Ezra has a good point for critics of providing state aid, including in the form of Medicaid and teacher assistance.
States had record rainy-day reserves in the run-up to the crisis. That's pretty fiscally responsible. It's just that the crisis is the worst economic catastrophe since the Great Depression. You wouldn't want states budgeting for once-every-80-years economic storms. That'd mean keeping a lot of cash sitting around that could be more productively used for other things. And we don't want states deficit spending, or at least we seem to not want that.
But that means they need some help from the federal government -- which does have the tools to survive these storms -- when these crises do strike. We've started to walk away from that responsibility by using the long-run problems of state pension funds to decide that this is all their fault, but it really isn't. You can hardly blame Nevada and Florida for not managing global capital flows and Wall Street's risk-load. And the fact that pretty much all of the states fell apart at once -- save for a few that rely heavily on energy industries -- suggests this isn't a governance problem. It's a global economy problem.
To say the situation in most states is dire is an understatement. The Center on Budget and Policy Priorities reported on the scope of the crisis at the end of June, before the new fiscal year began.
The states’ cumulative budget shortfall will likely reach $140 billion in the coming year, the largest shortfall yet in a string of huge annual gaps that date back to the beginning of the recession. Closing it will have severe effects on services and jobs.
In many states, the new fiscal year will bring immediate cuts to programs and services that are facing unprecedented demand. As of July 1, 10,000 families in Arizona will lose eligibility for temporary cash assistance; Georgia will lay off as many as 284 workers who help low-income families enroll for food stamp, Medicaid and TANF benefits; and Kansas will cut off nearly 2,800 individuals with a disability from independent living services. Education, health care, and other priority areas will also face new cuts in the coming fiscal year — on top of extensive cuts that at least 45 states have enacted over the last two years.
States are raising taxes as well for 2011. Effective July 1, Kansas and New Mexico increase their sales taxes; Hawaii, New Mexico, New York, South Carolina, and Utah increase their tax on tobacco products; Washington begins taxing soda, and Oklahoma is temporarily suspending various business and energy tax credits. Other changes have already taken effect or will take effect later in fiscal year 2011. Since 2008, more than 30 states have raised taxes or tax-like fees.
The $26 billion in the current bill, whittled down in the face of opposition from Republicans and Ben Nelson, wouldn't solve the crisis, but it would at least stanch the bleeding.