States likely to cut schools when stimulus ends-S&P

WASHINGTON, April 21 (Reuters) - The ending of the economic stimulus plan this year will rip away funds crucial to helping U.S. states survive the recession and they will likely start to cut spending on education, Standard & Poor's Ratings Services said on Wednesday.

The stimulus plan passed last year included a transfer of $135 billion to states, which played a key role in keeping them financially stable during the longest and deepest recession since the end of World War Two, the rating agency said.

Now "they are facing the end of federal stimulus funding before revenue recovery has taken hold in a meaningful way," the report said. "They also face budget gaps for fiscal 2011 that are likely to exceed $100 billion."

For most states fiscal 2011 starts this summer.

Many states have so far survived recent steep drops in revenue from mounting layoffs, the housing market downturn and a standstill in consumer spending by combining stimulus money with cuts in their staffing and public services.

One of the conditions for receiving stimulus funds was that states had to keep education and Medicaid spending above a certain level. Medicaid is the healthcare program for the poor jointly administered by states and the federal government.

When the stimulus expires, the "maintenance of effort" requirement will also expire and states will be free to cut. Given that healthcare and education make up half of most states' spending, this will "open some opportunities for budget adjustments," S&P said.

Public elementary, middle and high schools will not be the only ones feeling the pinch.

The stimulus plan provided $80 billion for public universities. That will disappear just as what S&P calls a "subdued economic recovery" will make fund-raising difficult and force universities to "keep tuition rate increases down to attract and retain students."

Universities in Arizona, Illinois and California will particularly have to rearrange their budgets to compensate for the impending lean times, according to S&P.

"The end of federal stimulus money for higher education could offer a teachable moment for four-year public U.S. colleges and universities: how to do more with less," it said.

Any additional help from the federal government "would certainly be helpful in addressing the sizable budget gaps most states are facing," S&P said, adding that further stimulus could speed along the economic recovery.

But it warned states against counting on more federal cash when drafting budgets, saying that introduced some risk.

With the recent passage of the federal healthcare reform plan states will likely see some funding help for Medicaid. Also, the U.S. House of Representatives has voted to extend the extra money for the program that was in the stimulus for another six months, although it has not been finally approved. (Reporting by Lisa Lambert; Editing by James Dalgleish)