By Larry Jones
June 2, 2003

On May 28 President George Bush signed into law an economic stimulus package that will provide $330 billion in tax cuts over the next several years and $20 billion in fiscal relief to states. Although $4 billion of the $20 billion was earmarked for local governments in earlier drafts of the legislation, members of a House'Senate conference panel eliminated the local share during negotiations on the final compromise. No explanation was given for the change.

While most states are facing a fiscal crisis and welcome the help from Washington, local governments across the nation are no better off. Since the downturn in the economy, the 9/11 terrorist attacks and recent cuts in state aid, many cities have been facing huge budget shortfalls. And many are taking drastic steps to close their budget gaps, including raising taxes and fees, laying off hundreds of workers and cutting back on essential services.

The $20 billion approved for states will be allocated over a two year period with $10 billion of the amount being made available to help states pay for their share of the Medicaid program. The remaining $10 billion will be made available to states as general fiscal relief, which can be used for any essential government service such as education, homeland security and transportation or for federal unfunded mandates.

The U.S. Treasury Department will allocate $4 billion is Medicaid funds to states in 2003 and $6 billion in 2004. In instances where local governments are required to pay a portion of the state's share of Medicaid cost, they will receive a portion of the states Medicaid funds. States will also receive $5 billion in general fiscal assistance grants in 2003 and $5 billion in 2004. Although there is no requirement that the state share these funds with local governments, there is nothing preventing them from doing so.

By providing fiscal relief to states, some congressional leaders are hoping they will spend the money immediately to mitigate drastic steps they are planning to address their budget shortfalls, such as huge layoffs and cuts in public services. While states are not expected to have any problems spending their Medicaid dollars over the next two years, some governors have already warned against using the general fiscal assistance funds on permanent services.

In a May 29 USA Today article, Pennsylvania Governor Ed Rendell said if he spent all of the $418 million the state is expecting in discretionary funds to reduce the size of cuts now, the state would be forced to make worse cuts later on. Also Michigan Governor Jennifer Granholm and Massachusetts Governor Mitt Romney said they favor putting a portion of their funds in reserve to help pay for schools and a prescription drug program for the elderly later on.

The chart below provides an unofficial estimate of how $20 billion in fiscal relief funds will be allocated among the states.