Federal Assistance: Temporary State Fiscal Relief (07-MAY-04,	 
GAO-04-736R).							 
                                                                 
As part of the Jobs and Growth Tax Relief Reconciliation Act of  
2003, the federal government provided $10 billion in temporary	 
fiscal relief payments to states, the District of Columbia, and  
the U.S. commonwealths and territories (herein referred to as	 
states). Generally, use of these funds is unrestricted in nature;
the act authorizes funds to be used to "provide essential	 
government services" and to "cover the costs... of complying with
any federal intergovernmental mandate." These funds were intended
to provide antirecession fiscal stimulus to the national economy 
and to help close state budget shortfalls due to the recession	 
that began in March 2001. According to the National Conference of
State Legislatures (NCSL), in February 36 states reported facing 
budget shortfalls with a cumulative budget gap of about $25.7	 
billion. This report responds to the February 13, 2004, request  
by the Chairman of the Senate Committee on the Budget to provide 
information to help Congress assess the use of the temporary	 
state fiscal relief payments. Specifically, we are reporting (1) 
what is known about the potential impacts of unrestricted fiscal 
relief on the fiscal behavior of states, (2) how the temporary	 
fiscal relief payments were distributed among the states relative
to their fiscal circumstances, and (3) how state budget officials
report these funds were used. The temporary fiscal relief	 
payments reviewed in this report were designed to provide	 
assistance to help state and local governments address cyclical  
deficits prompted by the recent economic downturn. These payments
were not intended to address longer term structural fiscal	 
challenges facing state governments, and accordingly our report  
does not address these issues.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-736R					        
    ACCNO:   A09990						        
  TITLE:     Federal Assistance: Temporary State Fiscal Relief	      
     DATE:   05/07/2004 
  SUBJECT:   Budget deficit					 
	     Economic analysis					 
	     Economic policies					 
	     Economic stabilization				 
	     Federal aid to states				 
	     Fiscal policies					 
	     Intergovernmental fiscal relations 		 
	     Recession						 
	     State budgets					 
	     Antirecession Fiscal Assistance Program		 
	     General Revenue Sharing Program			 

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GAO-04-736R

United States General Accounting Office Washington, DC 20548

May 7, 2004

The Honorable Don Nickles
Chairman
Committee on the Budget
United States Senate

Subject: Federal Assistance: Temporary State Fiscal Relief

Dear Mr. Chairman:

As part of the Jobs and Growth Tax Relief Reconciliation Act of 2003,1 the
federal government provided $10 billion in temporary fiscal relief
payments to states, the District of Columbia, and the U.S. commonwealths
and territories (herein referred to as states). Generally, use of these
funds is unrestricted in nature; the act authorizes funds to be used to
"provide essential government services" and to "cover the costs ... of
complying with any federal intergovernmental mandate." These funds were
intended to provide antirecession fiscal stimulus to the national economy
and to help close state budget shortfalls due to the recession that began
in March 2001.2 According to the National Conference of State Legislatures
(NCSL), in February 36 states reported facing budget shortfalls with a
cumulative budget gap of about $25.7

3

billion.

This report responds to your February 13, 2004, request and subsequent
agreement with your office to provide information to help Congress assess
the use of the temporary state fiscal relief payments. Specifically, we
are reporting (1) what is known about the potential impacts of
unrestricted fiscal relief on the fiscal behavior of states, (2) how the
temporary fiscal relief payments were distributed among the states
relative to their fiscal circumstances, and (3) how state budget officials
report these funds were used. The temporary fiscal relief payments
reviewed in this report were designed to provide assistance to help state
and local governments address cyclical deficits prompted by the recent
economic downturn. These payments were

1 Pub. L. No. 108-27, Title VI, May 28, 2003.

2 A recession begins just after the U.S. economy reaches a peak of
activity and ends as the economy reaches its trough. The National Bureau
of Economic Research identified the period of the recession from the peak
to the trough month (March 2001-November 2001).

3 National Conference of State Legislatures, State Budget Update: February
2003.

not intended to address longer term structural fiscal challenges facing
state governments, and accordingly our report does not address these
issues.4

To respond to this request, we used findings from our and other reports on
unrestricted federal aid to describe the known potential impacts of such
funds on the fiscal behavior of states. We obtained data on the
distribution of fiscal relief funds from the Department of the Treasury
and compared this information with indicators of state fiscal
circumstances we selected from our and other reports on grant design. We
also discussed the use of fiscal relief funds with senior budget officials
from 12 states with varying fiscal circumstances. We conducted our review
from February to April 2004 in accordance with generally accepted
government auditing standards. For a more complete discussion of our
approach, see the scope and methodology section.

Results in Brief

Temporary state fiscal relief funds share common characteristics with
similar programs enacted in the 1970s that provided unrestricted funds to
state and local governments. Past analyses of these programs can provide
insights into the potential impacts unrestricted funds can have on the
fiscal behavior of state governments. For example, previous studies have
noted that the effectiveness of unrestricted aid on stabilizing state
finances during economic downturns can be limited if this aid is delayed
beyond the trough of the downturn, or if the aid is not targeted to
entities most affected by the recession and with the fewest available
resources. Past studies have also shown that unrestricted federal funds
are fungible and can be substituted for state funds, and the uses of such
funds are difficult or impossible to track. One study suggested that
states could come to rely on federal aid in order to close budget gaps
during economic downturns instead of taking actions, such as setting aside
budgetary reserves, to stabilize their own finances.

We examined the distribution of fiscal relief funds under the Jobs and
Growth Tax Relief Reconciliation Act of 2003 in terms of its timing
relative to national economic trends and its targeting relative to each
states' fiscal circumstances. From the perspective of the national
economy, the first distribution of fiscal relief funds occurred about 19
months after the end of the recession. However, employment levels
continued to decline and this was reflected in continuing fiscal stress
facing many states during this period. The funds were not targeted to take
into account significant differences among states in the impact of the
recession, fiscal capacity, and cost of expenditure responsibilities.
Rather, the funds were allocated to the states on a per capita basis,
adjusted to provide for minimum payment amounts to smaller states.

4 A fiscal system is said to have a structural imbalance if it is unable
to finance an average (or representative) level of services by taxing its
funding capacity at average (or representative) rates. U.S. General
Accounting Office, District of Columbia: Structural Imbalance and
Management Issues, GAO-03-666 (Washington, D.C.: May 22, 2003).

According to NCSL, in April 2004 states reported facing a cumulative
budget gap of $720 million, down from $21.5 billion at the same time the
previous year.5 In all of the states we contacted with the exception of
New Mexico, budget officials indicated that they had used their own
reserve funds, to varying degrees, to address budget shortfalls. States
reported deploying fiscal relief funds in state fiscal year 2003, 2004, or
planned to in future years. Many of the 12 states we contacted reported
using the funds as general revenue available to support broad state
purposes. The one-time federal fiscal relief funds were available to help
close budget gaps and reduce the pressure for tax increases or spending
cuts.

Past Experiences with Fiscal Relief Programs Provide Key Insights

Federal funding provided under the General Revenue Sharing (GRS) and
Antirecession Fiscal Assistance (ARFA) programs enacted in the 1970s share
common characteristics with the temporary fiscal relief funds provided
under the Jobs and Growth Tax Relief Reconciliation Act of 2003.6
Primarily, the temporary fiscal relief funds and the funds provided under
GRS and ARFA were unrestricted. State or local recipient governments could
choose to use the funds entirely at their own discretion. GRS funds were
provided as general financial assistance to state and local governments.
ARFA program funds, just as the temporary fiscal relief funds, were in
part intended to stabilize the finances of state governments that had
recently experienced budgetary stress due to an economic downturn.

Analyses of these programs can provide insights into the potential impacts
unrestricted funds can have on state fiscal behavior. Previous studies
have noted that the effectiveness of unrestricted aid on stabilizing state
finances during economic downturns can be limited if this aid is delayed
beyond the trough of the recession, or if the aid is not targeted to
entities most affected by the recession and with the less available
resources.

A Treasury study found that the timing of the ARFA funding disbursements
was a key element toward the goal of stabilizing state finances during a
recession.7 The purpose of this program was to stabilize state budgets and
discourage state governments from enacting tax increases or spending cuts
because such budgetary actions would exacerbate the recession.8 The
Treasury study showed that the ARFA funds were poorly timed. They came
late, after the trough of the recession, and did little to

5 National Conference of State Legislatures, State Budget Update: April
2004.

6 Title I of the State and Local Fiscal Assistance Act of 1972 (Pub. L.
No. 92-512) authorized general revenue sharing. Title II of the Public
Works Employment Act of 1976 (Pub. L. No. 94-369) authorized antirecession
payments to states and local governments.

7 U.S. Department of the Treasury, Federal-State-Local Fiscal Relations:
Report to the President and the Congress (Washington, D.C: September
1985).

8 The general argument is that increasing state taxes or reducing state
spending can work to offset the economic effects of federal
countercyclical stimulus, such as the "automatic stabilizers" built into
the federal budget that automatically reduce revenue and increase spending
during economic downturns.

forestall state decisions regarding tax increases or spending cuts that
could have contributed to the recession. Further, because the economy had
already entered a period of strong recovery, the ARFA funds may have
contributed to inflationary pressure.

Our and CBO studies noted that targeting unrestricted funds is also a key
consideration in achieving effective fiscal stabilization.9 Because
recessions affect states unevenly, targeting unrestricted funds to states
most affected and with less available resources could yield better
results. Changes in employment rates can serve as an indicator for the
magnitude of fiscal impact of the recession in that sales and income tax
receipts are closely tied to employment levels. A recent Economic Policy
Institute (EPI) paper noted that indicators of a state's fiscal capacity
(a state government's ability to raise revenue through its taxable
resource base), such as Gross State Product (GSP) or Total Taxable
Resources (TTR), can also be considered.10 Some states, relative to
others, have more available resources to draw upon. States differ in their
need for assistance due to variations in job losses, tax bases, and
expenditure responsibilities.

We have previously reported that unrestricted funds, such as those
provided under

11

the GRS program are fungible, and easily substituted for state funds.
Within the context of stabilizing state budgets during recessions, the EPI
paper noted that fewer restrictions governing the use of federal funds is
appropriate because such funds do little to interfere with state spending
priorities and can be mobilized more quickly. However, the ease with which
unrestricted funds can be substituted for state funds suggests that timing
and targeting issues take on a greater importance. If unrestricted federal
funds are granted to a state with little need, the funds could be
substituted for own source revenues and allow the state to lower taxes,
increase spending, or place the funds in state reserves. Under these
circumstances, the funds would do little to stabilize state budgets.

We have also previously reported that it is difficult or impossible to
identify the

                                       12

states' uses of unrestricted federal funds. Budget decisions are typically
based upon total resources available to a state government. A state
government can identify the amount of available unrestricted federal
funds, as well as the amounts and sources of all other revenues. Once
funds from different sources are commingled for budgeting purposes, it is
difficult or impossible to identify the source of the dollars that fund

9 U.S. General Accounting Office, Antirecession Assistance-An Evaluation,
PAD-78-20 (Washington, D.C: Nov. 29, 1977) and Congressional Budget
Office, Countercyclical Uses of Federal Grant Programs (Washington, D.C.:
Nov. 1978).

10 Economic Policy Institute, An Idea Whose Time Has Returned:
Anti-recession Fiscal Assistance for State and Local Governments
(Washington, D.C.: October 2001).

11 U.S. General Accounting Office, Revenue Sharing: An Opportunity For
Improved Public Awareness of State And Local Government Operations,
GGD-76-2 (Washington, D.C.: Sept. 9, 1975).

12GGD-76-2.

specific expenditures. Reporting on or tracking the use of funds can be
somewhat meaningless where revenue sources can be used interchangeably for
the same expenditures.

The potential availability of countercyclical federal funds could
discourage state actions to prepare for the fiscal pressures associated
with a recession. States can prepare their finances for fiscal stress and
budget uncertainty, primarily through establishing budgetary reserves.
Budgetary reserves (sometimes referred to as budget stabilization funds or
"rainy day" funds) are available revenues set aside to provide a cushion
that could be used in times of fiscal stress. According to a Center on
Budget and Policy Priorities report, at the end of state fiscal year 2001
many states had accumulated substantial reserves, others modest reserves,
and others none at all.13 A Treasury study noted concerns that the
availability of federal aid could discourage states from setting aside
budgetary reserves to prepare for budgetary uncertainty. Unintended
consequences such as this (sometimes referred to as a "moral hazard") are
not new to federal-state relations when budgeting for uncertain events.
For example, state budgeting for natural disasters provides an
illustration of these unintended consequences. In 1999, we reported that
while natural disasters and similar emergencies had an impact on state
finances, states were less concerned about these situations because they
relied on the federal government to provide most

14

of the funding for recovery efforts. For example, at the time, although
California had experienced many catastrophic natural disasters over the
prior 10 years, California did not provide any advance reserve funding for
disaster costs. Instead, the state included in its budget only the
estimated state share of funds needed for prior years' disasters.

The Timing and Targeting of Fiscal Relief Funds

The distribution of fiscal relief funds under the Jobs and Growth Tax
Relief Reconciliation Act of 2003 occurred after the economy began to
recover from the recession, but while the states were still struggling
with revenue shortfalls. From the perspective of the national economy, the
first distribution of fiscal relief funds occurred about 19 months after
the end of the recession. In looking at three indicators of states' fiscal
circumstances, we found large differences in indicators of the impact of
the recession, fiscal capacity, and cost of expenditure responsibilities.
The funds were not allocated according to these differences; rather, they
were allocated on a per capita basis, adjusted to provide for minimum
payment amounts to smaller population states. Consequently, the allocation
of fiscal relief funds was not related to the state's relative need for
antirecession aid.

13 Center on Budget and Policy Priorities, Heavy Weather: Are States Rainy
Day Funds Working? (Washington, D.C.: May 13, 2003).

14 U.S. General Accounting Office, Budgeting for Emergencies: State
Practices and Federal Implications, GAO/AIMD-99-250 (Washington, D.C.:
Sept. 30, 1999).

Payments Were Made After the National Economy Was in Recovery, but States
Were Experiencing Lags in Employment Growth

The fiscal relief payments were first distributed to the states in June
2003, about 19 months after the end of the recession as measured by gross
domestic product (GDP), but prior to recovery of employment levels (see
figure 1). The National Bureau of Economic Research (NBER) determined that
a peak in business activity occurred in the U.S. economy in March 2001.15
This peak marked the end of an expansion and the beginning of a recession.
NBER indicated an end of the recession in November 2001; however,
employment levels continued to decline even after the economy entered an
expansion period.

The Allocation of Fiscal Relief Funds Does Not Appear to Have a Systematic
Relationship with State Fiscal Circumstances

In looking at states' fiscal circumstances, we found large differences in
indicators of the impact of the recession and fiscal capacity. Indicators
of expenditure responsibilities, the level of public services provided by
the average state fiscal system, are not readily available. We were able
to draw upon employment and gross state product (GSP) data as indicators
of the impact of the recession and state fiscal capacities, respectively.
Changes in employment can serve as indicators of the magnitude of fiscal
impact of the recession in that sales and income tax receipts are

15 NBER, Business Cycle Dating Committee, The Business-Cycle Peak of March
2001 (Cambridge, Mass.: Nov. 26, 2001).

closely tied to employment levels. GSP serves as an indicator of the
ability of states to raise revenues from their own sources.

As figure 2 shows, the allocation of fiscal relief funds does not appear
to be related to the indicators of impact of the recession on states or
their ability to generate revenues from their own economic resources. For
example, the recession had the least relative impact on Wyoming, as
indicated by its percentage change in nonfarm employment, and it has a
relatively strong tax base, as indicated by GSP per capita, however it
received a larger fiscal relief payment per capita than the U.S. average.
Other states, such as Indiana, Kentucky, and Michigan had much greater
impacts from the recession and weaker tax bases than the U.S. average.
These states all received slightly less than the U.S average per capita
fiscal relief payment.

Figure 2. Comparison of Employment, Fiscal Relief, and GSP by State

Note: The figure does not include the commonwealths and territories due to
the lack of available employment and economic data.

a Percentage change in nonfarm employment was calculated for the
identified period of the recession, March 2001 to November 2001.

There are large differences in the impact of the economic downturn among
the states. The Bureau of Labor Statistics' (BLS) data on nonfarm
employment is regarded as the only timely and high-quality state-level
indicator for assessing economic downturns, although it has limitations.
To assess the impact of the recession across states and identify those
states most affected, we compared the percentage change in nonfarm

16

employment by state during the national recession (see enclosure 1). This
indicator

16 The National Bureau of Economic Research defines expansions and
recessions in terms of whether aggregate economic activity is rising or
falling, and it views real GDP as the single best measure of

shows that the downturn was greater in some states when compared to
others. For example, Alaska had a 1 percent gain in nonfarm employment
during this period, whereas North Carolina experienced a 2.5 percent loss.
However, Alaska received $79.75 in fiscal relief per capita whereas North
Carolina received $34.01.

There are large differences in the underlying strength of a state's tax
base. A second indicator to assist targeting fiscal relief funds is the
strength of the state tax base, in other words, the state's ability to
generate revenues from its own economic resources. Leading indicators to
measure state fiscal capacity are TTR and GSP. We chose per capita 2001
GSP to measure state fiscal capacity as it was the more recent and readily
available data (see enclosure 2). The indicator shows that some states
have a relatively greater ability to self finance than others. For
example, Delaware had a per capita GSP of $51,696 whereas West Virginia
had a per capita GSP of $23,429. However, Delaware received $63.81 in
fiscal relief per capita payment while West Virginia received $34.01.

The cost of delivering an average level of services per capita varies by
state. A third indicator to assist targeting fiscal relief funds is the
differences among states in funding the cost of an average basket of
public services. This indicator can assist in targeting fiscal relief
funds to states with a higher cost of providing public services. However,
this type of information is not readily available due to the sophisticated
economic modeling required. However, we recently analyzed the fiscal
condition of the District of Columbia in relation to other states using a
representative expenditure model.17 We reported that the District of
Columbia and five states (New York, California, Massachusetts, Texas, and
New Jersey) needed to spend more per capita than the 50-state average in
order to fund an average basket of public services.

Distribution Formula Provides Funds on a Per Capita Basis, with Minimum
Payments to Smaller States

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 appropriated
$5 billion for each of federal fiscal years 2003 and 2004. The act
allocated funds to states on a per capita basis adjusted to provide for
minimum payment amounts to smaller population states. The Treasury was
responsible for making payments to states in two payments upon proper
certification to the Treasury; the first was available in June 2003, and
the second was available in October 2003. States were to certify to the
Secretary of the Treasury that the use of the funds was consistent with
the purposes of the act. These funds were only to be used for expenditures
permitted under the most recently approved state budget. The minimum
amount specified in the act for the states and the District of Columbia
was $50 million and the minimum for the commonwealths and territories was
$10 million.

economic activity. Real GDP has risen substantially since November 2001.
However, this growth in real GDP took the form of productivity growth. As
a result, the growth in real GDP has been accompanied by falling
employment.

17 U.S. General Accounting Office, District of Columbia: Structural
Imbalance and Management Issues, GAO-03-666 (Washington, D.C.: May 22,
2003).

As table 1 shows, 12 states, the District of Columbia, American Samoa,
Northern Mariana Islands, Virgin Islands, and Guam received minimum
payments, which ranged from $38.64 to $174.55 per capita. The remaining 38
states and Puerto Rico received $34.01 per capita. Although smaller states
received more per capita funding in relation to larger population states,
the total amount is relatively small. A total of $690 million, about 7
percent of the $10 billion in fiscal relief funds, was allocated as
minimum payments.

Table 1: Total and Per Capita Fiscal Relief Payments, in Dollars

                  State    Total Per capita          State       Total    Per 
                                                                       capita 
         American Samoa   10,000,000 174.55         Kansas  91,420,224  34.01 
     N. Mariana Islands   10,000,000 144.46       Kentucky 137,441,212  34.01 
                Wyoming   50,000,000 101.26      Louisiana 151,968,477  34.01 
         Virgin Islands    10,000,000 92.07       Maryland 180,108,130  34.01 
District of Columbia    50,000,000 87.40 Massachusetts  215,902,391  34.01 
                Vermont    50,000,000 82.13       Michigan 337,958,897  34.01 
                 Alaska    50,000,000 79.75      Minnesota 167,287,927  34.01 
           North Dakota    50,000,000 77.86    Mississippi  96,733,199  34.01 
           South Dakota    50,000,000 66.24       Missouri 190,266,337  34.01 
                   Guam    10,000,000 64.60       Nebraska  58,191,861  34.01 
               Delaware    50,000,000 63.81         Nevada  67,951,153  34.01 
                Montana    50,000,000 55.42     New Jersey 286,131,757  34.01 
           Rhode Island    50,000,000 47.70     New Mexico  61,857,045  34.01 
                 Hawaii    50,000,000 41.27       New York 645,298,446  34.01 
          New Hampshire    50,000,000 40.46 North Carolina 273,718,596  34.01 
                  Maine    50,000,000 39.22           Ohio 386,065,934  34.01 
                  Idaho    50,000,000 38.64       Oklahoma 117,340,221  34.01 
                Alabama   151,224,579 34.01         Oregon 116,345,399  34.01 
                Arizona   174,468,230 34.01   Pennsylvania 417,619,847  34.01 
               Arkansas    90,909,534 34.01    Puerto Rico 129,512,591  34.01 
             California 1,151,812,577 34.01 South Carolina 136,429,319  34.01 
               Colorado   146,265,293 34.01      Tennessee 193,465,275  34.01 
            Connecticut   115,806,960 34.01          Texas 709,070,563  34.01 
                Florida   543,484,155 34.01           Utah  75,939,386  34.01 
                Georgia 278,382,071 34.01         Virginia 240,706,404  34.01 
               Illinois   422,320,693 34.01     Washington 200,430,835  34.01 
                Indiana 206,768,182 34.01    West Virginia  61,493,121  34.01 
                   Iowa    99,510,268 34.01      Wisconsin 182,392,906  34.01 
                        10,000,000,000                                 
          United States 35.01                                          

Source: Prepared by GAO with data from the Department of the Treasury and
the Census Bureau.

Allocation of federal assistance based on population is not a novel
concept and is used, at least in part, in some grant programs to apportion
funding. Some advantages of using an allocation formula based on
population is that the data are readily available and is meant to provide
political equity among the states. However, as we have cited in previous
work, using population alone in a grant formula is not an

effective indicator of the relative economic circumstances of states or
their fiscal capacity.18

State Budget Officials Report Using Fiscal Relief Funds in a Variety of
Ways

The one-time federal fiscal relief funds provided by the Jobs and Growth
Tax Relief Reconciliation Act of 2003 were available to help close budget
gaps and reduce the pressure for tax increases or spending cuts. According
to NCSL, state budget outlooks are improving, however, many states are
continuing to face budget

19

shortfalls. In all of the states contacted, with the exception of New
Mexico, budget officials indicated that they had already used their own
reserve funds to help close budget gaps.

Some state budget officials interviewed indicated they were able to deploy
these funds in state fiscal year 2003, but others planned to use these
funds in state fiscal year 2004 or beyond. For example, in five states
(Alabama, Louisiana, Maryland, New Jersey, and Ohio), budget officials
indicated that they used their first disbursement in June 2003 to
substitute for unrealized revenue or for other purposes in their state
fiscal year 2003 budgets. Although North Dakota officials reported drawing
upon state reserve funds in state fiscal year 2003, they were unable to
budget any fiscal relief funds. Due to its biennial legislative session
and accompanying budget, the North Dakota state fiscal year 2003-2005
budget was passed prior to the Jobs and Growth Tax Relief Reconciliation
Act of 2003. As of our interview, the legislature was next scheduled to
meet in January 2005.

In two states budget officials reported disagreement about whether the
legislature or the governor could determine how the funds were to be used.
Legislative budget officials in both Colorado and New Mexico indicated
that the governor has not made the fiscal relief funds available to the
legislature for appropriation in the respective states. In Colorado,
subsequent to a State Supreme Court ruling and legislation passed by the
General Assembly, the issue has been resolved. New Mexico officials have
not indicated to us that the dispute has been resolved.

Most state budget officials we surveyed reported that the fiscal relief
funds were placed in the General Fund, although others, such as
Massachusetts and New Mexico, created a new account specifically for these
funds. Some officials indicated that they dedicated funds for a specific
purpose, while others told us that they have used the funds as general
revenue. For example, state budget officials in Alabama indicated a
portion of the funds was allocated for children's services and education.
Maryland official reported some fiscal relief funds were dedicated for
state police expenditures and Louisiana officials designated funds for the
state's Minimum Foundation Program, a program that provides local fiscal
assistance to support K-12 education.

18 U.S. General Accounting Office, Federal Grants: Design Improvements
Could Help Federal Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.:
Dec. 18, 1996).

19 National Conference of State Legislatures, State Budget Gaps Shrink,
NCSL Survey Finds, http://www.ncsl.org/programs/press/2004/040428.htm
(Denver: April 28, 2004).

However, as we cited previously, budget decisions are typically based upon
total resources available to a government and once funds from different
sources are commingled for budgeting purposes, it is difficult to verify
the source of the dollars that fund an expenditure category or specific
expenditures. Of the states we contacted, only Washington budget officials
indicated they had allocated a portion of their fiscal relief funds
directly to localities for use at their own discretion. Budget officials
informed us that about $10 million of their $200 million was allocated to
some localities for unrestricted use.

Table 2 provides a brief summary of state budget officials' responses to
our questions

about the timing of fiscal relief funds.

Table 2: State Budget Timing

State State budget cycle and fiscal year

Legislative approval State fiscal year in which of the state fiscal year
relief funds were used 2004 budget

Annual Alabama October 1 - Sept. 30 September 2003 2003 and 2004 Annual
Colorado July 1 - June 30 April 2003 2004 and future Annual Illinois July
1 - June 30 May 2003 2004 Annual Louisiana July 1 - June 30 June 2003 2003
and 2004 Annual Maryland July 1 - June 30 April 2003 2003 and 2004 Annual
Massachusetts July 1 - June 30 June 2003 2004 and future Annual New Jersey
July 1 - June 30 July 2003 2003 and future Annual New Mexico July 1 - June
30 March 2003 2004 Annual New York April 1 -March 31 May 2003 2004
Biennial North Dakota July 1 - June 30 April 2003 Not budgeted yet
Biennial Ohio July 1 - June 30 June 2003 2003 and 2004 Biennial Washington
July 1 - June 30 June 2003 2004 and 2005

Source: National Association of State Budget Officials (for state budget
cycles and fiscal years) and

interviews with state budget officials.

Note: Massachusetts officials indicated the date the Governor approved the
budget.

Concluding Observations

The $10 billion provided to states by the Jobs and Growth Tax Relief
Reconciliation Act of 2003 can be assessed from two perspectives-whether
it provided fiscal stimulus that contributed to the nation's economic
recovery and whether it helped states address budgetary shortfalls. It is
too soon to fully assess the complete impacts of these payments. However,
several observations are in order.

o  	The first fiscal relief payments were distributed to states when the
economy was beginning to expand as measured by GDP growth. Consequently,
it is doubtful that these payments were ideally timed to achieve their
greatest possible economic stimulus.

o  	Employment growth lagged behind the economic recovery measured by GDP
and state income and sale tax receipts are closely linked to employment
levels. From the start of the recovery to receipt of the first fiscal
relief payment overall, nonfarm employment continued to decline and
therefore the fiscal relief payment likely helped resolve ongoing
budgetary problems.

From an economic perspective, the allocation of relief payments among the
states was less than optimal. The magnitude and timing of cyclical
downturns in the economy affect states unevenly. Further, due to
variations in their underlying fiscal capacities, states differ in their
ability to weather economic downturns. Ideally, countercyclical fiscal
assistance should take into account when and how severely states are
effected by a recession and their fiscal capacities. Failure to take these
differences in account reduces the effectiveness of such assistance in
terms of facilitating economic recovery or in moderating fiscal distress
at the state level.

Even if countercyclical assistance was well timed and targeted, its
provision could have adverse consequences for how states manage their
finances. Prior to the recent recession many states put away reserves
which they were able to draw upon in order to help meet revenue
shortfalls. However, several states put away little or no reserves. If
states now believe that in response to any future recession the federal
government will again provide unrestricted fiscal assistance, they could
be less apt to fund budgetary reserves.

Agency Comments

We provided segments of this draft report to the state agency officials we
interviewed and incorporated their comments in the report as appropriate.

Scope and Methodology

We used findings from our and other reports on unrestricted fiscal aid to
describe the known potential impacts of such funds on the fiscal behavior
of states. We also obtained data on the distribution of fiscal relief
funds from the Department of the Treasury and compared this information to
the selected indicators of state fiscal circumstances. We identified these
indicators based on our and other reports on grant design.

Our selection of 12 states for this report was based in part on the
indicators for fiscal capacity and impact of the recession, as well as
some consideration of state population, geography, and fiscal relief
minimums. However, this selection of states is not meant to be
representative of the entire population and may not be

extrapolated to all the states. We discussed the use of fiscal relief
funds with senior budget officials from the following state offices:

o  Alabama Executive Budget Office

o  	Colorado Joint Budget Committee and the Office of State Planning and
Budgeting

o  Illinois Governor's Office of Management and Budget

o  Louisiana Office of Planning and Budget

o  Maryland Department of Budget and Management

o  Massachusetts Executive Office for Administration and Finance

o  	New Jersey Office of Legislative Services and the Office of Management
and Budget

o  	New Mexico Legislative Finance Committee and the Department of Finance
and Administration, Budget Division

o  New York State Division of the Budget

o  North Dakota Office of Management and Budget

o  	Ohio Office of Budget and Management and the Legislative Service
Commission

o  Washington Office of Financial Management, Budget Division

We conducted our review from February to April 2004 in accordance with
generally accepted government auditing standards.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. At that time, we will send copies of this report to the
Chairmen and Ranking Minority Members of the Senate Committee on Finance,
House Committee on the Budget, and House Ways and Means Committee. We will
also make copies available to appropriate congressional committees and to
other interested parties on request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-6737 ([email protected]) or Michael Springer at (202)
512-7035 ([email protected]). Jack Burriesci, Keith Slade, Robert
Dinkelmeyer, and Jerry Fastrup made key contributions to this report.

Sincerely yours,

Patricia A. Dalton Director, Strategic Issues

Enclosures

Enclosure 1

Table 4: Percentage change in Nonfarm Employment, March 2001 through
November 2001.

           State Percentage change        State             Percentage change 
                     Alabama -1.2%       Nevada                         -1.7% 
                       Alaska 1.0%       New Hampshire                  -1.7% 
                     Arizona -1.2%     New Jersey                        0.1% 
                    Arkansas -1.0%     New Mexico                        0.2% 
                  California -1.7%      New York                        -2.4% 
                    Colorado -2.4%      North Carolina                  -2.5% 
                 Connecticut -0.4%    North Dakota                      -0.4% 
                    Delaware -2.2%        Ohio                          -1.9% 
         District of Columbia 0.9%      Oklahoma                        -0.5% 
                     Florida -0.4%       Oregon                         -2.4% 
                     Georgia -2.0%        Pennsylvania                  -1.2% 
                      Hawaii -2.0%    Rhode Island                      -1.0% 
                       Idaho -1.3%      South Carolina                  -1.7% 
                    Illinois -2.0%        South Dakota                  -0.3% 
                     Indiana -1.9%      Tennessee                       -1.9% 
                        Iowa -1.5%        Texas                         -1.1% 
                      Kansas -0.7%        Utah                          -1.0% 
                    Kentucky -1.4%       Vermont                        -0.4% 
                   Louisiana -1.0%      Virginia                        -1.2% 
                       Maine -0.7%     Washington                       -2.0% 
                    Maryland -0.1%    West Virginia                     -0.5% 

       Massachusetts         -2.5%             Wisconsin                -1.8% 
         Michigan            -2.2%              Wyoming                  1.3% 
         Minnesota           -1.2%          American Samoa                n/a 
        Mississippi          -1.1%               Guam                     n/a 
         Missouri            -1.2%        N. Mariana Islands              n/a 
          Montana            -0.3%            Puerto Rico                 n/a 
         Nebraska            0.3%           Virgin Islands                n/a 
       United States         -1.5%                               

Source: GAO analysis of BLS data.

Note: BLS employment data are not available for the commonwealths and
territories. Percentage change in nonfarm employment was calculated for
the NBER identified period of the recession, March 2001 to November 2001.

Enclosure 2

Table 5: Gross State Product (GSP) Per Capita, 2001.

                     State   GSP per capita      State         GSP per capita 
                   Alabama     $27,319           Nevada               $39,645 
                    Alaska     $45,589         New Hampshire          $38,181 
                   Arizona     $31,319         New Jersey             $43,424 
                  Arkansas     $25,403         New Mexico             $30,470 
                California     $40,130          New York              $43,553 
                  Colorado     $40,400       North Carolina           $34,241 
               Connecticut     $48,792        North Dakota            $29,594 
                  Delaware     $51,696            Ohio                $32,917 
      District of Columbia     $112,679         Oklahoma              $27,199 
                   Florida     $30,752           Oregon               $35,089 
                   Georgia     $36,631        Pennsylvania            $33,252 
                    Hawaii     $36,078        Rhode Island            $35,236 
                     Idaho     $28,521       South Carolina           $28,715 
                  Illinois     $38,291        South Dakota            $32,127 
                   Indiana     $31,234         Tennessee              $32,080 

           Iowa            $31,077              Texas                 $36,633 
          Kansas           $32,434               Utah                 $31,529 
         Kentucky          $29,756             Vermont                $31,452 
        Louisiana          $33,273             Virginia               $38,577 
          Maine            $29,374            Washington              $37,826 
         Maryland          $36,818          West Virginia             $23,429 
      Massachusetts        $45,330            Wisconsin               $33,066 
         Michigan          $32,245             Wyoming                $41,350 
        Minnesota          $38,226          American Samoa                n/a 
       Mississippi         $23,597               Guam                     n/a 
         Missouri          $32,437        N. Mariana Islands              n/a 
         Montana           $25,089           Puerto Rico                  n/a 
         Nebraska          $33,289          Virgin Islands                n/a 
      United States        $35,492                              

Source: GAO analysis of Bureau of Economic Analysis (BEA) and Census data.

Note: BEA gross state product data are not available for the commonwealths
and territories.

(450299)

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