Budget & Tax

Ray Carter | June 10, 2020

Will federal bailout create state budget problems again?

Ray Carter

In 2009, as the nation was in the grip of a severe recession, the federal government provided billions in bailout funding to state governments, including Oklahoma, through the American Recovery and Reinvestment Act of 2009 (ARRA). This year, with the government-ordered COVID-19 shutdown generating an even more severe economic decline, the federal government again provided bailout funds to state governments through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Former lawmakers involved in budget discussions during the Great Recession and following years say the federal bailout may have temporarily eased some financial strain, but warn it also contributed to subsequent budget challenges.

“Certainly, it alleviated the shortfalls we were experiencing during that recession,” said former Rep. Scott Martin, R-Norman, who was named vice-chair of the House Appropriations and Budget Committee in November 2010 and became the appropriations chair in 2012. “But then it set a certain expectation or perception that there was more money that should be on the table than there really was.”

Former Rep. Earl Sears served separate terms as chair of the House Appropriations and Budget Committee over the course of several years, beginning in November 2010. He also believes the infusion of federal funding created unrealistic expectations for state spending.

“Clearly, it was in my understanding, and I think many others, this was one-time money,” said Sears, R-Bartlesville. “But that isn’t how it turned out. Where you gave $700 million, as far as public education was concerned that $700 million somehow, someway had to come back. Or mental health. You pick whichever one you want, they never did look at it as one-time money.”

Former Sen. Clark Jolley served as vice-chair of the Senate Appropriations Committee starting in November 2010 and became chairman in subsequent years. He said “maintenance of effort” requirements associated with the 2009 bailout funds also had unintended consequences.

“It made us cut education more, or not give any increases or maintain funding on education, because we had the ‘maintenance of effort’ as it related to health care,” said Jolley, R-Edmond. “It definitely played and had a huge impact.”

Sears recalled that the 2009 bailouts required states to spend the money on specific uses—for example, $500 million in federal funding had to go to roads and bridges, $700 million had to go to education, and so on. That hamstrung budget planning and added to the budget challenges facing state policymakers, he said.

The challenges created by ARRA spending requirements were noted at the time. In January 2010, the editorial page of the Wall Street Journal noted that “maintenance of effort” spending requirements prohibited state legislatures from cutting spending on 15 programs.

State lawmakers’ inability to rein in spending in so many major spending areas during the recession made budget challenges that much greater once the federal bailout funds were gone. By the time the 2009 federal bailout funding was largely depleted, Oklahoma state revenues were declining due to lower oil prices, and state government also faced unexpected expenses from other sources, such as a court settlement directing more money to the Department of Human Services, Sears noted.

At the same time, many interest groups argued agency budgets should not be cut, despite the fact that those budgets had been propped up or even inflated by federal bailout funds that were no longer available. The expectation for higher spending coincided with greater restraints on actual state tax collections in Oklahoma.

“It was just really Oklahoma and maybe one other state or two that had any recession that they had to deal with at that point, because we trail everybody so much,” Jolley said. “If California, Washington, Florida and Maine—if those four corners were all dealing with it—I think there would have been more sympathy with maybe giving some (federal) relief from that. But it wasn’t that way.”

In May 2020, Aaron Garth Smith, director of education reform at Reason Foundation, and Christian Barnard, an education policy analyst at Reason Foundation, noted that ARRA funds often only delayed inevitable budget choices.

“While having these funds available in the immediate aftermath of the Great Recession played some role in smoothing out fiscal cliffs experienced by states, they also simply delayed some of the necessary cuts to state budgets,” Smith and Barnard wrote. “Current expenditure data from the National Center for Education Statistics (NCES) show that while ARRA funds and other state-level funding adjustments kept nationwide per-pupil expenditures relatively flat compared to pre-recession spending in the 2009-2010 and 2010-2011 school years, these spending levels subsequently decreased in the 2011-2012 school year and hit post-recession lows in 2012-2013. This is because many state economic recoveries were moving slowly, and further because state revenue growth tends to lag behind economic growth.”

In his 2012 book, “The Debt Bomb,” former U.S. Sen. Tom Coburn, R-Muskogee, wrote that the 2009 bailout funds “created a precedent that said states no longer needed to live within their means because the federal government would be there to bail them out.”

“At all levels of government, the stimulus catered to the worst habits of politicians: Why make a hard choice today when you can borrow a dollar and make a hard choice tomorrow?” Coburn wrote. “The stimulus gave states such as California, Illinois, Nevada, and Michigan an excuse to delay hard choices that only became more difficult the next budgetary year.”

Today, with hundreds of millions in federal COVID-19 funding sloshing through state accounts, some officials worry Oklahoma government could be headed for a repeat of the budget challenges of the past decade that were created in part by inflated spending tied to 2009 bailout funding.

Gov. Kevin Stitt has been among the most vocal members of that group, arguing Oklahoma government should use federal COVID-19 money only for unexpected expenses directly related to COVID-19. He has warned lawmakers against using one-time federal COVID funds for ongoing agency expenses and urged lawmakers to bring state spending more in line with actual revenue.

That has been a source of contention with legislative leaders, who have mostly balked at efforts to rein in spending or streamline government to lower costs.

The difference between the financial philosophies of the executive and legislative branches came to a head in May when Stitt vetoed Senate Bill 1922, the general appropriation bill for all of state government. Stitt warned the budget drafted by legislators was “propped up with one-time funds that will not be available for Fiscal Year 2022” and “leaves us with very few options in FY 2022—we will either have to raise taxes or implement draconian cuts.”

Lawmakers declined to address those concerns, and instead overrode Stitt’s veto to keep state spending at a higher level than what Stitt argues is sustainable.

At an April meeting of the State Board of Equalization, Stitt noted the 2020 state budget (which covers state spending through June 30 this year) totaled $8.13 billion. In the FY22 budget year, he said officials expect to have $6.9 billion available. Yet the budget legislators enacted via override keeps state spending at $7.7 billion, roughly $800 million above the amount of funding officials believe may be available for the next budget year, and lawmakers depleted the majority of state savings in the process. While lawmakers started 2020 with more than $1 billion in state savings, just $244 million now remains.

Officials say some changes have been adopted or are underway in state government that may help avoid some problems experienced in the aftermath of the 2009 federal bailouts. Martin noted lawmakers began including information on agencies’ full funding—which included state appropriations and all federal dollars—in budget reviews. That practice was not common before the Great Recession.

And today lawmakers are in the process of creating a new state entity, the Legislative Office of Fiscal Transparency (LOFT), that will audit state agency budgets and evaluate the effectiveness of state programs and services. Martin said that is also a step in the right direction.

Even so, he said officials should try to use federal COVID funds “for one-time purposes as opposed to ongoing operations so you don’t find yourself in a position where you’re having to reduce personnel or other services that people have become accustomed to.”

“When you’re in the middle of a crisis like they are now, you appreciate the relief to lessen the blow,” Martin said, “but I think you also try to spend those dollars as smartly as possible for the long term.”

Ray Carter Director, Center for Independent Journalism

Ray Carter

Director, Center for Independent Journalism

Ray Carter is the director of OCPA’s Center for Independent Journalism. He has two decades of experience in journalism and communications. He previously served as senior Capitol reporter for The Journal Record, media director for the Oklahoma House of Representatives, and chief editorial writer at The Oklahoman. As a reporter for The Journal Record, Carter received 12 Carl Rogan Awards in four years—including awards for investigative reporting, general news reporting, feature writing, spot news reporting, business reporting, and sports reporting. While at The Oklahoman, he was the recipient of several awards, including first place in the editorial writing category of the Associated Press/Oklahoma News Executives Carl Rogan Memorial News Excellence Competition for an editorial on the history of racism in the Oklahoma legislature.

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