Revenue shortfalls will make budgeting for FY 2011 particularly difficult for state legislators. The task will be made tortuously more complex by an entirely new set of fiscal obligations resulting from states' use of federal "stimulus" funds.

Under the American Recovery and Reinvestment Act of 2009 (ARRA), Congress awarded states and localities some $280 billion (35% of all stimulus dollars) to sustain employment, create jobs and promote economic activity and growth. The vast majority of the state and municipal outlays - some 85% - have been designated for health, transportation, education and training programs.

The Wall Street Journal on 01.02.10 identified federal stimulus funds as making the state budget situation worse. Legislators, enticed by the promise of federal money, spent more money instead of adjusting budgets to declining revenue. Money was added for K-12 education; higher education; child care; health and welfare benefits; and a large expansion of Medicaid to cover the health care of unemployed workers and single workers without children. In 2011, when the federal funds run out, states will be stuck with one million more people on Medicaid with no money to pay for it.

A variety of conditions accompany acceptance of the funds. Foremost among them are assurances from states to maintain specific levels of program spending after the stimulus spigot runs dry. Such "maintenance of effort" standards apply to no less than 15 types of services buoyed by ARRA dollars, including Medicaid, K-12 education, road construction, and unemployment benefits.

Locked into such spending levels, state legislators now have far less flexibility in budgeting. For example, Illinois officials told researchers with the General Accountability Office that lower-than-expected fuel tax receipts will require the state to use general funds to comply with the maintenance of effort requirements. That will necessitate either spending cuts in other services or a tax increase to make up for the revenue shift.

States may appeal to the federal government for a waiver from specific maintenance of effort amounts. However, a waiver would still require the recipient state to maintain the same proportion of the total budget for applicable programs.

An accounting of stimulus funding by state is available at Recovery.gov, a Web site created by Congress as a repository for information related to stimulus spending.

The General Accountability Office also has issued a report on the challenge to states in complying with maintenance of effort requirements. http://www.gao.gov/new.items/d10247.pdf

It appears that the federal stimulus bailout of the states resulted "in decreased state sovereignty, encouraged future fiscal responsibility and rewarded the most fiscally irresponsible states at the expense of the fiscally responsible states."