Friday, May 28, 2010

Biggest Bang For Stimulus Buck Over For States

Biggest bang for stimulus buck over for states

Thu, May 27 2010
By Lisa Lambert - Analysis

WASHINGTON (Reuters) - For states and local governments, the biggest bang for the stimulus buck may have already passed.

Government data released this week shows that the $863 billion economic stimulus plan, which included the largest transfer of federal funds to the states in U.S. history, helped support jobs, economic growth and financial stability in states and cities.

But well before the two-year plan expires in December, states and cities are once again struggling with faltering economies. A collapse in revenue is forcing them to cut back on spending and lay off employees.

In the first quarter, state and local governments reduced spending at a 3.9 percent rate, the steepest drop since 1981, according to a Commerce Department report on the country's gross domestic product released on Thursday.

The spending level of state and local governments during the first three months of 2010 totaled $1.521 trillion, well below the $1.533 trillion level during the same time in 2009.

Money from the plan began pouring out in the second quarter of 2009. The American Recovery and Reinvestment Act had been passed in February, creating a stabilization fund for schools and state budgets, establishing infrastructure programs to make work and boosting funds for state healthcare programs that are their biggest budget burdens.

The Commerce Department report shows that the seasonally adjusted level for state and local spending peaked at $1.548 trillion, adjusted for inflation, in that quarter and then began trickling off.

Likewise, a recent report on public construction in March that would have included many of the recovery projects shows that spending was down 6.3 percent from March 2009. A recent Labor Department report indicated that both state and local governments had fewer workers on their payrolls in April 2010 than in April 2009.


The Government Accountability Office, an independent federal auditing agency that tracks the stimulus, said that in fiscal 2010, which for most states ends in a month, stimulus funds helped them "provide services while closing current and anticipated budget shortfalls."

Many states, however, "accelerated" money from the stabilization fund. That meant they used more stimulus funds in fiscal 2010 than they anticipated, shrinking their pool of available money for fiscal 2011. The stimulus expires in December 2010.

Colorado had to accelerate the use of $5.5 million, "leaving fewer funds available to fill the budget gap for fiscal year 2011," GAO said. New York had to accelerate $391 million, it said.

State tax receipts continue to decline, and at least 46 states are addressing or have addressed budget gaps totaling $112 billion for fiscal 2011, the think tank Center on Budget and Policy Priorities said in a report released on Thursday. Altogether, budget gaps could reach $180 billion.

Because all states except Vermont have to close holes in their budgets, they will have to turn to tax increases or slash spending for already lean social services such as education and healthcare.

There are signs of economic recovery on the national horizon, but state recoveries often lag national ones. States are hurt twofold by unemployment in recessions -- people put more demands on public assistance when they lose their jobs just as their tax contributions decline.

On Thursday the House of Representatives could vote on an $84 billion tax and spending bill that will continue some of the stimulus aid to states. The Senate is expected to follow soon after.

The legislation would extend a boost in federal funds for Medicaid, the healthcare program for the poor that takes up 20 percent of state budgets on average, for another six months.

Moves to also extend the education stimulus funds failed in the Senate, under Republican pressure to cut back government spending, but the money could be attached to a bill the House of Representatives is considering.

According to the GAO, states will welcome the extensions. Already, most have included the Medicaid measure in their budgets for fiscal 2011 and "the impact on the states' budgets of this assumption ranged from approximately $107 million to more than $1 billion," GAO said.

"States' approaches to preparing for the end of Recovery Act funding vary," GAO said, but on the whole they want to avoid a "cliff effect."

Many states say that the end of the stimulus funds will have the effect of shoving their economies off of a very steep cliff.

(Editing by Kenneth Barry)

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