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State governments face budget gaps that will exceed $100 billion in the 2009-10 fiscal year and
by some estimates could exceed $350 billion over the 2.5-year period through the end of the
2010-11 state fiscal year.
Fortunately for states, the federal stimulus package (the “American Recovery and Reinvestment
Act of 2009”) contains significant aid for states, including $87 billion for a temporary increase
in the federal share of Medicaid costs; $54 billion in a State Fiscal Stabilization Fund to help
stave off cuts states might otherwise make to public education and other programs; a myriad of
smaller funding streams that will benefit state needy populations and/or state finances; plus grants
for transportation, clean water, and other construction projects.2
Unfortunately for states, most if not all of this aid will be temporary. Will it tide states over until
the recovery comes? How significantly will it curtail the need for states to cut spending or raise
taxes? What will happen when the money runs out?
To investigate these questions, we examined the impact of the fiscal stimulus package on state
government finances under two scenarios: (1) a “low-gap” scenario under which the current fiscal
crisis is a bit less severe than the sharp 2001 fiscal crisis, but lasts longer,3 and (2) a “high-gap” scenario
under which fiscal gaps approach $370 billion over the next 2.5 years.4 We assume that states
are able to use most of the federal stimulus package for budget relief rather than for new spending
programs.
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