States: We'll take stimulus - our way

Some governors are balking at Obama's tight rules on stimulus funds. Some want more latitude, others are rejecting portions.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Big money often spurs big battles. A month after President Obama signed the $787 billion economic stimulus law, governors and state lawmakers are already fighting with Washington and each other about putting the money to use.

At least two governors are asking the White House for special consideration in applying the funds meant to shore up state budgets.

And several governors, saying they don't want to expand eligibility, have turned down millions of dollars of unemployment benefits. This, in turn, has pitted some against their own state legislatures and prompted some lawmakers to threaten to take matters into their own hands.

"Everyone's trying to figure out the limits on flexibility," said Nick Johnson, director of the Center on Budget and Policy Priorities' state fiscal project.

South Carolina's debt problem

One of the highest-profile battles is being waged by South Carolina Gov. Mark Sanford, who is hoping to use his state's share of stabilization funds to pay down debt. The law gives governors some latitude on how to use the money. But it is designed to prevent deep state budget cuts, particularly in education.

After the Obama administration denied his request for a waiver to pay down debt, Sanford submitted a new proposal this week asking for federal blessing to use $577 million to pay off education bonds and the remaining $125 million to pay down a range of state debt.

Doing this will free up more than $162 million in debt payments on the education bonds alone, allowing the state to spend more on the schools, said Joel Sawyer, Sanford's communications director. The governor believes using the money this way is consistent with the law.

The Obama administration has received the second request and is reviewing it, a White House budget office spokesman said.

Sanford's proposal has also put him at odds with his own state legislature, which is depending on $350 million of federal stimulus money to balance its 2009-2010 budget, which starts July 1. The state has already slashed its current budget to $5.6 billion from $7.1 billion in the past seven months, and it just implemented another 2% cut to every agency.

The state's education department alone is relying on receiving $283 million from the stimulus funds. If it doesn't receive them, it might have to cut 4,000 teachers, said Dan Cooper, chair of the state's House Ways and Means Committee.

"If we don't use it, we've got to balance the budget another way," Cooper said. "We'd have to make cuts to every agency."

Alaska: No to 45% of funds

Alaska Gov. Sarah Palin Thursday announced she would only take 55% of the federal stimulus money offered her state. She'll only take $515 million for capital efforts -- including transportation, aviation and road projects -- that will create jobs and fund infrastructure improvements.

Palin is rejecting money for education, unemployment benefits and other programs that she says the state won't be able to fund after the federal money runs out. And the governor said the state should not be bound more closely to Washington, D.C.

"I don't want to automatically increase federal funding for education program growth, such as the National Endowment for the Arts, at a time when Alaska can't afford to sustain that increase," said Palin, who was the Republican vice presidential candidate last year. "We need to ensure that these stimulus dollars are used for job opportunities for Alaskans, while preserving the regular operating spending decisions through the normal budget process."

The governor, however, said she would not stand in the way of state lawmakers or local officials if they want to request additional funds.

Dismayed by Palin's decision, Sen. Mark Begich urged his state's legislature to request the rest of the $930 million allocated to the state. The money would help Alaskans struggling to cope with the recession.

"I trust the legislature will do the right thing and take Alaska's share of the money for education in the economic recovery package," said Begich, a Democrat. "We owe it to our children to give them the most opportunities possible, and this is money fairly allocated to Alaska in this stimulus package."

Thanks, but we're broke

Nevada's fiscal problems are so severe that it can't meet the stimulus law's requirement that it fund its higher education system at 2006 levels. Therefore, it's asking for a waiver. The state is set to receive nearly $324 million in stabilization funds for education of all levels.

"Our state is in such a dire financial crisis that we believe it would be very difficult or impossible to fund education -- especially higher education -- at 2006 levels," said Daniel Burns, spokesman for Gov. Jim Gibbons.

The state is facing the largest 2010 budget gap of any in the nation, according to the Center on Budget and Policy Priorities. Hammered hard by the foreclosure crisis and suffering from rising unemployment, Nevada is looking to shear $1.1 billion, or 30%, from its budget.

Gibbons may also reject $77 million for unemployment benefits that would require the state to expand eligibility to part-time workers and others. If he does so, he'd join his peers in Texas, Louisiana, South Carolina and elsewhere who have said they would turn down the funds.

Several governors across the nation have expressed reservations about the expanded eligibility because federal money to fund it runs out after two years. They fear businesses would face higher unemployment insurance taxes to continue the benefits after that.

In Texas, for instance, Gov. Rick Perry said last week that his state's employers can't afford that stimulus provision.

"The last thing they need right now is government burdening them with higher taxes and expanded obligations," he said in prepared remarks.

The decision, however, doesn't rest with governors alone. The federal law allows for state legislatures to request funds. That's exactly what is happening in Nevada, where the House introduced a measure this week to expand its eligibility provisions. Nevada's unemployment rate in January was 9.4%, higher than the nation's 7.6% rate that month.

Though the governor could veto the legislation, which would bring more than 4,100 people onto the rolls, lawmakers don't believe he will. The governor's office did not respond to requests for comment.

"It would be a slap in the face to anyone who is unemployed, and right now that is one out of 10 Nevadans," said Barbara Buckley, speaker of the Nevada House. To top of page

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