Stimulus Funds Bring Relief to States, but What About 2010?

By Keith B. Richburg and Ashley Surdin
Washington Post Staff Writers
Tuesday, August 11, 2009

NEW YORK -- As states across the country grapple with the worst economy in decades, most have cut services, forced workers to take unpaid days off, shut offices several days a month and scrambled to find new sources of revenue.

The good news is that much of the pain this year has been cushioned by billions of dollars of federal stimulus money, which has allowed states and localities to avoid laying off teachers, prison guards, police officers and firefighters.

The bad news is that for the next fiscal year, beginning in July, the picture looks even bleaker. Revenue is expected to remain depressed, even if the national economy improves. There will be only half as much federal stimulus aid available, and many states have already used up their emergency reserves.

Most states have just approved a budget for the fiscal year that began July 1, and their legislatures have adjourned for the summer. But in a dozen or more states, those budgets have already gone into the red less than two months into the fiscal year, by a total of about $24 billion. More than 30 states are projecting deficits for next year, according to the Center on Budget and Policy Priorities, a Washington-based think tank, and other expert estimates.

The economic picture in state capitals has looked bad since last fall, when the national economy first went into freefall and many governors called their legislatures into emergency sessions to make drastic mid-year cuts for such things as health-care services and support for public colleges and universities. But as legislatures have just completed their regular budgeting process, the extent of the fiscal disaster is only now becoming clear -- and some are already talking about additional special sessions this fall, with more painful cost-cutting ahead.

Maryland, with a $1.9 billion budget, faces a $700 million gap, according to the Center on Budget and Policy Priorities. The District has a new $650 million budget with a $150 million shortfall. Virginia, with a $1.8 billion budget, also faces a new deficit, but the size has not been determined.

For the next two fiscal years, the states face a combined budget shortfall of $350 billion, according to the center and the Council of State Governments, using roughly the same projections.

"I think that states are going to have to look at revenue and programs across the board, or they're going to have to raise revenue in an anemic economic environment," said Chris Whatley, deputy executive director of the Council of State Governments. "Either way you look at it, it's going to be about tough decisions in state capitals."

Already, in California, the epicenter of the states' fiscal meltdown, domestic-violence shelters have been turning people away because state funding was eliminated, and some shelters have shut down.

State funding has also been eliminated for several programs run through California's office of AIDS, and for a black infant health program that helps 6,000 African American pregnant women and new mothers statewide. "This is the worst I've ever experienced, and I've been with the County of Sacramento for 23 years," said Sharon Saffold of the county's health department.

State offices across Michigan were closed Friday, but not for a holiday. It was the fourth of six furlough days for more than 37,000 state workers, with two more shutdowns due before Labor Day.

New Jersey Gov. Jon S. Corzine (D), struggling in a reelection campaign, recently signed a new $29 billion budget that was $1.5 billion less than the first budget he signed as governor four years ago. But even that was not enough to stop Moody's, the Wall Street rating agency, from downgrading New Jersey's credit outlook to "negative," citing the state's huge debt and the use of one-time budget gimmicks.

Even with the national economy showing signs of improvement -- joblessness for July had the smallest monthly loss for a year -- conditions for states and localities are likely to remain dire for some time, economists and experts said. The depressed value of housing will continue to mean lower revenue from sales taxes and property taxes. Also, continued high unemployment will mean reduced income-tax receipts, more expenditures for unemployment claims and more demand for "safety net" services.

Unlike the federal government, most state governments are barred by their constitutions from running a deficit or borrowing money to cover operating costs. Their only choices are to cut services further -- although most say programs already have been pared to the bone -- or to raise revenue in the form of new taxes or fees, something legislatures are loath to do in a recession.

Already, to balance their fiscal 2010 budgets, governors have increased fees, raised sales taxes and imposed new taxes on high-income earners. New Yorkers will pay more for licenses to drive, hunt, boat and fish. New Jersey has raised taxes on cigarettes, wine and liquor. Other states are said to be considering expanding sales taxes to include such services as landscaping, pest control, cable television and diaper delivery.

This year, the federal stimulus package signed into law by President Obama in February served as a lifeline. For all the intense partisan debate in Washington over whether the stimulus so far has worked, in the states there is little question that federal cash has staved off catastrophe.

According to the General Accounting Office's July report, by June 19 the federal government had disbursed $29 billion to the states, with 90 percent of that money going to Medicaid, to help states maintain coverage levels, or to help them stabilize budgets and avoid layoffs.

"The stimulus has had a tremendous effect in forestalling some of the worst cuts," said Elizabeth McNichol, a senior fellow with the Center on Budget and Policy Priorities. It's absolutely worked for the states."

Whatley, of the Council of State Governments, said state deficits would be 40 percent worse if not for the stimulus funds. The federal funds have given states "breathing room," he said, but he added that "the stimulus cushioned the blow of the state fiscal crisis, but it didn't blunt it."

The stimulus money "is helping California weather the worst fiscal crisis in recent memory," said H.D. Palmer, spokesman for the California Department of Finance. But Palmer said the crisis is far from over: "We hope that the worst of this recession is behind us, but whoever is the next governor will face continuing fiscal challenges."

On Friday, Corzine, who has had little good news lately, was able to announce that New Jersey had received $10.5 million in federal stimulus money for homelessness prevention, and that the state's community affairs department would immediately start taking applications from nonprofit groups and local governments. The money can go to people on public assistance or victims of domestic violence.

In Los Angeles, that kind of help is desperately needed.

A heavyset, hazel-eyed woman, originally from Texas, described last week how she and her 8-year-old son spent two weeks wandering Los Angeles's streets looking for room at a shelter. She said they spent days at a McDonald's restaurant trying to stay cool, and nights sleeping on a hand-sewn quilt under the 110 Freeway in South Central Los Angeles.

The woman, who spoke on the condition that she would not be identified, said she was fleeing an abusive boyfriend who had beaten her for more than a year. She had hoped to move immediately into a shelter for abused woman but was regularly turned away. "They just didn't have room," she said in her Texas drawl.

The woman eventually found a place at the Jenesse Center, near South Los Angeles. But that shelter is now full and turned others away. With state aid eliminated, the Jenesse shelter lost 30 percent of its revenue -- money used to pay for diapers, baby formula, food, paint, and plumbing repairs. The staff, after layoffs, is nearly half the size it used to be at a time when the number of homeless people seeking shelter is growing.

"It's devastating to the survivors and the victims who need these services," said Adrienne Lamar, associate director of the Jenesse Center. She said she knew of at least three other domestic-violence shelters that have closed.

She added: "The potential outcome for this is deadly, just deadly."

Surdin reported from Los Angeles.

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