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States counting on their slice of $787B

Stimulus package trims some aid to states, but still provides funding for Medicaid, education and infrastructure. Money will help avoid deep spending cuts.

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By Tami Luhby, CNNMoney.com senior writer

How effective will the $787 billion stimulus plan be in reviving the economy?
  • It will help a lot
  • It will help, but more will be needed
  • It's not nearly enough
  • It costs too much

NEW YORK (CNNMoney.com) -- Though not quite as generous as first envisioned, the federal stimulus package funnels a nice chuck of change to states to help them deal with their yawning budget gaps.

Most governors are still calculating how much they stand to get from the $787 billion stimulus package, which is expected to be approved by Congress late Friday. The majority of their allotments will go for Medicaid, education and infrastructure projects, but they will also have some funds to use at their own discretion.

Still, many states continue to suffer from steep declines in tax revenues as people lose their jobs and pull back on their spending. This is opening big gaps in their budgets -- and since much of the stimulus money is dedicated to specific uses, governors can only use a piece of their allotment to balance their budgets.

At least 46 states face shortfalls totaling $144.6 billion in their budgets for this fiscal year or next, according to the Center on Budget and Policy Priorities. This is forcing them to make draconian cuts in state spending, with at least 40 pulling back on services such as public health and education.

The stimulus funds should plug about 40% of the deficit in most states, said Elizabeth McNichol, senior fellow at the Center on Budget and Policy Priorities.

"It should be a big help to the states," she said. But "states still have a lot of hard decisions to make on how to fill the remainder of that gap."

Infrastructure spending, which is designed to create jobs, can help states balance their budgets by increasing tax revenues, said Michael Bird, federal affairs counsel for the National Conference of State Legislators. The purchase of construction supplies boosts sales taxes, and residents with jobs pay more in income and sales taxes, since they can afford to spend more.

The stimulus package provides:

  • $87 billion for Medicaid;
  • $46 billion for transportation projects, including $27.5 billion for highway and bridge construction, $8.4 billion for mass transit and $4 billion for public housing;
  • $39.5 billion for aid to local school districts, as well as $13 billion for programs for disadvantages students and $12.2 billion for special education;
  • $8.8 billion for governors' high-priority needs;
  • $4 billion for law enforcement; and
  • $2 billion to redevelop abandoned and foreclosed properties.

Still, that's less than they were hoping to get under the original $819 billion, which would have provided $30 billion for highway construction, $20 billion for school construction and $25 billion for governors' needs.

As governors sifted through the final bill, many said they would still need to implement spending cuts.

In Pennsylvania, for instance, Gov. Edward Rendell is contending with a $2.3 billion budget gap for the current fiscal year. Expecting to get $16 billion in aid from Capitol Hill, the governor is expecting he'll still have to fill a $60 million to $70 million shortfall.

"On balance, the relief that goes to citizens, the jobs created, the amount put into the economy, I'd give it a B-plus," Rendell, who as head of the National Governors Association has pushed hard for the stimulus package, said in a conference call. "Could it have been better? Yes."

Next door, New York Sen. Charles Schumer said the stimulus package should provide the state with $12.6 billion in budget relief in Medicaid relief, $1 billion in highway construction funding and $4 billion for education. Also, it should create 215,000 new jobs.

"From funding for education, to health care and budget relief, to transportation and infrastructure, this is just what we need to get and keep people working during these very difficult times, said Schumer, a Democrat.

The federal funds will alleviate, but not eliminate, many of the cuts, Schumer said.

New York is grappling with a $1.6 billion shortfall in the current year and a $13 billion budget deficit for fiscal year 2010, which starts April 1. Gov. David Paterson has proposed wide-ranging spending reductions, including slashing higher education's allocation, delaying services to children in foster care and cutting funding for environmental protection.

"Even with the stimulus package, there will be some very tough decisions, very difficult cuts and there will be some pain which we will try to distribute evenly," Paterson said in a conference call. To top of page

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