Monday, January 04, 2010

How that stimulus "free money" is helping to bankrupt the states

Remember how a handful of Republican governors such as Rick Perry of Texas, Mitch Daniels of Indiana and, yes, Mark Sanford of South Carolina resisted accepting all the federal stimulus money because they argued that it would force the states to spend more money that they didn't have. Well, guess what. It's all come to pass.
First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money.

For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.

A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.
And this is before Obamacare kicks in and forces the states to expand their Medicaid coverage.

Then there are the provisions tucked into the stimulus bill which prevent the states from cutting spending in specified programs if they accepted the federal money.
Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.
Cute, huh? It's as if they think that forcing the states to spend more money will somehow help them balance their budgets. They're leaving the states with little choice but to raise taxes. Perhaps that was a deliberate goal.

Yet more reasons to condemn the Democrats' failed stimulus plans. And to be highly suspicious of any new grandiose plans they come up with.