Congress pulls back state aid package, leaving a $2-billion hole in California budget

With the federal deficit a growing political liability, lawmakers in Congress are backing off plans to send more aid to financially strapped states, putting in jeopardy billions of dollars that California and others were counting on to balance their budgets.

The potential loss of funds is a significant setback for Gov. Arnold Schwarzenegger and state lawmakers, who may not see nearly $2 billion in federal assistance that they intended to use to help bring California out of the red.

The money was to be California’s share of $24 billion in proposed assistance, mostly to cover healthcare spending, spread among all states. Budget experts say that is enough to wipe out about one-fourth of the combined state budget shortfalls.

In California and elsewhere, officials thought the funds were a sure thing. The money was one of the few elements of Schwarzenegger’s budget plan on which there was bipartisan agreement. But House Democratic leaders last week stripped the money out of legislation amid election-season jitters.

“This is a serious problem,” said Jean Ross, executive director of the California Budget Project, a Sacramento-based nonprofit. “The fear of deficits seems to be overtaking Washington. They are not realizing the bigger threat is the economy could slide back into recession as a result of state and local budget cuts.”

In California, the governor has already proposed eliminating the state’s welfare program, cancelling state-subsidized day care for hundreds of thousands of low-income children, freezing school spending and making a number of other deep cuts to close a $19.1-billion budget gap.

Failure to get the federal money would surely force more drastic proposals. But even if the state eliminated its entire home healthcare program, which serves 440,000 elderly and disabled Californians, it wouldn’t make up for the $1.9 billion the state is now scrambling to secure.

The states have launched a frantic lobbying effort to persuade the U.S. Senate to provide the assistance.

“You’ve got virtually every governor in the country calling on Congress to do this,” said H.D. Palmer, deputy director of the California Department of Finance. “This is not just a California issue. It is a national issue.”

The states’ efforts come as the Democrats who control Congress face resistance to increased spending from fiscally conservative members of their own caucus, many of whom face tough reelection campaigns in districts where they campaigned on pledges of fiscal discipline. Republicans, meanwhile, have highlighted the federal budget deficit, which could reach $1.5 trillion, in this year’s mid-term election campaigns.

Michael Bird, federal affairs counsel for the National Conference of State Legislatures, said securing the funds would be a challenge. “We’ve got our work cut out for us,” he said.

Thirty states have been counting on the additional Medicaid money in their budgets, according to the conference. The money was originally provided in last year’s economic stimulus bill — but only through the end of this year.

With unemployment still high, a bipartisan group of governors, with President Obama’s support, has sought to extend the funding through mid-2011.

The $24 billion was stripped from a package of unemployment aid and tax breaks by House Democratic leaders in response to the demands of fiscally conservative members of their party to reduce the bill’s overall cost. The bill was approved by the House last week and is awaiting action in the Senate.

A spokesman for Rep. Chellie Pingree (D- Maine), a leader in pushing for extension of the Medicaid funding, said that the congresswoman has been assured by Democratic leadership that the issue will come back before the House.

Schwarzenegger has aggressively pushed the California congressional delegation to extend the federal aid to states. He expressed confidence in January that Washington would step forward with as much as $7 billion in new federal assistance, which could be used to close more than a third of California’s budget gap.

By May, he acknowledged that was unlikely but suggested the state could safely assume it would receive half that amount. Now the state is facing the prospect of getting barely more than $1 billion.

Among those resisting the governor’s push for more assistance are his fellow Republicans in the state’s Congressional delegation, who say Washington has its own budget problems.

While the loss of Medicaid funds would hit California hard, the House bill does include provisions that would benefit the state.

Among them is an extension of the Build America Bond program that has been used in California to fund infrastructure projects. There is also $400 million in increased Medicare payments to doctors in a wide swath of the state to address longstanding complaints that low reimbursement rates have discouraged them from taking on new patients.

Times staff writer Shane Goldmacher contributed to this report.