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States seek financial help as new fiscal year begins

By Michael A. Fletcher
Washington Post Staff Writer
Thursday, July 1, 2010; A11

State governments desperately need money. Congress is in no mood to spend it. And the reckoning will begin Thursday, when the new fiscal year will start for most states.

Nothing less than the nation's nascent economic recovery hangs in the balance. States say that if they do not find financial rescue they will have to cut services and workers. That would deliver a potentially crippling blow to the economy, which needs higher employment levels to fatten wallets, promote spending, bolster tax revenue and reduce dependence on expensive social services.

States face a combined deficit of $89 billion in the fiscal year that begins Thursday, according to the National Conference of State Legislatures. And because every state but Vermont is required to balance its budget, the only recourse is cutting employees or vital programs, including education spending, medical services, programs for the disabled and elderly, and police and fire protection.

All that cutting could mean the loss of 900,000 jobs -- in the public sector and in private companies that rely on state business, according to the Center on Budget and Policy Priorities, a liberal research group.

President Obama has called for $50 billion in aid for states, but concern about the federal deficit has made lawmakers wary about significant new spending.

"We may be looking at a culture and lifestyle around this country that will start to remind people of the Depression, not a recession, if we cut through these budgets much more," said New York Gov. David A. Paterson (D), who was among a small group of state chief executives who descended on Congress on Wednesday to make a last-ditch plea for federal help.

Although the downturn has not hit the Washington region, with its relatively stable federal workforce, as hard as it has some parts of the country, Virginia and Maryland have eliminated jobs and imposed employee furloughs in the past year. Both states have proposed cuts to a wide range of programs, including education and local government aid for the coming budget year -- cuts that will have to go deeper without a new round of federal help.

A bill that would funnel federal money to states by helping them with a larger share of their Medicaid costs has failed repeatedly in Congress, most recently last week.

Cindy Mann, the federal director of Medicaid, said she was on the phone last week with the Massachusetts health secretary when word came that the legislation had failed again in the Senate. "She just got what the budget looks like without the [higher federal Medicaid match]. There's going to be a lot of sticker shock," Mann said. "It's going to wreak a lot of havoc on the states."

A recent Pew Research Center survey found that most Americans think that states should solve their budget crises without federal help. Paradoxically, however, most respondents also said they oppose reductions that would have to be made for states to balance their budgets.

Thirty states have already included a new round of federal money in their budgets, assuming that Congress was sure to approve it given its past support and the fiscal chaos likely to ensue if the money is not forthcoming. But there is now serious doubt that the federal government will provide new aid to extend a program in the stimulus bill that is scheduled to expire at the end of December. Only nine states that have budgeted the federal aid have contingency plans for what to do in its absence, according to a survey by a state legislatures group.

"The states are going to have to go back and take some action," said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers (NASBO). "There is a lot of concern about a cliff with stimulus funding and how fast it drops off in fiscal 2011."

The recession has sent state revenue declining sharply for two consecutive years -- the first time that has happened since state budget officials began tracking them in 1979. State general fund spending was down $74 billion -- 11 percent -- since peaking at $687 billion in 2008, according to a recent survey of states by NASBO and the National Governors Association. Revenue was beginning to stabilize this year, but with the emergency federal money drying up, states are being forced to make draconian cuts that economists warn undermine the stimulus effort.

"More and more economists are talking about a double-dip recession," said Raymond C. Scheppach, the NGA's executive director. "These cuts could be the straw that breaks the back."

Beyond harming the larger economy, deep cuts by states would also jeopardize social services even as stubbornly high unemployment rates and other lagging effects of the downturn are fueling demand for the services. With Medicaid and education comprising the lion's share of state budgets, the cuts are likely to hit key programs.

Since the recession began, states have experienced sharp increases in their Medicaid rolls, which are projected to grow by 21 percent between 2009 and the next fiscal year, which begins July 1 for 46 states. Some states have responded by reducing some reimbursement rates for health-care providers and curtailing some services, although they are prevented from limiting eligibility by the new health-care law. In education, more than 100,000 teaching jobs could be on the chopping block.

States pushed through $26 billion in tax and fee increases last year. But, overall, lawmakers are reluctant to raise taxes, particularly as the economies in so many states are listing, leaving governors little option but to make deep cuts.

States have shed more than 200,000 jobs since the downturn hit in 2008. Some have cut payments to Medicaid providers and trimmed prison spending. Arizona has sold assets, such as office buildings. Michigan created incentives to urge teachers to take early retirement. California is among the states that raised tuition costs and slashed budgets at public colleges and universities, igniting protests.

In Illinois, a state wracked by fiscal problems even before the downturn, $5 billion in unpaid bills -- which account for 18 percent of the budget -- is being rolled forward into the new fiscal year. Alan Henry, a spokesman for the Illinois comptroller's office, said some of the 200,000 unpaid bills date back as far as November.

"We get thousands of calls a week from vendors," Henry said. "Across the state, agencies are closing down or cutting back their workforces because they are not getting the money from the state. It is a mess."

Staff writer Alec MacGillis contributed to this report.

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