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States Facing $150 Billion in Red Ink

WASHINGTON — The total budget hole for state and local governments in fiscal 2011 is “approaching $150 billion,” Mark Zandi, chief economist and co-founder of Moody’s Economy.com, said in an interview Thursday.

But Senate Democrats on the same day said that legislation to provide more federal aid to states will be delayed until after the Senate approves a jobs bill without those provisions.

“If they don’t get more aid, there will be more serious job cuts and program cuts,” Zandi said.

Some states are already preparing for such cuts, he added, saying that he “would guess that a number of states are counting on that extra money” from federal legislation.

Zandi and other economists warned three months ago that state budget cuts would cause the gross domestic product to drop nearly one percentage point in fiscal 2011 unless the federal government swoops in with aid to states extending beyond what is currently provided by the American Recovery and Reinvestment Act, the vast majority of which expires this year.

The Rockefeller Institute of Government last month reported that in the third quarter of 2009, tax collections in 48 states fell on a year-over-year basis.

Zandi and analysts from the Center on Budget and Policy Priorities called for between $20 billion and $50 billion of additional federal money, so that states could avoid cutting budgets and increasing taxes by this summer.

The center’s calculations put state budget gaps at $113 billion this fiscal year, $142 billion next fiscal year, and $118 billion the year after — even taking into consideration the ARRA funds they are receiving in areas such as health care and education. Most states’ fiscal years begin July 1.

Zandi said Thursday that the Build America Bond program created by ARRA is helping states and localities save money on bond issuance. The BAB program is “probably one of the best things that came out of the stimulus in the long run, but it’s not enough” to prevent states from having to cut budgets and jobs, he said.

The measure being floated by Senate Majority Leader Harry Reid, D-Nev., which has become the forerunner in conversations about the next jobs bill, does include an expansion of BABs. However, it does not include direct money to states to ease the revenue squeeze caused by increased demand for their services and programs, and decreased tax collections to fund those services and programs.

“I don’t think this is enough,” Zandi said in a teleconference with Sens. Jack Reed, D-R.I., and Charles E. Schumer, D-N.Y.

“It’s a good step, but it’s too small a step,” Zandi said. “The budget hole that has developed [for states] in fiscal year 2011 is enormous, and unless they get help ... the cuts they make there will overwhelm” job gains from the current federal legislation.

Republican support for even the stripped-down bill — unveiled as part of a longer-term “jobs agenda” by Senate Democrats — is not a certainty, Senate Democrats said Thursday.

The bill has bipartisan support “in its individual components,” Reid said. “We have to work to get the governors to start making the case emphatically that the choices are not very good,” to help build momentum for more federal aid to states.

The National Governors Association earlier this month sent House and Senate leaders a letter asking for “timely passage of an extension” of ARRA’s aid to states for medical programs, for another two fiscal quarters.

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