Economy: Can The Stimulus Bolster State Budgets?

Ken Travous has spent the past month trying to get out of the red. During a meeting with Arizona State Parks Board members Feb. 3, Travous, who serves as parks director, explained that statewide budget cuts would mean he'd have to close up to 11 state parks. The board naturally wanted to avoid such drastic measures and asked him to come back with "more options" for cutting $27 million.

Unfortunately, the options aren't necessarily better. Shutting down the parks would mean closing some of the oldest public lands in the state, a loss of about 31 jobs and roughly $50 million dollars in economic impact to the state. Plan B would mean asking employees to take furloughs, laying off up to 40 park workers and cutting about $12 million in funds for community projects like local parks, trail developments and historic preservation. Without that funding, landscapers, carpenters and plumbers hired by these communities would be out of work. It's this choice that made him feel like he'd been punched in the stomach every time he sits down at his desk. "I have spent the last 23 years as the director of this state park system, building it up," he says. "Now I see it crumbling beneath my feet, and it makes me sick."

Travous is not the only one faced with difficult choices and some pain in his gut. The recession has caused a world of hurt and throughout the U.S., at least 46 states are facing budget deficits for the remainder of this fiscal year or for fiscal 2010. To keep from running out of money, most states have cut or are proposing cuts to education, public health care and state services and projects. Certainly, the impact of federal funds has helped curb some of these, as President Obama suggested in his speech last night. And not all of America's problems will be solved by government intervention, as Louisiana Gov. Bobby Jindal said in his follow-up speech. But the problems at the state level have become so grave that the concern lays not only in closing these gaps but in the trickle-down effect related cuts and reductions could have long after the recession has ended. "There are far-reaching implications to making such drastic cuts, but when the cupboard is bare, you can't just come up with money to fund programs," says Corina Eckl, fiscal program director at the National Conference of State Legislatures.

Unlike the federal government, nearly all states must balance their budgets each fiscal year. If a state ends up with a deficit, they have only three real options: get help from the federal government, cut spending or raise taxes. The $144 billion set aside by the federal government in the American Recovery and Reinvestment Act of 2009 will certainly prevent some cuts to health and education programs and help avoid some state and local tax increases, but it won't close any deficit gaps. Faced with raising taxes or making cuts to fix the problem, most states have opted for the latter. But economists like Joseph Stiglitz and Peter Orszag have argued in the past that, at the state level and for the short term, tax increases on high-income families are less damaging to the economy than cutting spending on programs and services that usually go to lower-income households. Still, steep spending cuts have and will continue to be implemented by most states, says Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities (CBPP), "even though they tend to take demand out of the economy."

What does a drop in demand and a drag on the economy actually look like? When a state like Florida, for example, cuts $140 per pupil it impacts a child's education, but it also leads schools to lay off teachers, reuse books instead of purchasing new ones or shut down after-school programs—all economic drivers in their own way. Other responses to spending cuts include closing two mental-health facilities in Ohio, delays in issuing income tax refunds in California and a 10 percent increase in tuition at public universities in Maine. The ripple effect extends beyond shutting down a facility, handing out an IOU or asking for more money for college.

This all paints a bleak future for state recovery. It's made worse by the fact that historically states lag behind when it comes to recuperating from an economic downturn. Take the eight-month recession earlier this decade. It took some states four years to fully bounce back, says McNichol. And according to a recent CBPP report, a number of the state reductions to education, higher education, health coverage and child care made during that downturn are still in effect.

For Ken Travous that sad state of affairs sounds familiar. On Feb. 20, the Arizona State Parks Board came to a decision about which of Ken's options made the most sense. They decided to temporarily close three parks, cancel or suspend millions in grants and authorize layoffs, furloughs and transfers. "These are not happy times," he says. "I don't want to end my career having to do this."

Even with all the slashing, it's only enough to keep the parks system functioning temporarily. On July 1, which marks the beginning of fiscal year 2010, Travous will have to come up with about $10 million dollars to remain afloat through the first quarter. How? He's not sure.