- Associated Press - Sunday, January 9, 2011

Cut spending, raise taxes and fees, and accept billions of dollars from Congress. That’s been the formula for states trying to survive the worst economy since the 1930s.

As Republicans take control of the House and exert more influence in the Senate, it’s clear that option No. 3 will soon wither. States will continue to face substantial deficits over the next few years, but they will have to get by with the end of stimulus spending and less financial help from the federal government. In recent interviews, top GOP lawmakers made clear it will be much less.

“We’ve got to put our fiscal house in order in Washington, D.C.,” said Rep. Mike Pence, Indiana Republican. “It’s going to be essential that leaders at the state level roll their sleeves up, make the hard choices and put their fiscal health in order, as well.”

“The states got themselves into their problem by profligate spending. They need to take care of that and not rely on the federal government to bail them out,” added Rep. Doc Hastings, Washington Republican.

Rep. Kevin McCarthy, California Republican and the new House majority whip, said GOP lawmakers will try to provide states with relief by cutting their expenses, not by giving them more money. For example, he advocates repeal of the national health care reforms enacted last year.

“More importantly, what the states can really hope for is that we turn the economy around so revenues will pick up,” he said. “But Washington is in very bad financial shape itself.”

Mr. McCarthy said the GOP would be focused on cutting mandates and giving states more flexibility on how they spend federal money.

The $814 billion stimulus program, passed by a Democratic Congress and championed by President Obama, helped states provide essential services, but most of the money will run out this year.

States spent the bulk of their money on public schools, higher education and health care, so those programs likely will take a hit this year. But transportation, prisons and services such as early-education programs also will not be spared the budget ax, said Todd Haggerty, a policy analyst with the National Conference of State Legislatures.

“Anything and everything is going to be affected,” he said.

As of June 30, 2011, the federal government will have spent about $165 billion on temporary aid to the states to help them weather the recession. The states have used most of that money on education and health care - keeping teachers in the classroom and reimbursing doctors and hospitals for treating the growing number of people eligible for Medicaid.

States will continue to get some stimulus money for road, energy and high-speed rail projects, but that money helps fund specific projects and wasn’t intended to plug holes in a state’s operating budget.

A slowly improving economy means many states should see an uptick in tax revenue in the coming year, but it will not be enough to replace the stimulus money. Without federal aid, the majority of legislatures around the country will not have enough money to maintain current services and face another round of budget-cutting.

States closed a cumulative budget gap of nearly $84 billion in the last fiscal year. In the coming year, 31 states and Puerto Rico face budget shortfalls totaling $82.1 billion, according to the National Conference of State Legislatures.

“You have the federal money running out, but very deep state budget problems are lingering,” said Phil Oliff, a policy analyst at the Center on Budget and Policy Priorities, a liberal think tank based in Washington. “That’s why we say the coming fiscal year could actually be the worst budget year states have faced since the start of the recession.”

There also is a sense among many governors that seeking more temporary aid would delay tough decisions about what the states can afford in the long-term.

Governors are facing an era of slow economic growth, combined with growing pension liabilities, said Ray Scheppach, executive director of the National Governors Association. Most know they must get spending down to a sustainable level, he said.

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