House Democrats in Washington, D.C., claim their massive federal stimulus package will require “unprecedented accountability” for how the added money is spent.  In reality, they’re pushing an unprecedented intrusion by the federal government into state and local decision-making on how to reallocate scarce resources in a severe fiscal crisis.

Excluding capital infrastructure, more than one-quarter of the $825 billion to be spent over the next two years will be distributed to states and local governments — more specifically, to K-12 schools, public colleges and universities, and Medicaid providers.  This will be a complex (not to mention opaque) process with high compliance costs, involving considerable behind-the-scenes byplay between federal bureaucrats and their counterparts in state capitals.  Making matters worse, some crucial passages of the federal appropriations are deliberately ambiguous.

For example, consider a tidbit from the proposed $79 billion State Fiscal Stabilization Fund, which is described under Title XIII of the main stimulus bill.  In describing how the biggest chunk of the money shall be allocated among local school districts, Section 13002 says each governor “shall first use the funds … to provide the amount of funds, through the state’s principal elementary and secondary funding formula, that is needed to restore state support for elementary and secondary education to the fiscal year 2008 level.”  A similar passage applies to the distribution of funds to public colleges and universities.

But which “fiscal 2008” are we talking about here?   The federal fiscal year that ended Sept. 30, 2008?   If so, for most of the country, that could be translated to mean state and local fiscal years ending in 2009.   In New York State’s case, that would mean the first $700 million in Title XIII funding in each of the next two years would have to be used to backfill Governor David Paterson’s proposed cuts in the statewide school aid formula.   New York City’s share under that formula is a little more than 40 percent.

If, on the other hand, the reference to “fiscal 2008” means state and local fiscal years ending in 2008, then the same hunk of federal cash must be distributed in line with the federal Title I education aid formula—under which 79 percent of the money would flow to New York City.

What all this has to do with “stimulating” the economy is anyone‘s guess.

My op-ed in today’s New York Post predicts that the state bailout funding in the stimulus stimulus bill will pump at least $17 billion in noncapital funding directly into New York state and local coffers — but the money is both temporary and narrowly targeted.

As a result, the federal bailout will do painfully little to forestall the massive tax hikes now being cooked up in Albany and City Hall. Nor will it do much to “stimulate” New York’s economy (unless, like Schumer and too many other leading New York politicians, you pretend public-sector unions and Medicaid providers are engines of economic growth).

New York State’s share of the surprisingly small capital infrastructure allocation elsewhere in the stimulus package will probably come to at least $3.4 billion.  That will bring the two-year total to well over $20 billion.  But if the state’s tax burden grows significantly heavier in the meantime — as still appears likely — the damage will more than offset the economic benefits dubiously associated with the rest of the package.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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