Stimulus-induced Budget Mirages

The impetus for last year’s stimulus was to save jobs and prevent states from implementing drastic budget cuts. As predicted, the stimulus has only delayed the day of reckoning for budgets. A new study by New York State’s Comptroller shows that $2.8 billion of the $31 billion in stimulus funds allocated to New York was spent on schools. The move allowed local governments to keep tax hikes to 2.1 percent. Absent the stimulus taxes would need to go up by 7.7 percent to meet that level of school funding.

The Government Accountability Office finds most states have concentrated their stimulus money in education and in particular on salaries. New Jersey, Georgia, Michigan, Florida, New York and North Carolina have used over half of their education funds for job retention.When the stimulus money is exhausted in 2011-2012 state budget gaps will reappear, in particular in education. Scott Pattison of the National Association of State Budget Officers calls it “the stimulus cliff.” If revenues do not recover states will be left with few choices. Local governments will have to raise taxes in a era with depressed housing values or undertake “massive teacher layoffs.”

The one things the stimulus has provided is the the illusion of rescue from the need for state and local government downsizing, making the case for a second stimulus all the more puzzling.