The quest for stimulus money

The S.F. Chronicle has an article today that notes that if California, in attempting to close a $16-21 billion deficit cuts too much funding from education and health care programs, it will lose additional stimulus money.

How ironic.

The stimulus bill requires that state spend a minimum amount of money on certain projects, and if the state cuts spending below that amount, they will have violated the terms of the stimulus agreement, and will have the money taken away. So, California, trying to cut spending in the face of a dramatic deficit, will be punished for trying to do what Washington can't do: live within their means. The states are required to have a balanced budget, Washington is not. Congress passed a stimulus bill earlier this year that directed funds to states and cities for specific purposes, which was the first mistake of this whole mess. Instead of directing the money to be used for specific purposes (and threatening states and cities to abide or else), Congress should have just given each state a lump sum and let them decide what's best. Instead, we get Congress dictating to states how to use the money, which ends up causing a big mess. From labor groups lobbying the Administration in protest of previous wage cuts, to not allowing cities to swap transportation funds, even if they have no projects to fund, to governor's rejecting stimulus money because it creates a future unfunded mandate on certain programs.

The OMB has noted that stimulus money cannot be used to pay down debt, but only for spending on specific programs as directed by Congress and the Administration. So, what happens if a state has to cut money from these programs below the requirement set by the legislation in order to balance their budget? Will the Federal government really take away that stimulus money because states are bound to balance their budget?

California Assembly Speaker Karen Bass has already said that she doubts this deficit can or will be met through tax increases, and she also notes that spending cuts will be severe, especially if Propositions 1A through 1E fail next week, which is likely. Instead, Bass was in D.C. to get the Federal government to provide a guarantee on new "Revenue Anticipation Notes" that she hopes will get the state through whatever length of time is needed.

What in the world is going on here? California needs to make spending cuts to balance their budget. Those spending cuts, however, may impact the ability of California to receive stimulus money, money that is being relied on by California to help off-set that budget deficit; if the stimulus money gets pulled, that would make the deficit situation even worse. So, California wants to issue short-term borrowing notes, backed by the Federal government, so that it can borrow even more money, at much higher interest rates than before, to balance the budget today but at at the likely loss of revenue in the future due to interest payments. This is nothing short of an unmitigated disaster.

You know what, screw the stimulus money- it's a sham anyway that is not even coming close to meeting anything that this economy is "so urgently" needing. Furthermore, the Administration has admitted that unemployment will still likely rise this year, even if the economy meets the Administration's wildly optimistic and unlikely growth expectations this year. Even before the stimulus was passed, the Administration said that unemployment without the stimulus would hit near 8.8% by the end of next year, guess what, we're at 8.9% right now. California should just reject all of the stimulus money, and be thankful that it will not be beholden to the wishes and whims of this Administration as it dictates to states how to run their own business. After all, it's worked so well for the auto industry and their creditors.