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Politics

States See Red as Help from Washington Dries Up

Cuts in stimulus money and rising Medicaid costs add up to big budget problems.

As the economy limps along in recovery from a deep two-year recession, not all boats are being lifted.

State finances, especially, are still a mess. And they’ll get worse in the new fiscal year, which starts July 1 for many governments, despite rising tax revenues flowing into many capitals.

The reason: Billions of dollars in new bills are coming due. That means more program cuts and higher taxes, on the heels of slashed spending, trimmed payrolls and higher taxes and fees that states had to resort to during the downturn. States were spared even deeper cuts when things were at their worst because Uncle Sam chipped in with stimulus money and kept it flowing in the early part of the recovery. Washington kicked in about $61 billion last year and $51 billion this year. But in the coming fiscal year, stimulus money will add up to less than $3 billion.

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The sluggish recovery is adding to the misery being felt by many governors and state legislators. The unemployment rate remains above 9%. Until that situation improves, enrollment will rise in the Medicaid health coverage plan for those with low incomes and no medical insurance. States will bear much of that financial burden. The program already accounts for $1 of every $4 spent by state governments, eating up more revenue than any other slice of the budget pie, including education.

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State and federal courts will give states new spending headaches, too. Judges are starting to overturn earlier funding cuts, forcing a scramble for money to cover tabs that states weren’t expecting. California is already in this bind from overcrowded state prisons and is looking to help pay for a solution by extending tax increases that are due to expire. And in New Jersey, courts ordered the state to give $500 million more to school districts. Lawmakers are trying to figure out how to come up with the money.

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More states will end up having to justify their decisions to slash education spending. According to the National Governors Association and others, one-third of states will have to cut school funding this year, and half of them are taking similar steps for college and university programs. School money will also be squeezed at the local level. Many districts base school budgets on state aid and revenue from real estate taxes. With the housing market still weak, property tax revenue is expected to decline by about 3% this year.

Hard times for state and local governments, of course, mean hard times for the rest of us, as well. New taxes and fees will be added in many places, and far fewer services will be offered. Schools in many areas will resort to larger class sizes and four-day class schedules.

Even when the fiscal picture does brighten, services will be restored to pre-cut levels more slowly than usual. One reason is that job hunters will find public sector jobs less attractive after multiple rounds of pay cuts and pension reductions.

Local businesses will feel the pinch, too, as they receive fewer orders from cash-strapped state and local governments and school districts. So more job cuts can’t be ruled out.

All things considered, it’s a vicious cycle that isn’t likely to be broken soon.

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