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54–998—PDF 2008

S. HRG. 110–1000

ECONOMIC AND FISCAL CONDITIONS

OF THE STATES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 26, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Kyl, Hon. Jon, a U.S. Senator from Arizona ......................................................... 1

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

WITNESS

Napolitano, Hon. Janet, Governor, State of Arizona ............................................ 3

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Grassley, Hon. Chuck:

Prepared statement with attachments ........................................................... 9

Kyl, Hon. Jon:

Opening statement ........................................................................................... 1

Napolitano, Hon. Janet:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 13

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 25

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ECONOMIC AND FISCAL CONDITIONS

OF THE STATES

TUESDAY, FEBRUARY 26, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:04 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Stabenow, Salazar, Snowe, and Kyl.

The CHAIRMAN. The hearing will come to order.

First, Governor, thank you very, very much for taking the time.

I know how busy schedules are. It is very difficult. You are so busy

as Governor of your State. A very strong thank you. Second, a big

apology because the Senate will begin a series of votes shortly,

which means that this is going to be a very efficient hearing, to get

right down to it. But thank you very much, again.

Senator Grassley is not here, but Senator Kyl is here. Senator

Kyl would probably like to make a statement here.

[The prepared statement of Senator Grassley appears in the appendix.]

OPENING STATEMENT OF HON. JON KYL,

A U.S. SENATOR FROM ARIZONA

Senator KYL. If I could just make a short statement to welcome

my Governor, Governor Janet Napolitano, to the Finance Committee here. We appreciate your being here. Senator Grassley

asked me to express that he would not be able to be here at the

very beginning of the hearing, but will try to come back. Now, in

view of these votes, I am not exactly sure how that is going to

work, but you know the drill here. He did want me to let you know

that he will get here for part of the hearing.

So, rather than risk taking up all of the time with us speaking

and to make sure you get your testimony in before we start the

votes, I am going to pass it with that. But again, I welcome you,

and thank you for being here, Governor.

The CHAIRMAN. Thank you. Thank you, Senator.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Justice Louis Brandeis wrote, ‘‘There must be

power in the States and the Nation to remold our economic practices and institutions to meet changing social and economic needs.

It is one of the happy incidents of the Federal system that a single

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courageous State may serve as a laboratory and try novel economic

experiments without risk to the rest of the country.’’

We meet today to examine the economic and fiscal conditions of

the States. We meet today to learn how different States are reacting to the economy. And we meet today to discuss whether our Nation should remold our economic policies to meet the changing economic needs of the States.

Today, the Nation’s economy is hurting. Last month, the U.S.

economy lost jobs for the first time in 41⁄2 years.

Some States have been hit especially hard. Michigan’s unemployment rate is 7.6 percent; Mississippi’s is 6.8; Alaska’s is 6.5 percent.

Economic conditions vary from State to State. With high oil

prices, States that pump oil are doing all right. With high prices

for many crops, many farming States are doing well. Mining and

farming have helped to keep the unemployment rate in my home

State of Montana at 3.6 percent.

A State’s economy affects the State’s budget. When the State’s

economy weakens, the State government’s revenues generally fall

off. As unemployment increases and incomes decline, more people

become eligible for programs like Medicaid.

Almost all States’ constitutions require them to balance their

budgets. During a time of economic weakness, States may have to

raise taxes or cut spending to balance their budgets. Unfortunately,

that is exactly the wrong policy for the economy.

State tax increases reduce the purchasing power of people in the

State. And State spending cuts lower the purchasing power of the

people who received the funds. Tax increases and spending cuts

can thus accelerate the economic decline.

At least 20 States now project deficits for the coming fiscal year. California alone expects a $14.5 billion deficit. Taken together,

these 20 States are projecting shortfalls that add up to more than

$35 billion. If these deficits lead to tax increases or spending cuts,

they could counteract some of the fiscal stimulus that we just enacted.

What can Congress do? For one thing, Congress could increase

the number of weeks that unemployed workers receive federally

funded unemployment benefits. The stimulus bill that this committee reported last month would have allowed for an additional 13

weeks of benefits for all States, and 13 extra weeks for benefits in

States with high unemployment. Unfortunately, that proposal did

not make it into the final bill. If unemployment increases, we could

revisit that proposal.

During the last economic downturn, Congress passed two other

measures that provided budgetary help to the States.

First, Congress increased the Federal matching rate for the Medicaid program for a little more than a year. Congress also provided

direct fiscal assistance to the States through a block grant, distributed on the basis of State populations. Many thought these two

measures worked pretty well. Should we consider using them

again?

The application of a Federal system also finds other areas where

the States and the Nation can work together to meet changing economic needs.

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Let me just tick off a few. Many States couple their tax codes to

those of the Federal Government. States and the Federal Government work together on Trade Adjustment Assistance. States and

the Federal Government work together on infrastructure. The Federal and State governments share responsibility for Medicaid, a

vital health care safety net.

The State Children’s Health Insurance Program is also funded

with a contribution with a combination of State and Federal dollars. The Temporary Assistance for Needy Families block grant

provides critical support for work. And the child support program

helps 17 million children. The Social Services Block Grant supports

programs that serve our Nation’s most vulnerable.

This year, the committee begins to work on comprehensive reforms to our Nation’s health care and our tax systems. So we have

many reasons to examine the economic and fiscal conditions of the

States. We have many things to learn about how different States

are reacting to the economy. We have much to discuss as we consider how the Nation and the States should mold our economic

policies to meet these changing economic times.

I would like to introduce our witness, Janet Napolitano, Governor of Arizona. Thank you again, Governor, for coming. Thanks

for taking the time. As you know, generally our witnesses speak

about 5 minutes, but full statements are included in the record.

This is going to be a bit different hearing this morning given our

time constraints.

So, why don’t you proceed?

STATEMENT OF HON. JANET NAPOLITANO,

GOVERNOR OF ARIZONA

Governor NAPOLITANO. Thank you, Mr. Chairman. Thank you for

inviting me. I’d like to especially thank Senator Kyl for being here.

We come from different political parties, but I think for both of us,

what is good for Arizona is what we are working toward jointly. So

I appreciate, Senator, that you are here.

I do have a complete statement and ask that it be in the record.

[The prepared statement of Governor Napolitano appears in the

appendix.]

Governor NAPOLITANO. I will speak swiftly and to the point because, even though I know you have a vote, this is a very important hearing and it is a very important message I have to send on

behalf of myself, and I think I can speak for many of the Nation’s

Governors. We have just been meeting in Washington the past couple of days. That is, the fiscal condition of the States is precarious

right now. Eighteen States currently are experiencing deficits of

upwards of $14, $15 billion. It seems to change by the hour.

In 2009, an additional 17 States will also be in deficit situations.

We are talking billions and billions of dollars that States have to

manage and balance their budgets with. As you know, and as you

remarked, Mr. Chairman, 49 of the 50 States require a balanced

budget every year. So, when the economy goes down, that is felt

immediately at the State level. I would give two basic rules for this

committee, for the Senate, and for the Congress. That is, as we

move through this economic downturn, as we manage our way

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through it as States and as a country, I would ask that the Congress, vis-a`-vis the States, do two things.

One is, first, take the Hippocratic oath and do no harm. The

plain fact of the matter is, the last stimulus package actually removed revenue bases from the States at a time when we were

struggling to manage our budgets.

The second is, pay your bills. There are things that are being

cost-shifted to the States as we speak, some of them proposed by

the administration, some of them having been done by statute,

some of them are statutes that have been on the books for years

and have never been funded. Nonetheless, they are obligations that

the States are having to undertake at a very difficult time.

So, first, the Hippocratic oath: do no more harm to the States

whenever you consider another stimulus package, and, second, pay

the bills that are outstanding.

Let me, if I might, I will give you a few quick lines or a few quick

things there. First, if there is to be a second stimulus package, and

there is some discussion that there will be, I would urge you to consider a State piece. That State piece could be inspired by what you

did a few years ago when we were in a similar situation.

It is something that the National Governors Association has endorsed, Republican and Democratic Governors of the Nation. It is

a $6-billion Medicaid FMAP piece and a $6-billion block grant

piece. I was a Governor in 2003 and that was very useful to balance the budgets and help us manage our way through and not

have to kick people or children off of health care, be able to manage

our way through an economic downturn.

Seven specific areas for Congress to consider as we move through

this, and we will have to move through it together. First, I believe

there should be a moratorium on any new Medicaid regulations.

The Medicaid regulations that are being proposed by the administration now violate the first rule: they do harm to the States. They

violate the Hippocratic oath.

Second, stop CMS’s August 2007 SCHIP Directive. It also violates the Hippocratic oath. Not only does it prevent States from

trying to put more children into health care, some States would actually, under those regulations, have to kick children out of health

care at a time when the economy is in a downturn. Not the right

thing to do.

Third, restore the 67-percent slashing of the Byrne/JAG program.

These are grants we use for local law enforcement. In many areas

of our States, they are the sole source of funding for cooperative efforts on drug task forces. We use them in Arizona for gang and

gang-related work. Those are very useful grants, and public safety

is something we should never sacrifice at any time, much less in

an economic downturn.

Fourth, fund the SCAAP program at the authorized level. This

is a particular passion of mine and something that Senator Kyl and

I have worked jointly on for several years. This is the statute that

says that States are to be reimbursed for the costs of incarcerating

illegal immigrants when they violate State law. We have never

been reimbursed at our level in Arizona.

In fact, I have regularly sent the Attorney General of the United

States a bill for our unreimbursed costs. I keep adding a late fee.

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It still does not get paid. That bill right now is over $400 million

for Arizona alone. When I look at our State budget and the millions

that we are trying to cobble together to pay to educate our citizenry

and to provide for Medicaid, that $400 million really sticks out like

a sore thumb. That falls under my second suggestion to the Congress, which is to pay the bills. Pay your bills.

Fifth, the REAL ID problem. REAL ID is an unfunded mandate.

I believe I can speak for the Governors of the country in our discussions over the weekend. Unless the Congress puts money in there

to fund the implementation costs, our enthusiasm for moving forward is disappearing rapidly, or has disappeared.

Next, restore the funding of the State Homeland Security Grant

Program. This is in line with Byrne/JAG and the others that I

mentioned.

Finally, if you are looking for a place where the States really

need some help and where our National security could use some assistance, it is in funding and replenishment of a National Guard.

The administration’s budget takes too long to replace the equipment and other resources that have been used by our Guard in

their deployments to Iraq and Afghanistan, and we need those

Guard resources. For example, in Arizona we use them in particular during wildfire season; other States use them during periods of flood, hurricane, tornado, whatever natural disaster may befall.

So, Mr. Chairman, that is as quick as I can make it. I have a

more extensive statement. But I hope it has been clear in the sense

of what we can do together and what we ask of the Congress, what

I ask of the Congress.

The CHAIRMAN. You bet. Thank you, Governor. We have about 12

minutes left before we have to run off and vote, so I am going to

be very brief in my questions, and maybe will let other Senators

ask theirs.

Governor, this is a very impressive list you have read off here.

I know it is difficult, but if you could just look at all the States generally, in addition to Arizona, in addition to what we did a couple

of years ago with FMAP and the block grant, you listed six or

seven others. If you could somewhat kind of prioritize, what really

is needed at this point? What does it really come down to?

Governor NAPOLITANO. If I had to say what the top priority is as

we manage our way through this, it would be on the health care

and the Medicaid side. That is where the States incur an immediate cost out of their budgets. That is where the enrollment goes

up as economic circumstances wane. Because of the formulas that

are used, there is already a mismatch between the income levels

that are used for judging when a State receives a Medicaid benefit

versus what the citizenry is actually receiving, so we already have

a disconnect. I would say that Medicaid would be my top priority.

The CHAIRMAN. But keep the moratorium. Do not allow CMS regulations to move forward.

Governor NAPOLITANO. That is right. Do no harm.

The CHAIRMAN. Do no harm. The same with the Children’s

Health Insurance Program.

Governor NAPOLITANO. Correct.

The CHAIRMAN. That bubbles up to the top, as you see it.

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Governor NAPOLITANO. Yes, Mr. Chairman.

The CHAIRMAN. Thank you.

I will now turn to Senator Kyl.

Senator KYL. Thank you, Mr. Chairman. I will just make a couple of points. I want the record to reflect that I voted against the

stimulus package. I thought it did do harm, including the harm

that the Governor just pointed out. I think it would be a mistake

for us to immediately consider a stimulus two, which is, I understand, an item of business that the Majority Leader intends to

bring up later this week. Among other things, the bankruptcy provisions of the stimulus two, with the cram-down provisions, will,

according to all estimates, increase interest rates for home mortgages.

Now, this is going to hit my State of Arizona, our State of Arizona, because of course we have a huge housing market. Because

of the number of people moving into our State and a need to make

that housing affordable, including with the mortgages, to increase

the mortgage interest rates at a time of economic downturn is exactly the wrong policy. So I hope that my colleagues will think

twice before considering another stimulus package which could do

additional harm to our economy. I appreciate the Governor’s pointing out that the first stimulus package did not help all that much.

Mr. Chairman, since we are now getting the 10-minute notice on

the vote, I will not pose any questions to the Governor here. But

again, thank you very much for being here, Governor.

Governor NAPOLITANO. Thank you, Senator.

The CHAIRMAN. Thank you.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman.

Welcome. It is good to see you, Governor. Just quickly, since Senator Kyl raised the Foreclosure Prevention Act which we will be

discussing later this week, I wonder if you might speak to how an

increase in the cap on Mortgage Revenue Bonds by $10 billion

would help States, or allowing community development block

grants to be used to purchase foreclosed properties. Those are two

of the major items that are in the housing legislation that Senator

Reid is bringing before the Senate later this week. I wonder if you

might speak to the need to help the States and communities as it

relates to foreclosures.

Governor NAPOLITANO. Yes. Mr. Chairman, Senator Stabenow,

one thing I would say is, do not take my remarks as suggesting

there should not be a second stimulus package. There will be. What

I am saying is, when there is, it needs to be constructed in such

a fashion that it does not deleteriously affect State budgets any

more.

With respect to the bill that this body will be considering later

this week, I have not had a chance to actually review it. I heard

about it for the first time yesterday afternoon. By the way, it would

be helpful, as we move through—it is good to have this dialogue

to talk about what really will work at the State level. My overall

view, however, is that the genesis of this economic downturn began

with housing.

So, if you address housing as a central part of a second stimulus,

for a State like mine which has really been impacted—our economy

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went from one that was one of the highest-performing in the country in terms of revenue growth and the like to one where we were

really struggling. So, if you address what started that and what is

the central part of it, housing, and getting credit back into the

housing market and housing moving again, that would seem to me

to be a logical place to look at for a second stimulus.

Senator STABENOW. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Salazar? We are being very efficient here.

Senator SALAZAR. We have to go. We cannot miss. Chairman

Baucus, thank you for holding this hearing. I have a statement I

will just include for the record.

[The prepared statement of Senator Salazar appears in the appendix.]

Senator SALAZAR. I want to make a personal comment, if I may,

with Governor Napolitano. She was Attorney General during the

time that I served as Attorney General for Colorado and did a masterful job there, including being the head of the Conference of

Western Attorneys General, and now is doing a great job for the

State of Arizona. I appreciate the seven points that you have raised

to this committee, as well as the two principles under which you

believe that we can function.

My one quick question is, your list of seven priorities, Governor

Napolitano. Are those the view of both Democratic and Republican

Governors or are these the views of Democratic Governors, or the

view of the Governor of Arizona?

Governor NAPOLITANO. They are my views overall. But in terms

of a second stimulus package, to considering having an FMAP feature with a block grant, that is an official position of the National

Governors Association, so that is all Governors. In addition, I believe you will be getting a communication from the National Governors Association in the next few days. We are in agreement on

the moratorium on further Medicaid regulations.

Senator SALAZAR. Thank you.

The CHAIRMAN. Thank you, Governor.

Since we have a little bit more time here and Senator Snowe is

about to arrive, could you explain a little bit more—here she comes

right here, Senator Snowe. I will let her speak right now. I was

going to ask you about bonding, but I am not going to do that. That

is, financing.

Go ahead, Senator.

Senator SNOWE. Thank you.

I would like to ask you, and I know you addressed this in your

written statement, regarding the proposed Medicaid regulations,

some of which are going to take effect on March 3. Can you discuss

the impact to your State? I know it is certainly going to have an

impact on mine, especially in the populations that it affects.

Governor NAPOLITANO. Yes, Senator Snowe, Mr. Chairman.

There is no State that those regulations do not harm. As I said in

my initial statement to the committee, I would like the Senate and

the Congress to adopt two rules as you move through this economic

downturn vis-a`-vis the States. One is, first, do no harm. Second,

pay the bills that we have. Pay your bills.

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But it would reduce funding even now, even while we are coping

with deficits. I will give you one concrete example. It would reduce

current funding for residency programs, graduate medical education in our State, $31 million this year alone. Well, that is how

we are getting physicians into the rural parts of America, and I believe it is probably something that is happening in your State as

well, so to cut back on those now under the guise of Medicaid regulations does not make a lot of sense. There are all sorts of impacts

on different populations and coverages as well.

Senator SNOWE. Thank you very much.

Thank you, Mr. Chairman.

The CHAIRMAN. All right. Governor, I have 3 minutes left to get

over and vote. My memory is, this is the shortest hearing we have

had. I deeply apologize that we do not have the ability to take advantage of all of your deep knowledge in your State of Arizona, and

also as a representative of the Governors. It is regrettable I did not

know about the vote schedule until this morning. It just popped up.

Thank you very, very much for taking the time.

Governor NAPOLITANO. Thank you, Mr. Chairman. I used to be

an appellate lawyer and a litigator. I am used to doing things in

15-minute increments, so it is all right. [Laughter.]

The CHAIRMAN. Thank you.

The hearing is adjourned.

[Whereupon, at 10:25 a.m., the hearing was concluded.]

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A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

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