States to Senate: Send more federal aid

NEW YORK (CNNMoney.com) -- States are looking to the federal government for more help balancing their budgets, but the Senate is not heeding their call.

Federal aid to the states was among the top priorities in an early Senate job creation bill, as well as in a $154 billion measure passed by the House in December. But it has fallen off the list as Senate Democrats look to craft legislation that will attract bipartisan support.

Senate Majority Leader Harry Reid, D-Nev., on Thursday unveiled a jobs bill that does not contain state aid. A Senate Democratic aide said Reid hopes to back a state aid measure in the future. Republican support, however, remains questionable.

Experts and state officials say they need to know now whether they'll get more funds. Governors are currently crafting their budgets and, for many, it will be their third year of contending with massive deficits due to declining tax revenues.

States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.

"State and local government spending is a very important driver of the national economy, especially when the private sector is faltering," said Jon Shure, deputy director of the Center on Budget and Policy Priorities' State Fiscal Project.

To close this gap, governors and lawmakers will be forced to lay off state employees, cut services and postpone capital projects, said Michael Bird, federal affairs counsel for the National Conference of State Legislators.

The cutbacks will all work against an economic recovery.

Already, states laid off 44,000 workers in the 12 months ending in January, according to federal labor statistics.

In California, for instance, Gov. Arnold Schwarzenegger is proposing deep cuts to health care, education, the state workforce and social services programs. The governor is looking to Washington D.C. for $6.9 billion for its fiscal 2011 budget, on top of the $6 billion in stimulus funds it is using.

"We believe that providing funds to states will provide the flexibility critical to jumpstart our economy and create jobs," said Eric Alborg, communications director of the California Recovery Task Force.

Massachusetts, meanwhile, is counting on $600 million in federal Medicaid funds that have yet to be approved by the Senate. The state needs the money to close a $3 billion budget gap for fiscal 2011, which comes on top of the $9 billion deficit it has closed over the past two years.

Without that money, "everything has to be on the table," said Cyndi Roy, budget spokeswoman for Gov. Deval Patrick.

While many Democratic lawmakers on Capitol Hill back another federal bailout of the states, Republicans have said they don't think it's the best way to create jobs.

A recent Congressional Budget Office report showed that sending money to the states for needs other than infrastructure does spur hiring, but not as much as increasing aid to the unemployed or cutting employers' payroll taxes.

Still, CBO Director Douglas Elmendorf said in testimony Friday that providing aid promptly would probably have a significant effect on employment and economic output.

"Without further aid from the federal government, many states would have to raise taxes or cut spending by more than they would if aid was provided," Elmendorf said. "Such actions would dampen spending by those government and by households in those states, and more state and private jobs would be lost."

Not only would state workers be impacted, but government contractors and suppliers would be too, Shure said. If the states curtain their spending, the companies that do business with them will likely downsize too.

Though the most recent version of the Senate jobs bill does not contain state aid, House Speaker Nancy Pelosi, D-Calif., on Friday urged her peers on Capitol Hill to take up the issue.

"We will work to ensure that critical pieces of the House-passed Jobs for Main Street Act are enacted into law -- including investments in our roads, bridges, and public transit systems, support for job training initiatives, and funding to keep police and firefighters on the streets and teachers in the classroom," Pelosi said.