Goodbye, stimulus. Hello, state budget cuts

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- Think states have made deep spending cuts? You ain't seen nothing yet.

States have been struggling with huge budget gaps since 2008, but this year could be worse as federal stimulus funds wind down.

Until now, stimulus money spared governors and state lawmakers from making some of the most brutal budget cuts. But with this lifeline running out, officials are looking at making significant cutbacks to public services, particularly schools and health programs.

"The stimulus funds have staved off what could have been even deeper cuts," said Todd Haggerty, policy associate at the National Conference of State Legislatures. "You're seeing states now are coming to that point where they will have to make additional cuts or find new sources of revenue for fiscal 2011 and that will continue in fiscal 2012."

Stimulus safety net

As of mid-April, states and localities have received nearly $109 billion since the American Recovery & Reinvestment Act was passed in February 2009, according to the U.S. Government Accountability Office. The vast majority of that money went to help states maintain their Medicaid services and education funding in the face of steep drops in tax revenues due to the recession.

In all, the stimulus funds helped plug between 30% and 40% of the $291 billion in budget gaps that states have faced over the past two years, experts said. But Recovery Act money will only be sufficient to plug 20% or less of the coming fiscal year's shortfalls, according to the Center on Budget and Policy Priorities. By fiscal 2012, most of the money will be gone.

Already, many states will have used up much of their education allotments by the start of fiscal 2011, which begins on July 1 in 46 states. And the Medicaid assistance will dry up by the end of the year, unless Congress extends it.

Compounding the problem is that many states have already slashed services and raided their rainy day funds to balance their budgets, as they are required to do. And a recent analysis by the Rockefeller Institute shows that the all-important personal income tax revenue for April is likely to decline steeply.

All this means that state officials are being forced to make some of the tough decisions they've been able to put off for the past 18 months.

"States had this one-time money that helped them bridge a difficult period in state finances," Haggerty said. "Now they have to face the absence of those funds and a whole new set of difficult issues."

Cuts on the horizon

Meanwhile, states are looking to Capitol Hill to renew some of the stimulus provisions, particularly the increased federal funding for Medicaid. Both the Senate and House have passed a six-month, $25 billion Medicaid extension, but they have to find a way to pay for it before sending it to President Obama for his signature.

At least 21 states, in fact, have already included the extension in their fiscal 2011 budgets, according to the Center on Budget and Policy Priorities. If the measure doesn't become law, these states would be in big trouble and would have to make even deeper cuts, said Nick Johnson, director of the center's state fiscal project.

In Pennsylvania, for instance, that extension translates into $850 million. Without it, the state would have to slash half its funding for domestic violence and rape crisis services and chop 25% off the budget for child welfare services, Gov. Ed Rendell wrote in a letter last month to his state's congressional delegation. In addition, state payments to hospitals, doctors and nursing homes would be reduced.

"If the extension of federal fiscal relief is not enacted, most states will have to lay off thousands of workers and make wrenching cuts to public and private sector services," he said.

School districts, meanwhile, are also feeling the pain. Some 275,000 education jobs could be eliminated in the coming school year due to budget cuts, according to a new survey by the American Association of School Administrators. This would nearly wipe out the estimated 300,000 jobs saved by stimulus funds.

"Faced with continued budgetary constraints, school leaders across the nation are forced to consider an unprecedented level of layoffs that would negatively impact economic recovery and deal a devastating blow to public education," said Dan Domenech, executive director of the association, which is pushing Congress to give states additional funds for education.

Take New York as an example. Some 14,800 teachers -- 8,500 of them in New York City -- could lose their jobs if Gov. David Paterson's proposed $1.4 billion cut in state education aid is enacted, according to a survey by the New York State Council of School Superintendents and the New York State School Boards Association. That represents 10% of the city's teachers and 4.1% of educators elsewhere in the state. (Some school districts have negotiated concessions from their unions that will save some jobs.)

Another 2,600 non-teaching staff, including student support staff, administrators, and other employees, such as custodians, kitchen workers and bus drivers, would also be laid off.

Stimulus funds had staved off some of these harsh cuts. But New York only has $700 million left of the $2.7 billion it received to prop up education aid, said David Albert, spokesman for the school boards association.

"This is the largest state aid cut we've seen in the last two decades," he said. "If you think this year is bad, next year is going to be worse because stimulus will run out." To top of page

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