U.S. state dependence on federal funds grows-NASBO

WASHINGTON Wed Dec 15, 2010 4:56pm EST

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WASHINGTON Dec 15 (Reuters) - Despite an historic collapse in revenue, U.S. states were able to modestly increase their spending for two years after the federal government sent them aid through the economic stimulus plan, according to a report released on Wednesday.

State leaders have warned that their budgets have become so dependent on federal money that they risk new budget holes or possibly another recession next year as the final stimulus funding dries up.

"Looking beyond fiscal 2010, states are very concerned that state revenues will not have recovered to pre-recession levels by the time the additional federal funds begin winding down in fiscal 2011," the report from the National Association of State Budget Officers said, adding states are likely to face increased demands for healthcare and public assistance.

State general funds declined 3.3 percent in fiscal 2009 and an additional 5.9 percent in fiscal 2010, which ended for most states in June, according to the group.

"At the same time general fund spending was rapidly declining, federal fund spending experienced sizable increases," the report said.

The $814 billion economic stimulus plan included the largest transfer of federal funds to states in U.S. history. State spending of federal money shot up 17.7 percent in fiscal 2009 and 23.4 percent in fiscal 2010, the association said.

The economic stimulus plan was passed in February 2009, seven months into the fiscal year for most states.

Now federal funds make up more than 34 percent of state spending. Before the plan was enacted, they made up slightly more than 26 percent.

"Due to the influx of additional federal dollars, total state expenditures grew modestly in both fiscal 2009 and fiscal 2010," the report said.

Regardless of economic conditions, Medicaid, the healthcare program for the poor administered by the states with partial reimbursement by the U.S. government, takes up a large amount of state spending.

In fiscal 2010, it represented the largest share of total state spending for the first time since 2006, the group said.

As people lost their jobs from the recession, they turned more to Medicaid for healthcare. Meanwhile, the stimulus plan boosted federal dollars sent to states for the program. The two developments combined to push up total state Medicaid spending by 7.8 percent in fiscal 2009 and 8.2 percent in fiscal 2010.

Along with expecting increased demand for help from the unemployed and those still struggling from the effects of the recession, states foresee pressure to maintain "adequate education and transportation funding levels."

"States will be forced to make difficult decisions as tight fiscal conditions are expected to persist for a number of years to come," the report said.

(Reporting by Lisa Lambert; Editing by Kenneth Barry)

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