Weekly Briefing

Another round of state fiscal relief is essential for North Carolina

Many Americans may not want to admit it – especially those who never supported him anyway – but President Obama has done a remarkable job of keeping the American economy from careening off the road and over a cliff.

Times may still be extremely tough, but they’re a heckuva lot better than they were 10 months ago when our nation was confronting the very real prospect of complete economic collapse. And they’re obviously a lot better than they would have been had the President and his advisors simply let the economic chips fall whichever way the wind happened to take them as was recommended by Glenn Beck, Rush Limbaugh and the other market fundamentalists.    

In many ways, Obama’s performance is reminiscent of some kind of movie action hero who grabs the steering wheel of a speeding and out-of-control car as it races through a series of mountain curves at breakneck speed. Now that he’s got the car more or less under control, he can begin to think about finding a mechanic to fix the bullet holes and worn out brakes.

Perhaps an even better entertainment analogy would involve the old TV army doctor show, M*A*S*H. In this case, Dr. Hawkeye Obama has wrested control of the seemingly hopeless patient from the shoulder-shrugging Frank “W” Burns and stabilized the situation. Now, his challenge is to figure out some way to get the army bureaucracy to part with some of the antibiotics they’ve been hoarding for a rainy day.

The patient: North Carolina

To see the next “real world” episode of this battle between economic doctors who would take aggressive action and those who would sit on their hands and leave the nation’s economic health up to divine intervention, check out the impending battle over proposals to adopt another round of federal aid to state governments.

By just about anyone’s estimation, the prognosis for most state governments around the country remains extremely grave. Here are the nonpartisan experts at the Center on Budget and Policy Priorities:

“States are continuing to grapple with record steep declines in tax receipts. Large job losses and declining incomes have caused state and local tax revenues to fall steeply, and this is occurring at the same time that high unemployment and rising poverty are increasing the need for state services such as Medicaid. The result has been large, widespread, and persistent state budget gaps of stunning magnitude. Deficits for the current state fiscal year, not all of which states have closed, total more than 25 percent of state general fund budgets, making these the largest shortfalls on record.

Deficits pose a particularly difficult problem for states during recessions because nearly all states are required to balance their operating budgets, no matter how bad the state of the economy. And many of the actions that states must take to achieve budget balance in the face of sharply falling revenues — cutting services, laying off workers, and raising taxes — further weaken the economy. Given the importance of encouraging job growth and bolstering the economy in the months ahead, federal policymakers have cause for serious concern that the actions which state policymakers will be compelled to take in the next two years will impede recovery and cause significant economic damage.”

In other words, the patient is extremely sick and the last thing she needs is to be discharged or receive a prescription for leeches.

North Carolina is no exception to this general diagnosis. As the General Assembly’s chief economist, Dr. Barry Boardman made clear earlier this month in his most recent “General Fund Revenue Report & Economic Outlook” presentation, the state continues to face several daunting challenges. These include:

• For the first third of the fiscal year that began on July1, revenues are 1.5% below the current budget’s extremely pessimistic projections.
• Though there is a general consensus among national experts that a recovery in underway, its effects have yet to reach North Carolina; employment and tax collections remain very weak.
• Our best hope is that things will bottom out toward the end of calendar year 2009 and begin a slow and modest recovery.

To which Boardman might have added: absent a dramatic and unexpectedly rapid recovery, state revenues will be inadequate for some time to come. This year, even with hundreds of millions in federal assistance, the state was forced to impose large and painful cuts to essential services like education, mental health, prisons and health care. Unless new sources are found, fiscal year 2010-‘11 will be much worse. 

A proven therapy

So, what therapy should the doctors apply in order to help revive North Carolina and the other 40 or so states in the fiscal intensive care ward? Should the President and his team continue the regimen they’ve been aggressively applying or should they simply hand the states their clothes and walking papers and wish them “good luck”?

The answer, of course, is to stick with what’s been working. As noted above, this year’s fiscal relief package provided under the American Recovery and Reinvestment Act (ARRA) was absolutely vital to the avoidance of widespread disaster in North Carolina and most other states.

Unfortunately, right now, a giant cliff looms for ARRA funding. ARRA’s assistance for state Medicaid programs through what is known as “FMAP” (short for “Federal Medical Assistance Percentage”) is scheduled to end abruptly on December 31, 2010. By that point, states will have also exhausted ARRA funds that they received for education and other services.

And, given that state fiscal recovery always lags behind rebounds in employment and income, even the best scenarios point to the continuance of big state shortfalls for some time. Absent federal action to extend or renew state fiscal relief, states like North Carolina will have to begin planning all sorts of the draconian cuts for fiscal year 2011, which starts in just over seven months. 

Finding the fiscal antibiotics

The solution to this dire situation, of course is for Congress to act quickly (before the end of 2009 if possible) to guarantee another round of fiscal medicine for the states. The Center on Budget experts summarize things this way:

“State fiscal assistance under ARRA will end or largely be exhausted by the end of calendar year 2010. Unfortunately, big state deficits are expected to continue through state fiscal year 2012 — that is, for another 18 months or so after 2010 ends. If states do not receive additional federal assistance beyond the scheduled expiration of such aid, they will be forced to institute further deep budget cuts and/or substantial tax increases. Such actions would place a drag on the U.S. economy, impeding the recovery and costing many jobs. Such measures also could cause serious hardship for many families and individuals that have lost their jobs and are relying on Medicaid and other key state services to make it through this unusually painful economic downturn.

For both economic and other reasons, the provision of some additional fiscal relief, so that such relief is extended or phased down after 2010 rather than ending abruptly at that point, would be highly desirable. It would constitute one of the most effective uses of additional dollars to boost the weak economy and preserve or create jobs.”

Let’s hope Dr. Obama issues this prescription right away, that the Congressional pharmacy honors it in short order and that the patients take all of their medicine until recovery is complete.      

     

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This entry was posted on Tuesday, November 17th, 2009 at 10:12 am and is filed under Weekly Briefing. You can follow any responses to this entry through the RSS 2.0 feed.