Budget-crunched states prepare for reduced aid under GOP House

State and local governments that relied on federal aid to stay afloat during the recession are not counting on as much help from Congress once the era of divided government begins next year.

Nationwide, states are grappling with a total budget gap of $110 billion for fiscal 2010 and $82 billion for fiscal 2011, according to the National Council of State Legislatures.

Compounding the budgetary problems, states are burning through the fiscal assistance that was passed under the stimulus law. The loss of that funding has analysts talking of an “ARRA hangover” as states adjust to life without the American Recovery and Reinvestment Act.

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The budget crunch also comes amid a post-election push by the GOP to end earmarking in Congress, a practice that has long been used to direct funding to state and local projects across the country. Republicans in the House and Senate approved a voluntary moratorium on earmarks last month, throwing the future of the practice into doubt.

“Even before the recent elections, getting more money out of Congress was far from a sure thing, and maybe a long shot,” said Robert Ward, deputy director of the Nelson A. Rockefeller Institute of Government.

“It’s going to be a tough environment next year,” said Charles Loveless, director of legislation for the American Federation of State, County and Municipal Employees. “We’re going to have a major fight on our hands, no ifs, ands or buts about it.”

Now most governments are “resigned” to seeing the increased federal aid come to an end, Ward said.

State officials and their lobbyists in Washington are girding for the new landscape.

“The next several years will continue to be very difficult, and currently Congress does not look like it’s very receptive to more assistance to the states,” said Jon Shure, deputy director of the State Fiscal Project at the Center on Budget and Policy Priorities (CBPP). “The hole they face this year is bigger [than in 2008 and 2009] because there will be less federal assistance there to help them.”

The stimulus included numerous provisions that were beneficial to state and local governments, including a $53.6 billion State Fiscal Stabilization Fund to help states shore up their budgets. All told, nearly $150 billion of ARRA was aimed at helping state and local governments fill budget holes and fund new projects.

There are still federal stimulus funds left, but they are dwindling. The CBPP says about $60 billion will remain for states in 2011, which will shrink to $6 billion in 2012. And state and local governments will continue to tap Congress for funds through grants and other appropriations.

Meanwhile, on the appropriations front, lobbyists who once helped local governments secure funding through earmarks are finding that avenue largely blocked by the GOP moratorium. Those same funds now will have to be secured by competing for competitive grants or through other processes.

“It is going to be harder,” said Howard Marlowe, president of Marlowe & Co., a lobbying shop that specializes in representing local government entities. “You used to be able to fill out a form for your member of Congress and get a request in, but now members aren’t taking requests.

“The money is there; it’s a question of who’s giving it out.”

Regular appropriations and leftover stimulus funds are not expected to cover the pending budget shortfalls, and Republicans have given no indication that they plan to hand out any more once they take power in the House in January.

Rep. Paul Ryan (R-Wis.), the incoming chairman of the House Budget Committee, has criticized federal efforts to boost ailing state and municipal budgets.

In August, as the House was moving on legislation that provided another $26 billion in state and local relief, Ryan said it was time for governments to make tough choices, rather than turning to Washington for cash.
“States and localities need to take this moment to get their fiscal houses in order. Just as the federal government must make the difficult decision on how to live within its means, states and localities must do the same,” he said.

Another indication of the tough line Republicans plan to take with government is recent criticism of state public pension funds, which some GOP lawmakers say are unfunded and bloated with plum deals for public-sector employees.

Ryan and Reps. Devin Nunes (R-Calif.) and Darrell Issa (R-Calif.) have introduced legislation that would force states to provide more information about the financial status of those funds, which they claim could have unfunded liabilities of up to $3 trillion. Under the bill, states that refuse to meet the higher disclosure standards would lose the ability to issue tax-exempt bonds, one of the key ways governments fund public projects.

“The American people have a right to know the truth about the unfunded liabilities being run up by state and local pensions,” Issa said.

Other Republicans, including Sarah Palin and Rep. Ron Paul (Texas), have taken up the cause, pre-emptively blasting any “state bailouts” that might result from the pension liabilities.
States and localities recognize the federal relief well is drying up fast.

“I think every governor and fiscal committee chair is worrying about how they can possibly make up such a big loss,” Ward said. “Some will raise taxes or other revenues, but the loss of extraordinary federal aid clearly will be followed by some significant spending cuts.”

An indication of how difficult it will be to coax more assistance from the federal government came in the tax agreement President Obama reached with congressional Republicans, which left one popular fiscal program for states on the cutting-room floor.

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One provision of ARRA allowed state and local governments to take advantage of the Build America Bonds program. Under the program, a state would issue taxable debt to finance a project and later receive a check from the Treasury Department subsidizing a portion of the interest cost. The program was wildly popular among state and local governments, with nearly $200 billion being issued in two years.

But despite a full-court press from nearly all sectors of the $2.7 trillion municipal bond market and assistance from Democrats, it now appears the bond program will expire at the end of the year, along with several other ARRA provisions that were carved out of the tax bill. Its demise is largely due to Republican opposition.

Sens. Jon Kyl (R-Ariz.) and Chuck Grassley (R-Iowa) are outspoken opponents of the program in the Senate, and the incoming chairman of the House Ways and Means Committee, Rep. Dave Camp (R-Mich.), has argued that when it came to job creation, the program simply resulted in more public employees, not the jobs in the private sector the economy needs.

State and local groups would like to see continued federal assistance in the year ahead but aren’t holding out hope.

“The recession goes on for state and local governments,” said Jim Currie, director of federal relations for the National Association of State Treasurers.


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