Federal Stimulus Funds to Punch State with Double-Whammy 2-26-09

The top fiscal advisor to the Maryland General Assembly, Warren Deschenaux, presented a briefing to the Senate Budget and Tax Committee on Tuesday to provide an initial assessment of the impact of the federal stimulus law.  The media yawned, and there was little to no media coverage about this briefing.

However, the briefing provided a dramatic juxtaposition of state budget policy under the stimulus bill.  By accepting stimulus funds, the O'Malley Administration cedes control over FY10 budget priorities to the federal mandates included in the bill. 

Major increases will occur in the state budget only as directed by the stimulus bill.  Other state programs will continue to see dramatic reductions proposed by the Administration in its Budget Reconciliation and Financing Act (Senate Bill 166).

The double-whammy is this:

First, most of the federal funding is non-discretionary and can only be used to increase baseline levels of spending in education and Medicaid programs.  Only $80 million of the anticipated $962 million of general operating support from the stimulus bill is discretionary. The federally-mandated funding is a state budget-buster by providing a large infusion of cash fueling budget growth for two years at a level that will be unsustainable in three years when the stimulus funds expire.

Secondly, anticipated "write-downs" of state revenues by the Board of Revenue Estimates on March 12th could put Governor O'Malley's initial budget proposal in jeopardy even with the stimulus funding.  Legislators believe that the downward spiral of state revenues could cause a $400 million deficit in the current year (FY 09) and another $400 million in the FY10 budget prepared by Governor O'Malley.  O'Malley will need to present a supplemental budget to the General Assembly to account for the stimulus spending and the new "write-down" of revenues.

How do the stimulus funds so quickly evaporate?  Of the anticipated $962 million of FY10 stimulus funds, $350 million was already assumed by Governor O'Malley for Medicaid funding in his initial budget.  That leaves $612 million of which $181 million is specified education funding increases that do not supplant existing funds.  Therefore, $431 million is the net available to the budget which could be entirely offset depending upon the final "write-down" of revenues on March 12th.

Dark budget days are still ahead for Maryland's citizens mired in the economic downturn.  To review the Department of Legislative Services report "American Recovery and Reinvestment Act - Impact on Maryland Governments" click here.