Stimulus Bill Forcing California to Raise Spending and Taxes

The State of California is in big financial trouble, and thanks to the stimulus bill, those problems cannot be solved with lower spending:

Failing to abide by terms of the stimulus funds - by cutting too much from those programs - could jeopardize as much as $20 billion in federal funds.

"Trying to balance our budget in this fiscal environment is challenging enough," said H.D. Palmer, a spokesman for the Department of Finance. "Doing it under Washington's multiple requirements in order for us to receive federal funds multiplies that challenge."

The main problem is that the state has reduced spending levels to near the minimum requirements for federal funds, said Michael Cohen, a deputy legislative analyst.

For example, the federal government requires states to maintain spending in education to at least the levels in 2005-06, when California spent $38.4 billion on K-12 schools. The state's budget for the coming year, approved in February, would spend about $1 billion more than that for schools, Cohen said.

The difference in spending for the state's public universities is even slimmer - about $150 million more in the coming year than was spent in 2005-06, he said.

Some subjectivity
Numbers may shift depending on how state finance officials calculate the spending, and there may be a some subjectivity in meeting federal requirements, Cohen said.

Under federal stimulus rules, California is not allowed to change eligibility rules for Medi-Cal, the state's health care system for the poor, to save money. The state reversed an earlier change in eligibility rules for children in order to qualify for federal funds.

Anthony Wright, health care advocate for the poor, said there are three key ways to cut Medi-Cal: changing eligibility rules, reducing provider rates and cutting benefits. While the federal government forbids changes in eligibility rules, the state has cut optional benefits and is mired in a lawsuit over reducing provider rates, Wright said.

A budget that cuts programs without raising revenue will not be plausible to close a $15.4 billion to $21.3 billion deficit without losing federal funds, he said.

"Our inability to raise revenues would force unimaginable cuts and make us lose billions of federal dollars that should come to California," Wright said.

State Director of Finance Mike Genest said Wednesday that while there is no federal waiver provision for federal dollars for the state's health care system, the state can seek a waiver for funds received for education. He would not say whether the governor would seek such an exemption.

Perhaps the right thing to do is tell the feds to go pound sand, cut spending AND taxes, and let the recovering economy make up for the lost stimulus funds. It's worked every time it's been tried.