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New York State: Federal fiscal relief could mean $18 billion

Details are beginning to come out about the federal fiscal relief for states and localities that will be included in President-elect Barack Obama's economic stimulus package. (Here's an interesting sidebar on potential conflicts of interest re: the infrastructure spending aspect.) Sen. Chuck Schumer (D-NY) is already crowing about a likely $18 billion for the Empire State and the Big Apple. This is a pretty good chunk of change since the state itself is only looking at around a $15 billion budget gap for the upcoming fiscal year. (Trust me, it won't be the last one.)

The state will benefit most from $5 billion per year for two years in increases Medicaid reimbursements from the federal government. New York City could see $4 billion for mass transit next year. But, don't strike up the band just yet!

While relief such as this will not solve the states' and localities' fiscal troubles, it will buy them time to break the cycle of reactive nickel-and-dime budget cutting and revenue raising as they try to get ahead of deteriorating budget forecasts. Housing prices will continue to decline for some time and consumer spending is not going to rebound as though nothing has happened anytime soon. It will take years for the correction to work its way through the economy and be fully reflected in public revenue streams.

The New York Times' Paul Krugman has some interesting commentary on the impact of the states on the economic crisis. His voice is worth hearing because it will be heard within the walls of the next White House. However, I think everyone should understand that balanced budgets aren't the only reason states (and what about localities?) are forced to cut services to the bone when revenues decline. Part of the problem is that federal, state, and local spending have all grown to become a significant percentage of the nation's GDP, doubling and tripling since the Second World War.

You don't have to be a "supply-sider" to figure that the nation's tax load is at or near its maximum. All we can do now is shift the burden around amongst the tax brackets, and that's always politically painful. We could have more respect for federalism, by which I mean the federal government could reduce the taxes it collects and allow the states and localities to collect them for more localized purposes. Or, the states and localities could surrender their collection in favor of Washington and get pro rated returns from the Treasury. All of which seems unlikely.

So, therein lies the rub. We're facing what potentially could be the "next great depression," but--even if there were no balaned-budget requirements--neither Obama nor state and local leaders will enjoy anything near the same level of "revenue maneuverability" (a term I just made up) that was had in FDR's day. That's why I remain bearish on the prospects for any sort of major rebound for state and local revenues. This time, there's no way through it but to conduct an orderly revenue/spending retreat back to levels that pre-date the home-mortgage lending rush.

Fortunately, IT is part of the long-term solution. That's the best that can be said right now. GovWin will be watching every step of the way.

Want more on this topic? GovWin's latest Industry Insight report takes a look at the recession's impact on state and local revenues, the implications of federal fiscal relief, and the likely impact on state and local government IT spending over the next five years.

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