and immediate: States are required to balance their budgets, so they don't have the Washington option of printing money. They have to raise taxes or cut spending -- both of which could make the downturn even worse.

Some numbers suggest the dimensions of the crisis. As states are preparing their fiscal 2010 budgets, they are looking at a revenue shortfall of $84.3 billion, according to the National Conference of State Legislatures. The largest gaps forecast for 2010 are in states hit hardest by the real estate crash: Nevada (with a budget shortfall of 37.6 percent), Arizona (28.2 percent), New York (24.3 percent) and California (22.3 percent).

Facing these deficits, most states have said they will cut services and payrolls. At least 40 states are planning such cuts, according to the Center on Budget and Policy Priorities. The proposed cuts are scary: At least 28 states are contemplating reductions in public health programs; at least 22 are targeting services for the elderly or disabled.

Are these cuts for real? My old mentor Charles Peters, the former editor of Washington Monthly, liked to invoke the "Firemen First" principle. He argued that at budget time, governments always warned of the direst consequences -- they were going to lay off the firefighters or throw Granny out of the nursing home. And there's probably a bit of that hype now.

But people who follow state and local government insist that the squeeze is serious. Kerry Korpi, director of research for the American Federation of State, County and Municipal Employees, says she kept a log of proposed or actual layoffs and furloughs around the country and stopped counting when she got to 350,000 -- there were simply too many to follow.

California is where the fiscal meltdown is most dramatic. The Legislature has been deadlocked for four months over how to eliminate a $42 billion budget deficit. As the politicians have bickered, the state has moved toward insolvency. It has stopped paying tax refunds, and next month it may have to pay some of its bills with IOUs.

"We are dealing with a catastrophe of unbelievable proportions," state Sen. Alan Lowenthal said. This week the state began notifying 20,000 employees that they will be reassigned or lose their jobs and announced that it would halt $3.8 billion in public works projects.

Unable to borrow easily in the bond markets, California is considering a bizarre plan to sell investors securitized shares of future lottery revenue. That's taking the casino economy to its ultimate extreme. Other states and localities are coming up with their own wacky funding ideas. Chicago has sold the rights to collect money from its parking meters, for example.

Against this backdrop of real-world financial crisis out in the states, let's return to Washington and the debate over the stimulus package. The best thing that can be said for the new law -- and it's quite a lot, actually -- is that it will help state and local governments avert financial disaster. Michael Bird, the chief lobbyist for the state legislatures, says his members got most of what they wanted in the package. There is a $54 billion "state stabilization fund" to help cover the projected $84.3 billion in deficits, and several hundred billion dollars more in indirect help. Is that overdoing it? I hope so.

The stimulus plan even has a provision to help the market for municipal bonds, by easing tax rules for banks that buy them. That could induce $65 billion in new bond offerings, according to estimates by Municipal Market Advisors quoted by Bloomberg News. For states facing a desperate cash squeeze, that's welcome news indeed.

Did President Obama have a good day Tuesday when he signed the stimulus bill? You bet he did. But the point that weirdly seems to get relatively little attention is that it was a good day for millions of Americans who are getting hammered by the recession.

The writer is co-host of PostGlobal, an online discussion of international issues. His e-mail address is davidignatius@washpost.com.

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