Cut spending, raise taxes and fees, and accept billions of dollars from Congress. That's been the formula for states trying to survive the worst economy since the 1930s.
As Republicans prepare to take control of the House and exert more influence in the Senate, it's clear that option No. 3 will soon wither. States will continue to face substantial deficits over the next few years, but they will have to get by with the end of stimulus spending and less financial help from the federal government. In recent interviews, top GOP lawmakers made clear it will be much less.
"We've got to put our fiscal house in order in Washington, D.C.," said Rep. Mike Pence of Indiana. "It's going to be essential that leaders at the state level roll their sleeves up, make the hard choices and put their fiscal health in order, as well."
Rep. Kevin McCarthy of California, the new House majority whip, said GOP lawmakers will try to provide states with relief by cutting their expenses, not by giving them more money. For example, he advocates repeal of the national healthcare reforms enacted last year.
"More importantly, what the states can really hope for is that we turn the economy around so revenues will pick up," he said. "But Washington is in very bad financial shape itself."
McCarthy said the GOP would be focused on cutting mandates and giving states more flexibility on how they spend federal money.
The $814 billion stimulus program, passed by a Democratic Congress and championed by President Barack Obama, was designed to help states provide essential services and give a boost to the economy. Most of the money will run out this year.
States spent the bulk of their money on public schools, higher education and healthcare, so those programs likely will take a hit this year. But transportation, prisons and services such as early education programs also will not be spared the budget ax, said Todd Haggerty, a policy analyst with the National Conference of State Legislatures.
"Anything and everything is going to be affected," he said.
As of June 30, 2011, the federal government will have spent about $165 billion on temporary aid to the states to help them weather the recession. The states have used most of that money on education and healthcare — keeping teachers in the classroom and reimbursing doctors and hospitals for treating the growing number of people eligible for Medicaid.
States will continue to get some stimulus money for road, energy and high-speed rail projects, but that money helps fund specific projects and wasn't intended to plug holes in a state's operating budget.
California has benefited substantially from federal assistance that will soon run out. It is expected to receive a total of $85 billion from the Recovery Act, with about $51 billion awarded to date, according to the state website monitoring the spending. About half of the amount spent so far is for Medi-Cal payments, unemployment insurance, food stamps and other safety-net programs.
California state Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, said it's disappointing but not surprising that states are not likely to receive more federal help.
"The economy is not going to improve as fast by increasing the unemployment rate. And whether in the public sector or private sector, a job is a job is a job," Steinberg said. "We know that's what the Republicans ran on in part during the national campaign, so we recognize we're going to have to deal with reality, and we will."
A slowly improving economy means many states should see an uptick in tax revenue in the coming year, but it will not be enough to replace the stimulus money. Without federal aid, the majority of legislatures around the country will not have enough money to maintain current services and face another round of budget cutting.
States closed a cumulative budget gap of nearly $84 billion in the last fiscal year. In the coming year, 31 states and Puerto Rico face budget shortfalls totaling $82.1 billion, according to the National Conference of State Legislatures.
"You have the federal money running out, but very deep state budget problems are lingering," said Phil Oliff, a policy analyst at the Center on Budget and Policy Priorities, a liberal think tank based in Washington. "That's why we say the coming fiscal year could actually be the worst budget year states have faced since the start of the recession."
There also is a sense among many governors that seeking more temporary aid would delay tough decisions about what the states can afford in the long-term.
Governors are facing an era of slow economic growth combined with growing pension liabilities, said Ray Sheppach, executive director of the National Governors Association. Most know they must get spending down to a sustainable level, he said.
Illinois' spending is so out of whack that Democratic Gov. Pat Quinn wants to borrow at least $3.7 billion to cover this year's payment for the state's public pension systems, and state contractors are being forced to wait six months or more to get paid. Its $15 billion deficit for the coming fiscal year is 58 percent of the state's entire general fund.
Federal stimulus money provided a big boost to the state — some $13 billion total, with more than 40 percent of that going to unemployment insurance and more than $3 billion to education.
Quinn's budget spokeswoman, Kelly Kraft, said the state has received 92 percent of what it's owed in stimulus money and that it's too early to say whether it will receive more in the coming fiscal year.
"There's an unspoken hope among a lot of people that the federal government will come in and help out the states again," said Rep. John Bradley, a Democratic Illinois state lawmaker who chairs a finance committee. "I'm not part of that group."
Bradley said he is not convinced that Congress would ease any requirements to lessen the states' burden for mandated programs, and said economic recovery programs already had relieved states of many traditional mandates.
"We don't have the tax base we once had. The loss of American manufacturing has caught up to us," he said. "We have to cut back on services or tax the reduced base at a higher rate."
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