Calif. Gov. Calls For More Federal Aid As States Bleed Red

Calif. Gov. Calls For More Federal Aid As States Bleed Red

Calif. Gov. Arnold Schwarzenegger should have said “I’ll be back” when the state got billions of dollars from the federal government last year. Because on Wednesday, he demanded another handout.

In his state of the state speech, Schwarzenegger acknowledged California faces deep budget woes and called for federal assistance.

He did not give an exact figure but argued that Washington owes billions to the state, even though it got $8 billion from the stimulus package in 2009. The former big screen tough guy was a bit defensive in making the request though.

“We are not looking for a federal bailout, just federal fairness,” he told state lawmakers.

Everybody Is Special

California has long been a trendsetter for the nation. Budget experts believe Schwarzenegger’s request will kick off several more rounds of cup rattling from other financially pressed states.

“Other states should. California shouldn’t receive special treatment,” said Jean Ross, executive director of the nonprofit California Budget Project. “States as a whole need additional funds or we risk seeing cutbacks not only here but around the country.”

Jon Shure, state fiscal project director of the liberal Center on Budget and Policy Priorities, says it will be hard for the White House and Democratic majority in Congress to ignore them. The center estimates 900,000 jobs could be lost without federal assistance.

“The Federal Recovery Act, in terms of its impact on states, was huge and positive last year,” he said. “We are already seeing other state governors say we need another recovery act or some kind of jobs bill.”

Last year’s federal aid helped states close about 30% of their budget shortfalls, the center said.

The political problem is that you cannot do it for just one state, says John Pitney, economic scholar at the conservative Pacific Research Institute.

“Every parent … is familiar with the phenomenon. You buy a toy for one kid and the other ones want it too,” Pitney said.

This is a classic example of “moral hazard,” PRI’s Pitney added. Despite their talk, California and other states did little to truly reform their budget processes to prevent future crises, he says. More assistance won’t spur real reform, he said.

Most states are barred from running budget deficits. The federal aid lets them continue to spend beyond their means.

“Basically what California is asking for is subsidize us for misgovernance,” Pitney said. “Had we prevented the spending increases in the first place we obviously wouldn’t be in this fix.”

Indeed, Schwarzenegger announced Wednesday that touching education spending — about half of the state’s general fund spending according to the free market Reason Foundation — was off limits. He also vowed to increase higher education spending by shifting funds from prisons.

Late last month, White House spokesman Bill Burton indicated that the administration would listen to the states’ funding requests.

“It’s obviously something that we’ll take a look at,” he told reporters on Air Force One.

The $787 billion stimulus bill gave states an estimated $87 billion last year. But they remain in trouble. State budget shortfalls are likely to reach $180 billion in the coming fiscal year. California is leading that edge too. Schwarzenegger said the state faces a $19.9 billion shortfall over the next two years.

‘Our Katrina’

The CBPP and other liberal groups cite plunging sales and property tax revenue as the main culprit, along with the refusal of states to raise taxes. Critics say the recession exposed politicians’ failure to reform fiscal policy during the fat years. (California managed to run deficits even amid surging tax revenue fueled by the unsustainable housing boom.)

Schwarzenegger seemed to agree with the critics.

“The budget crisis is our Katrina. We knew it was coming. We’ve known it for years. And yet Sacramento would not reinforce the economic levees,” he said.

To help close the shortfall, he called for a “More fair and equitable financial relationship with the federal government,” according to a press release laying out the budget priorities. This is based on the argument that California residents only get 78 cents back for every tax dollar that goes to Washington.

Golden State Parachute

Schwarzenegger did not lay out specifics but said he wants more money for border enforcement as well as restructuring the state reimbursement formula for Medicaid.

He laid out the latter request in a letter to House Speaker Nancy Pelosi, D-Calif., late last month.

“This flawed formula is forcing California to subsidize Medicaid costs in other states,” he wrote.

The speaker’s office did not respond to a request for comment.

“We haven’t received a formal response, but the Speaker’s spokesperson has been receptive in the press,” said Rachel Arrezola, spokeswoman for the governor.

In his speech Schwarzenegger also attacked Washington Democrats’ health care overhaul. While it began as a “noble” effort, it has become a “trough of special bribes, deals and loopholes.” And the problem with that, he argued, is that California isn’t getting one.

“The California’s congressional delegation should either vote against this bill that is a disaster for California or get in there and fight for the same sweetheart deal that Sen. (Ben) Nelson of Nebraska got for the Cornhusker State,” he said to cheers.

Nelson was able to get the Senate bill to cover his state’s Medicaid costs to an estimated $100 million. A similar break for California would be far more costly, though.

The big question, according to experts on both sides, is whether federal assistance gets labeled as a bailout. If it does, it is likely to become toxic and lawmakers in Washington will keep their distance.

“When seen as a bailout, I think there is less of an appetite for it,” CBPP’s Shure said, adding he does not view it as a bailout.

PRI’s Pitney said, “Any kind of special assistance to the state is going to have to be disguised in some way.”

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.