Obama's Stimulus Bill Offers Help to the States

Some states will get into the black; others will have to keep cutting their budgets.

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There is some disagreement among economists about which state has been hit the hardest by the skidding economy. There is, after all, a disturbingly long list of contenders. Is it Arizona, for example, where the disintegration of the housing market has left the state facing a $1.6 billion gap between revenues and spending, leading lawmakers to propose more than $900 million in cuts to education? 

Or is it New York, where the collapse of Wall Street has depleted tax revenue so much that the state is coming up nearly $14 billion short through next summer? Or what about Nevada, where the shortfall over the next year and a half amounts to 38 percent of the state's total budget, forcing the governor to propose pay cuts for all state workers, including teachers? Then there is California, where the state's $42 billion budget shortfall caused a months-long standoff between lawmakers and Gov. Arnold Schwarzenegger, who has suggested that anyone who thinks the deficit could be closed without raising taxes should "go back and take Math 101." Last week, Schwarzenegger was able to win over the handful of Republicans he needed to pass a budget deal that includes $15 billion in spending cuts, almost $13 billion in tax hikes, and a staggering $11 billion in borrowed money.

As the red ink has continued to pool around many state capitals, lawmakers have been keeping a watchful eye on Washington, hoping the stimulus package signed into law this week would help them avert fiscal catastrophe. Experts say they got what they wished for. Almost $54 billion of the stimulus will go into a new stabilization fund for states, most of which must be spent on education. California alone will receive $4.9 billion in education block grants. The tens of billions being channeled to food stamps, infrastructure projects, and unemployment benefits may help prop up state economies, juicing tax revenues. An additional $87 billion is aimed at states' skyrocketing Medicaid costs, freeing up money that may be useful elsewhere.

"Dollar for dollar, it's going to be a big help," says Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, who estimates that the package will close more than 40 percent of the total shortfall states are facing over the next 2 1/2 years. Arizona, for example, facing nearly $1 billion in education cuts, will receive more than $800 million specifically earmarked for education, which may be enough to avoid drastic cuts in the short term.

Still, with 43 states facing a combined shortfall of nearly $200 billion in the next year, many experts don't believe the stimulus will solve all, or even most, of many states' problems. "This is a bandaid," says Michael Bird, federal affairs counsel at the National Conference of State Legislatures. "It's a big bandaid, but when you have a large open wound, you probably need stitches, instead." For a few states, he says, the stimulus will bring budgetary balance. For others, it may stop the bleeding long enough to allow tax revenues to revive. For some of the hardest-hit states, though, the federal aid may simply postpone the inevitable. "The budget cutting," says Bird, "will continue." l