President-Elect Obama Pledges Help to States in Economic Downturn

For many governors, the four weeks since the election have been a period of extended hand-wringing. With the economy slowing and tax revenues evaporating, budgets have fallen into deficit in 43 states, and economists say the situation is likely to get worse before it gets better. The Bush administration has pushed hundreds of billions of dollars in stimulus packages toward Wall Street, but governors have so far failed to win any major new aid for the states. "Without federal help...what we will have to do is just make continuing cuts and/or raise taxes, both of which would have a further deleterious effect on our states' economy," Gov. Ed Rendell of Pennsylvania told reporters yesterday. "By no means are we looking to the federal government to relieve us of that responsibility. We know first and foremost it's our responsibility. But we do need some help."

That help may be on the way. In an address this morning at the annual meeting of the National Governors Association, where he was received with a standing ovation, President-elect Barack Obama pledged to work with governors to help ease the fiscal crisis sweeping the states. "To solve this crisis and to ease the burdens on our states, we're going to need action, and we're going to need action quickly. That means passing an economic recovery plan that helps both Wall Street and Main Street, and this administration does not intend to delay in getting you the help you need," Obama said. "As president, I will not simply ask our nation's governors to help implement our economic recovery plan, I will ask you to help design that plan. Because if we're listening to our governors, we'll not only be doing what's right for our states, we'll be doing what's right for our country. That's how we'll grow our economy—from the bottom up. And that's how we'll put America on the path to long-term prosperity."

The details of this state-focused stimulus are likely to emerge in the coming weeks, experts say, but the basic outlines of the plan are beginning to take shape. House Democrats announced yesterday that they intend to push for a $500 billion economic recovery package when Obama takes office in January, and the governors are asking for $136 billion to use for what they call "ready-to-go projects," including infrastructure improvements on roads, bridges, water, and sewer systems that can begin in the next two years. For every $1 billion invested in state infrastructure, Rendell said yesterday, the governors believe they can create 40,000 jobs.

Some governors, including Ted Strickland of Ohio, have asked for even more aid. Ohio faces a shortfall of more than $600 million this year and a deficit of more than $7 billion next year. Strickland sent a letter to Obama yesterday asking for $100 billion in block grants to the states. The money could be used to prop up services like education, healthcare, vaccinations, and food safety. Because most governors must introduce their budgets in January and February, Strickland said, they need to know how much aid they can expect from the feds before they begin slashing programs. "Most states are facing the same economic challenges the national economy is facing," Strickland wrote. "[We] have sacrificed and have been resilient in the face of the cuts taken thus far. However, additional cuts would be devastating."

While governors wait for the new administration to act, many states have accepted that tax increases may be the only way to bridge their budgetary gaps. In Florida, where the deficit is expected to climb past $2 billion over the next year, the governor has said he plans to cut spending by 4 percent, but experts say that may not be enough. Most state budgets are based on tax revenue projections from earlier this year, when the economic picture was much different. Car sales in Florida are down 12 percent since then; tourism is down 6 percent. Some 300,000 homes were on the market in September, up from the usual 50,000. "Those projections won't be happening," Amy Baker, a state economist and director of the Legislature's Office of Economic and Demographic Research, said last month.

Since many states are required by law to keep their budgets balanced, biting the bullet may be the only option. California Gov. Arnold Schwarzenegger, for one, declared a "fiscal emergency" in his state yesterday, which gives the state legislature 45 days to address California's more than $11 billion shortfall. Warning that the state could be out of cash by February, Schwarzenegger has proposed raising the state's sales tax by 1.5 percent, tripling the annual fee for registering vehicles, and raising taxes on oil extraction. Meanwhile, lawmakers in Minnesota, which is facing a $4 billion deficit—more than 10 percent of the state's general fund—are discussing whether to raise taxes on the wealthy. "When you have a budget deficit that's 11 percent of the general fund, you can't close it only through spending cuts," Nan Madden, director of the Minnesota Budget Project, a research and advocacy group, said last week.