February 1, 2010 / 5:28 PM / 9 years ago

Obama budget sends more help to states, cities

WASHINGTON (Reuters) - President Barack Obama proposed on Monday sending more financial help to U.S. states and cities, as the economic stimulus program that gave local budgets emergency life support enters its final year.

Senate staff members get copies of U.S. President Barack Obama's 2011 Budget as it is distributed on Capitol Hill in Washington, February 1, 2010. REUTERS/Jonathan Ernst

Altogether, direct federal grants in aid to states and local governments will reach $645.7 billion, with nearly one-half directed at healthcare, in 2011, according to U.S. budget documents.

The budget would extend funding in the stimulus plan that covers health-care costs for states by six months to June 2011. The plan boosted the U.S. government’s share of Medicaid, a health-care program for the poor that is jointly funded by the states and federal government.

Through the first quarter of 2011, the stimulus sent $84.5 billion to states through the Medicaid boost.

In the budget that Obama sent to Congress on Monday, he suggested making permanent the popular stimulus bond program, known as Build America Bonds (BABs).

Currently, BABs, the taxable bonds give issuers a federal rebate of 35 percent of their interest costs, a subsidy so steep that states and local governments across the country rushed to sell the debt just months after the American Recovery and Reinvestment Act passed.

The bonds, intended for infrastructure projects, helped revive the tax-exempt municipal bond market that states, cities and municipalities use to raise funds to build schools, roads and hospitals. The market was hard hit by the credit crisis and all but frozen at the beginning of 2009.

As their revenues continued to drop during what the National Governors Association called the “Lost Decade,” states have pressured the U.S. government to continue the program.

Obama’s budget would expand BABs to cover refinancing some government debt, short-term operating costs and nonprofits such as hospitals and schools. It would also lower the subsidy to 28 percent.

California, one of the states worst hit by the recession that began in 2007, is expected to benefit from the expansion, which will help rein in borrowing costs. The state has been one of the chief issuers of BABs, selling about $5 billion of the debt so far.

Since April, a total of $71 billion in BABs have been issued, according to Thomson Reuters data, and Obama’s budget estimated that $2.94 billion in rebates will be paid during 2010, and $3.196 billion paid in 2011. The president also put aside $266 million to finance the expansion.

$83 BLN IN SHORTFALLS

The economies of states and cities are still in recession. The National League of Cities has projected that cities’ collective budget shortfalls will reach $83 billion through 2012, and the Center on Budget and Policy Priorities said state budget gaps could reach $97 billion in fiscal 2011.

Unlike the U.S. government, most states and cities must balance their budgets, and when faced with large budget holes cut healthcare, social services and school funding.

Still, some notable stimulus programs will not continue, such as a state fiscal stabilization fund that injected cash directly into state treasuries and averted many cuts in education. Block grants given to cities and counties for using alternative energy will taper off.

In Obama’s budget, cities would receive $4.4 billion in community development block grants for a host of needs, and another $4 billion for firefighter and first responder grants. They would also receive $302 million for new police officers in a program similar to a stimulus initiative that cities have said kept communities safe when police budget cuts loomed.

According to the budget documents, federal deductions for state and local property income taxes and the exemption of interest payments on municipal bonds from taxes would also provide indirect aid to the struggling governments, at a total of $109.2 billion in 2011.

Editing by Jeffrey Benkoe

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