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Lou Cannon: Struggling States Need More Help from the Feds

Most states can thank federal stimulus spending for squeaking through 2009, but they're facing steeper financial challenges next year

Tucked away in an inner passage of the 1,990-page health-care bill passed by the House of Representatives is a $23.5 billion holiday-season gift to states to help them meet the growing costs of Medicaid, which provides medical coverage for the poor. This little-noticed provision is in reality a hidden federal stimulus, much welcome to states, as they confront the looming budget gaps of 2010 and beyond.

Lou Cannon
Lou Cannon

State governments are less happy with other provisions of the bill, but they will take what they can get from Washington as revenues fall in tandem with rising joblessness. Even though the Great Recession is winding down, state revenues typically lag behind, along with unemployment, as they do in any economic recovery. The budget situation confronting states is “dire,” says Corina Eckl, fiscal program director of the National Council of State Legislatures. Her survey of states found that 21 of them are “pessimistic” and most of the rest “concerned” about their fiscal prospects. Only North Dakota, with the nation’s lowest unemployment rate of 4.2 percent, has an optimistic budget outlook.

At the other end of the fiscal spectrum, California has been informed by Legislative Analyst Mac Taylor that it faces a deficit of $21 billion — less than four months after legislative leaders and Gov. Arnold Schwarzenegger cobbled together a makeshift budget deal. California’s unemployment rate in October was 12.2 percent. Soon after Taylor’s announcement, Schwarzenegger predicted another round of budget cuts.

Although the structural problems of California state government pre-date the Great Recession, many states that were financially stable before the economy turned sour have also been overwhelmed by steep declines in revenues. In Florida, for example, where the unemployment rate is 11 percent, revenues have dropped to 2001 levels. In worst-off Michigan, where the jobless rate was 15.3 percent in October, revenues in 2009 are little more than what they were in 1988.

These dry statistics summarize thousands of stories of human misery even more poignantly reflected in the recent report from the Agriculture Department, which found that nearly 50 million Americans — including almost one child in four — struggled last year to get enough to eat. Perhaps the recession’s human dimension explains why a bipartisan consensus may quietly be emerging on the need to help the states and, in doing so, ease the burden on the poorest Americans. Republicans were virtually united in opposing the health-care bill, grandly named the Affordable Health Care for America Act, when it narrowly passed the House. But only one Republican spoke up against the provision that would give states the extra $23.5 billion in Medicaid funds.

Because of the lack of Republican opposition, state government lobbyists are hopeful this provision will survive in whatever health-care bill emerges from the Senate — and in the House-Senate conference committee that irons out the final legislation for President Barack Obama’s signature.

Even with federal help, the struggle of the states to balance their budgets in 2010 will be difficult. Thirty-nine states already have cut spending, 22 have raised taxes and 18 have tapped rainy-day funds or other reserves.

“All the low-hanging fruit has been plucked,” Connecticut House Majority Leader Denise Merrill said at a conference of state legislative leaders earlier this month.

This plucking comes at a cost, for tax increases decrease purchasing power and government layoffs add to unemployment. State taxes were raised a record $27.3 billion in 2009. Both these increases and the state budget cuts counteract the pump-priming thrust of the $787 billion stimulus plan proposed by Obama and enacted by Congress earlier this year as the American Recovery and Reinvestment Act of 2009. Without this bill, many states would have been unable to balance their budgets.

But what the federal government gives, it can also take away. The health-care bill, as it passed the House, would require the states, beginning in 2015, to pay 9 percent of the cost of new Medicaid enrollees, adding billions of dollars to state costs.

“This bill ... makes Medicaid the foundation of our health-care system, and they’re under-funding the foundation,” NCSL Washington lobbyist Joy Johnson Wilson said in a conference call with state legislators. Viewed in this light, the gift of $23.5 billion seems more like a bribe to win support from state legislators for the House bill. It’s a tactic that might work, for the current plight of the states is so desperate that legislators may be willing to endure long-term costs that will occur when many of them are no longer in office in order to obtain short-term relief.

The $23.5 billion, Section 1749 of the House health-care bill, comes in the form of a six-month extension of the relief provided to states on Medicaid costs by the American Recovery and Reinvestment Act. That bill boosted, on average, the federal share of Medicaid costs to 66 percent from 57 percent, with the hardest-hit states receiving more than the others. Without the extension voted by the House, this formula would revert to the old one next year, undoubtedly triggering another round of fiscal crises and budget cuts. Section 1749 would extend the added federal share of Medicaid until June 2011.

While this is welcome, a better solution would be to phase out the added federal assistance. As Raymond Scheppach, executive director of the National Governors Association and an economist, told The Washington Post, the federal aid ends too abruptly.

“It’s sort of like a cliff,” he said. “... The cliff is just moved back.”

It’s easy to be cynical about the performance of government in the current economic situation, and many Americans are. Although Obama still commands the support of a majority of Americans, his economic program is viewed with increasing skepticism by independents who voted overwhelmingly for him in 2008.

Americans are also skeptical of Congress and they are perhaps most skeptical of all about what’s taking place in state houses and legislatures. In Pennsylvania, a poll found that only 29 percent of respondents thought that Gov. Ed Rendell was doing a good or excellent job — and that just 18 percent rated the Legislature’s performance as good or excellent. In California, a survey gave Schwarzenegger a 33 percent approval rating and the Legislature an approval rating of only 11 percent.

Legislators have been vicariously tarnished in recent years by high-profile scandals involving the governors of Illinois, New Jersey, New York and South Carolina. But they are also in disrepute because in hard times the public demands more of those it sends to office. Fair or not, the perception is widespread that politicians in general and state leaders in particular haven’t delivered the goods.

In fact, states can claim a number of success stories. Massachusetts continues to tinker with — and improve — a landmark health-care bill that comes closer to universal coverage than any of the plans now being debated in Congress. The Senate version of the federal health bill usefully copies the Massachusetts plan in its employer requirements, charging a flat fee for workers who purchase government-subsidized insurance, which is preferable to the onerous House requirement of mandated coverage for all but the smallest businesses.

Rhode Island is using electronic pharmacy prescription data to track swine flu, an innovation with broad implications in an industry deficient in tracking and record keeping. In California, in defiance of their low approval ratings, legislators and Schwarzenegger have reached a historic agreement to increase the state’s water supply and preserve the endangered Sacramento-San Joaquin River Delta ecosystem. All this suggests that it’s way too early to give up on the states.

Nonetheless, one of the lessons of the Great Recession is that states aren’t going to make it on their own. It’s clear that many states would have failed to balance their budgets in 2009 without the federal stimulus, and that they won’t be able to do it next year without more of the same. The word “stimulus” has become politically unpalatable, but whatever it is called, states need additional help if they are to avoid plunging off that fiscal cliff.

— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.

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