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California May Forfeit Stimulus Funds

New America Media, News Analysis, Aaron Glantz Posted: Jun 22, 2009

SAN FRANCISCO, Calif.,-- Already burdened by a $24 billion budget deficit, California stands to lose billions more in federal stimulus dollars and matching funds if Gov. Arnold Schwarzeneggers proposed budget cuts go through.

The upshot is that youre undermining the recovery, said Mark Herald of the Western Center on Law and Poverty. The budget will lead to more layoffs and a steeper and longer economic slowdown. Its quite scary to think about what will happen to our economy if public spending and public employment actually contract at precisely the moment that we need the stimulus.

If you continue to cut programs it will be even harder for people to get back on their feet.

The U.S. Department of Labor reported Friday that Californias unemployment rate had jumped to 11.5 percent.

Among the cuts Schwarzenegger is proposing in order to close the budget gap are shutting down the states welfare program (CalWorks) and eliminating MediCal health insurance for poor families and Healthy Families, which includes children of lower income families. More than a million poor Californians would lose cash assistance, 180,000 no would longer have publicly funded childcare, and 940,000 children would lose their health insurance.

Funds for each of these programs are matched dollar for dollar by the federal government. If Schwarzeneggers cuts go through, California will lose not only that money, but also part of its share of President Barack Obamas stimulus funds which are meant to supplement, not replace existing programs.

For example, under the stimulus plan, theres a big pot of money thats coming to the sates in the form of increased federal spending on Medicaid, says Jean Ross, of the non-partisan California Budget Project.

The money is being made available because nationwide more Americans are slipping into poverty and turning toward the social safety net. But, Ross says, If we spend less on Medicaid were not going to get the enhanced dollars that we would under the recovery plan.

Jason Dickerson, financial and policy analyst at the Legislative Analysts office in Sacramento, notes Californians would still pay taxes to the federal government, but would see a diminishing share of those dollars coming back to their communities.

Its ironic, he said. The scale of the budget problem requires cuts in a lot of programs and so it seems almost certain that there will be some loss of federal funds.

If adopted, Dickerson says the governors budget would cause California to lose $3.7 billion in federal funds to help people on welfare, plus hundreds of millions more in lost money ear-marked for health care for the poor, elderly and children.

The advocacy group Health Access sees an even gloomier scenario. The organization says California stands to lose $7.5 billion in federal funds under the governors proposal. Over 600,000 Californians would lose their jobs and 2 million Californians would lose their health insurance--almost a million of them children.

Toby Douglas, the governor's deputy director of healthcare services, disputed both sets of figures. Its complicated, he said. Were now starting a conversation [with Washington]. Were looking for flexibilities in ways we can manage benefits to better manage the cost. Weve also been talking about waiving some of the federal mandates.

Democrats in the state legislature have put forward an alternative proposal, which they say would save much of the lost federal money.

In their place are billions of dollars in new taxes on oil extraction, tobacco and car registration.

Democrats also propose using accounting tricks to paper-over $5 billion worth of the deficit by deferring one months state employee pay-checks into the next fiscal year and sell a portion of the states non-profit workers compensation insurance company.

Gov. Schwarzenegger has already promised to veto the Democrats proposal over the tax increases, which he called unfair and irresponsible during an economic downturn.

Advocates are also critical, saying the Democrats proposal would not scrap the social safety net but would weaken it. Health Access estimates that under the Democrats plan, the state would forsake $1.2 billion in federal funds, lose 220,000 jobs and cost 550,000 Californians their health coverage.

Given that the final budget agreement will likely be a compromise between the Democratic lawmakers, Gov. Schwarzenegger and even more conservative legislative Republicans, Sacramentos final product will almost certainly contain deep cuts in services and the loss of federal funds.

Some observers say the only solution is a federal bailout of California, similar to the U.S. governments outlay of tens of billions of dollars to AIG, General Motors and Chrysler. Like those companies, California is simply too big to fail, says Jean Ross of the California Budget Project.

Allowing California to flounder would hinder not only the future of the state's economy, she said, but the national and potentially even the global economies as well. California is and will be the economic engine of the nation's future a hotbed of innovation and a 38 million-strong market whose purchasing power will be needed to turn recession into expansion.

Thus far, however, there has been little indication from Washington is interested in a bailout.

We havent seen any interest in that from the Obama Administration, says Dickerson. One of the challenges in the feds helping California is that there would be 49 other states that would want the same thing. People talk about banks, insurance and auto companies getting money but whats different about California is that its a sovereign state with the power to raise money.

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