Stimulus Strings Come to Haunt the States

Tuesday, January 5, 2010 8:47 AM

The Wall Street Journal ran a piece this weekend highlighting the fact that states, many of which had been eager to get their hands on federal "stimulus" dollars when they were being doled out, are now coming to realize that the "free money" wasn't quite so free.

In fact, it came with serious strings attached that are now hampering state lawmakers budget-making decisions, specifically preventing them from making cuts in the area of higher education and Medicaid. Writes the Journal, citing a study conducted by our friends at the Evergreen Freedom Foundation in Washington State:

A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs.

These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona's revenues are expected to be lower this year than they were in 2004. Some states don't expect to regain their 2007 revenue peak until 2012.

So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.

But Pelosi and her friends are not done yet  - they have already passed the "son of stimulus," another bill that while smaller in size and scope is once agains filled with handouts to state and local governments.  The Journal is right when its editors say:

Governors would be smarter to unite and tell Congress to keep the money and mandates, and let the states adjust to the new reality of lower revenues. Meanwhile, Mr. Perry and other governors who warned that the stimulus would have precisely this effect can consider themselves vindicated.

Meanwhile Jason Mercier at the Washington Policy Center has taken a look at whether states can free themselves from the "stimulus strings."

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