Snake-oil stimulus dollars were supposed to be a cure-all for states faced with severe budget shortfalls. As it turns out, they may end up making a bad situation even worse.
States that balanced their budgets using one-time stimulus funds rather than cutting spending are now headed into their next budget cycles with even bigger budgets than before and fewer federal dollars to pay for them.
Beginning in 2011, stimulus money begins to run dry, forcing states that relied heavily on the federal government’s help to go back to the drawing board in order to figure out how to make ends meet. Only this time, state lawmakers will be handcuffed by federal guidelines.
What most state legislatures overlooked or simply ignored when they accepted all those “free” federal dollars were the strings attached to Washington’s offer. In essence, those strings – or Maintenance of Effort mandates – severely limit a state’s ability to reduce spending in areas backfilled with federal aid.
Washington State, for example, faces a $2.6 billion budget shortfall over the next 18 months. But because state lawmakers accepted $820 million in education stimulus funds, 91 percent of the state’s $6.8 billion K-12 education budget is off-limits from budget cuts. Similar restrictions also apply to low-income health care (88 percent off-limits) and higher education (75 percent off-limits).
Most states accepted stimulus funds hoping for a quick economic recovery and a rebound in tax collections to pay for the additional spending. Unfortunately, that hasn’t happened. Unemployment remains near historic highs and second quarter 2009 state tax collections continued their downward spiral, falling nearly 17 percent, according to the Census Bureau. At least in the short-term, these conditions are expected to continue, complicating matters for state budget officials.
How exactly states go about addressing this federally mandated uptick in spending remains to be seen, but a reasonable person can assume that if a state is unable to balance its budget by cutting spending beyond a certain point, then the impetus to raise taxes will be all that much stronger. And it should go without saying that raising taxes during a severe recession is a disaster waiting to happen.
Here in Texas, the Legislature hasn’t yet had to walk the fiscal tightrope brought on by all those “free” federal dollars because of the fact that legislators are only required to meet every other year. But when the 2011 session finally does happen, lawmakers can expect a tough road.
Of the roughly $14 billion in stimulus money flowing through Texas state government, about one-third, or $4.5 billion, constitutes a recurring expenditure, according to Legislative Budget Board Director John O’Brien. The bulk of this money consists of spending on health care ($2.5 billion) and education ($2 billion).
Though the spending increases brought on by the stimulus funds may not break the state’s proverbial bank, it certainly complicates matters. Heading into next session, the state already faces a sizable budget deficit and will have fewer “rainy day” funds available than previously thought. Add to that strict federal guidelines dictating what the Legislature is allowed to cut, and budget officials can expect to have their hands full next session.
In hindsight, Texas should have never used federal funds to prop up government spending, particularly given the already bloated nature of state and local government spending – more than $7,000 per person. But since Congress increasingly seems to want to micro-manage state affairs, the least it could do is offer states aid without imposing additional obligations going forward.
At least Texas legislators had the foresight last session to reject Washington’s $555 million string-laden unemployment stimulus offer. Not only did the move avert a permanent tax increase on businesses, but it also shows Washington that not everyone is buying what they’re selling.
James Quintero is a fiscal policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.