Grading the Stimulus Package Results: Good and Bad News, But the Jury Remains Out

Is the stimulus working? That has been the question continually asked since the $787 billion economic stimulus bill—the American Recovery and Reinvestment Act of 2009—passed four months ago. The question carries an increasing sense of urgency with plans underway to accelerate the pace of spending. The law places states and governors on the front lines—partnering with the federal government to make the stimulus work. So it's a question governors are following closely.

For answers to whether the stimulus package is working, we can look at several indicators on the economic dashboard that show the good news, bad news, and some we'll-have-to-wait-and-see news.

The good news is that $246 billion will come to states or through states to individuals. If you are reading this, chances are you or someone you know will be the direct beneficiary of stimulus dollars. Some of the stimulus funding has already helped states avoid the most draconian of budget cuts and tax increases. This has preserved critical government services, provided much-needed economic stability, and saved jobs. As total unemployment increases, states are able to spend more to provide families with a safety net of unemployment benefits and health and social services support. In addition, states fund vital education, transportation, and other operations citizens have come to rely on.

Of the $246 billion in the stimulus bill in the pipeline to states, about $135 billion is relatively flexible and can be used to support Medicaid, our public schools, and higher education—together comprising nearly 70 percent of an average state budget. This $135 billion is critical for states as it is allowing them to postpone and limit planned budget cuts and tax increases.

Now for the bad news. The states' fiscal situation has deteriorated much more than expected with revenues in a free fall. Rampant layoffs and massive cuts in consumer and business spending have pummeled corporate and personal income and sales tax revenues for states so severely that they no longer can continue support and services to the public. The best estimate of the shortfall now is over $200 billion over the next three state fiscal years 2009, 2010, and 2011. This translates into a gap of about 11 percent per year given that general revenues for all states is a little over $600 billion.

While the stimulus funding is providing a partial stop-gap to state shortfalls, its success will be judged primarily by its ability to bring about an economic recovery and more new jobs. That's the "we'll-have-to-wait-and-see" news. To help engineer a recovery, the law marshals massive funding increases in existing federal/state programs and creates several new programs. Starting and administering these programs would be a challenge under any circumstances, but doing it with fewer staff to manage and distribute the massive influx of funds in a matter of months has never been attempted in the history of governors.

For comparison, consider that the average state energy department budget will increase more than 66 times with the infusion of stimulus funds. A large share of this money is in a $6.2 billion weatherization program to upgrade low-income homes to become more energy efficient. It is the largest program of its kind on record. The Department of Energy and state agencies were given a month to allocate the funds, and local agencies have 18 months to spend it.

States are being given more time to plan and execute some of the most innovative programs in health information technology, broadband, high-speed rail, research and development, and alternative energy and smart grid. These kinds of breakthrough programs to modernize our communication, transportation, and healthcare for many generations require careful planning. If invested wisely, these programs have the potential to provide a quantum leap in long-term economic growth and job creation.

Governors are no strangers to fiscal responsibility with all but one state requiring a balanced budget every year. And they recognize that no matter how the law was written to require huge spending increases at a breakneck pace—the buck stops with them.

President Barack Obama issued a stern warning to governor-appointed recovery czars at a recent meeting in Washington, D.C.: "If we see money being misspent, we're going to put a stop to it." Vice President Joe Biden, placed in charge by the president, seconded that view when he stated, "If we do not get this right, folks, this is the end of the ability to convince Congress that anything should go to the states."