THURSDAY, JULY 1, 2010


KLMNO


States seek financial help as new fiscal year begins


Employees and programs will be cut to make up for deficits


by Michael A. Fletcher


State governments desperately need money. Congress is in no mood to spend it. And the reckon- ing will begin Thursday, when the new fiscal year will start for most states. Nothing less than the nation’s nascent economic recovery hangs in the balance. States say that if they do not find financial rescue they will have to cut services and workers. That would deliver a po- tentially crippling blow to the economy, which needs higher em- ployment levels to fatten wallets, promote spending, bolster tax revenue and reduce dependence on expensive social services. States face a combined deficit


of $89 billion in the fiscal year that begins Thursday, according to the National Conference of State Legislatures. And because every state but Vermont is re- quired to balance its budget, the only recourse is cutting employ- ees or vital programs, including education spending, medical ser- vices, programs for the disabled and elderly, and police and fire protection. All that cutting could mean the loss of 900,000 jobs — in the pub- lic sector and in private compa- nies that rely on state business, according to the Center on Budget and Policy Priorities, a liberal re- search group. President Obama has called for


$50 billion in aid for states, but concern about the federal deficit has made lawmakers wary about significant new spending. “We may be looking at a culture and lifestyle around this country that will start to remind people of the Depression, not a recession, if we cut through these budgets much more,” said New York Gov. David A. Paterson (D), who was among a small group of state chief executives who descended on Congress on Wednesday to make a last-ditch plea for federal help. Although the downturn has not hit the Washington region, with its relatively stable federal work- force, as hard as it has some parts of the country, Virginia and Mary- land have eliminated jobs and im- posed employee furloughs in the past year. Both states have pro- posed cuts to a wide range of pro- grams, including education and local government aid for the com- ing budget year — cuts that will have to go deeper without a new round of federal help. A bill that would funnel federal


money to states by helping them with a larger share of their Medic-


Counting on federal money . . . Thirty states are relying on federal aid in fiscal 2011 to help fund projected state spending, but only nine have contingency plans if Congress does not approve the money.


Federal aid projected in 2011 state budget


WA ID CA NV


$1.5 billion


CO NM TEXAS $900 million AK HI


*Contingency plans include eliminating some Medicaid eligibility categories, depleting reserves and transferring general fund money from local income tax reserves.


. . . and facing budget gaps


Many states, including 26 that are expecting federal money, project budget gaps in 2011. The top 10 budget-gap states:


Budget gap in fiscal 2011, in billions


California Illinois


New Jersey New York Minnesota Texas Arizona


Massachusetts Maryland Florida


11.0 9.0


4.8 4.6


3.0 2.8


2.3 2.2


aid costs has failed repeatedly in Congress, most recently last week. Cindy Mann, the federal direc- tor of Medicaid, said she was on the phone last week with the Mas- sachusetts health secretary when word came that the legislation had failed again in the Senate. “She just got what the budget looks like without the [higher fed- eral Medicaid match]. There’s go- ing to be a lot of sticker shock,” Mann said. “It’s going to wreak a lot of havoc on the states.” A recent Pew Research Center


survey found that most Amer- icans think that states should solve their budget crises without federal help. Paradoxically, how- ever, most respondents also said they oppose reductions that would have to be made for states to balance their budgets. Thirty states have already in- cluded a new round of federal money in their budgets, assuming that Congress was sure to approve


SOURCES: National Association of State Budget Officers, National Conference of State Legislatures


CRISTINA RIVERO/THE WASHINGTON POST


it given its past support and the fiscal chaos likely to ensue if the money is not forthcoming. But there is now serious doubt that the federal government will pro- vide new aid to extend a program in the stimulus bill that is sched- uled to expire at the end of De- cember. Only nine states that have budgeted the federal aid have contingency plans for what to do in its absence, according to a sur- vey by a state legislatures group. “The states are going to have to


go back and take some action,” said Brian Sigritz, director of state fiscal studies for the National As- sociation of State Budget Officers (NASBO). “There is a lot of con- cern about a cliff with stimulus funding and how fast it drops off in fiscal 2011.” The recession has sent state


revenue declining sharply for two consecutive years — the first time that has happened since state budget officials began tracking


$13.8 12.5 CHARLES DHARAPAK/ASSOCIATED PRESS


them in 1979. State general fund spending was down $74 billion — 11 percent — since peaking at $687 billion in 2008, according to a recent survey of states by NASBO and the National Gover- nors Association. Revenue was beginning to stabilize this year, but with the emergency federal money drying up, states are being forced to make draconian cuts that economists warn undermine the stimulus effort. “More and more economists are talking about a double-dip re- cession,” said Raymond C. Schep- pach, the NGA’s executive direc- tor. “These cuts could be the straw that breaks the back.” Beyond harming the larger economy, deep cuts by states would also jeopardize social ser- vices even as stubbornly high un- employment rates and other lag- ging effects of the downturn are fueling demand for the services. With Medicaid and education comprising the lion’s share of state budgets, the cuts are likely to hit key programs.


Since the recession began,


states have experienced sharp in- creases in their Medicaid rolls, which are projected to grow by 21 percent between 2009 and the next fiscal year,which begins July 1 for 46 states. Some states have responded by reducing some re- imbursement rates for health- care providers and curtailing some services, although they are prevented from limiting eligibili- ty by the new health-care law. In education, more than 100,000


teaching jobs could be on the chopping block. States pushed through $26 bil- lion in tax and fee increases last year. But, overall, lawmakers are reluctant to raise taxes, partic- ularly as the economies in so many states are listing, leaving governors little option but to make deep cuts. States have shed more than 200,000 jobs since the downturn hit in 2008. Some have cut pay- ments to Medicaid providers and trimmed prison spending. Ari- zona has sold assets, such as office buildings. Michigan created in- centives to urge teachers to take early retirement. California is among the states that raised tui- tion costs and slashed budgets at public colleges and universities, igniting protests. In Illinois, a state wracked by


fiscal problems even before the downturn, $5 billion in unpaid bills — which account for 18 per- cent of the budget — is being rolled forward into the new fiscal year. Alan Henry, a spokesman for the Illinois comptroller’s office, said some of the 200,000 unpaid bills date back as far as November. “We get thousands of calls a week from vendors,” Henry said. “Across the state, agencies are closing down or cutting back their workforces because they are not getting the money from the state. It is a mess.”


fletcherm@washpost.com


Staff writer Alec MacGillis contributed to this report.


Jobless aid stalls in Senate; home buyers get more time by Lori Montgomery The Senate failed once again


late Wednesday to advance a plan to restore jobless benefits for peo- ple out of work more than six months, leaving millions of un- employed workers in limbo until after the July 4 recess. The measure fell one vote shy of the 60 needed to end a Repub- lican filibuster. Sen. George V.Voi- novich (R-Ohio) said he was pre- pared to provide that vote, but that Democrats had rejected his request to pay for at least half of the $34 billion measure with un- spent funds from last year’s stim-


ulus package. “Democrats are more interest- ed in having this issue to dema- gogue for political gamesmanship than they are in simply passing the benefits extension,” Voin- ovich, who is retiring, said in a statement. “I came to the table with a fair compromise and the ball is in their court.” Democrats countered that the


9.7 percent jobless rate consti- tutes a continuing emergency that, under congressional budget rules, has traditionally been ad- dressed through deficit spending. “For those who question


whether this is an emergency sit- uation, they should talk to the Ne-


vadans who I hear from every day who rely on this assistance to put food on the table and pay the bills while they look for work,” Senate Majority Leader Harry M. Reid (D-Nev.) said. That argument won over at


least two Republicans: Sens. Olympia J. Snowe and Susan Col- lins of Maine voted for the stripped-down measure, which would have restored jobless ben- efits that expired June 2 and ex- tended the deadline for home buyers to claim a tax credit aimed at reviving the housing market until Sept. 30. After the overall bill failed, the Senate passed a sep- arate measure that sent the tax


credit to President Obama for his signature. At Snowe’s urging, Democrats


had jettisoned numerous other provisions from the jobless bill, including $16 billion for cash- strapped state governments. But other Republicans — as well as Sen. Ben Nelson (D-Neb.) —continued to insist that at least a portion of the jobless benefits be paid for, arguing that the nation can no longer afford to add to rec- ord budget deficits. When it be- came clear that the vote would fail, Reid switched sides for stra- tegic reasons, making the final vote 58 to 38. House leaders were planning to


take up the jobless bill Thursday and said they expect it to pass. But its failure in the Senate ensures that more than 2 million people will have their checks cut off be- fore Congress returns to Washing- ton. The Labor Department esti- mates that more than 1.2 million people already have been affected. States typically provide unem- ployment benefits for up to 26 weeks. Congress triggered emer- gency benefits in 2008 and expan- ded them in last year’s stimulus package. On June 2, the federal programs was providing more than 5 million people with up to 99 weeks of assistance. montgomeryl@washpost.com


FL AL GA MN SD MI IA IL


$737 million


KY NC SC PA MD


Contingency plan in place*


$


Highest federal aid amounts projected


$1.1 billion NY VT ME MASS


$689 million


$848 million


BRADLEY C. BOWER/ASSOCIATED PRESS


Mike Auer joins a protest in Harrisburg, Pa., of state budget cuts to programs for the disabled. Meanwhile, President Obama attends a town hall gathering in Racine, Wis., to talk about the economy.


President Obama’s overhaul of the health-care system has done little to improve the nation’s fiscal outlook, and his pledge to extend an array of tax cuts for the middle class would only make things worse, congressional budget ana- lysts said Wednesday. In its latest long-term forecast, the nonpartisan Congressional Budget Office predicted that the national debt, which has surged to nearly 60 percent of annual economic output in the wake of the recession, would continue ris- ing in the coming decades despite cost-containment measures in the health overhaul Obama signed this spring.


“Growth in spending on health- care programs remains the cen- tral fiscal challenge,” CBO Direc- tor Douglas W. Elmendorf said in a presentation to Obama’s biparti- san deficit commission. “In CBO’s judgment, the health-care legisla- tion enacted earlier this year made a dent in the problem, but did not substantially diminish that challenge.”


Although more starkly stated,


CBO’s position has not changed since the health-care legislation was approved. The new forecast simply incorporates CBO’s cost es- timates from that time, which predicted that the plan to expand coverage, raise taxes and cut Medicare spending would reduce deficits by about $140 billion over the next decade and by more than $1 trillion in the decade after. “Slowing the rate of health care cost growth is the single most im- portant action we can take to re- duce our long-term fiscal short- fall,” White House budget director Peter Orszag said in a statement. “The report confirms that the en- actment and successful imple- mentation of the Affordable Care Act is a key step toward a healthi- er fiscal future.”


But Republicans seized on the


report, calling it more evidence that the health-care act will fail to significantly restrain government health costs, one of the legisla- tion’s key missions. “This is not a game-changer,” said Rep. Jeb Hensarling (R-Tex.).


Although the health-care law, in the CBO’s view, didn’t help much, the fiscal picture would dim dramatically if Congress moved to short-circuit its cost- control measures while enacting tax policies Obama has proposed to benefit the middle class. Those policies include a permanent re- duction in the alternative mini- mum tax and a plan to extend tax cuts enacted in the Bush adminis- tration for families making less than $250,000 a year. The Bush cuts are set to expire this year. Under that scenario, which as- sumes overall taxation levels would remain stable relative to the size of the economy, the CBO said the national debt would soar to 87 percent of gross domestic product by 2020, exceed its his- torical peak of 109 percent by 2025 and hit 185 percent by 2035 — “uncharted territory,” Elmen- dorf said, that could include high- er interest rates, more foreign borrowing, less private invest- ment and lower income growth, if not a full-blown fiscal crisis. montgomeryl@washpost.com


Change in IRS rules could block rewards for whistleblowers


Advocates see move as another sign of agency’s antipathy


by David S. Hilzenrath


Congress has called on the In- ternal Revenue Service to pay re- wards to whistleblowers on the theory that they may be the agen- cy’s best hope for penetrating tax- evasion schemes, but a recent change in an IRS manual could in certain cases block those rewards. The change is another in a se- ries of discouraging signals to whistleblowers, some of whom have long complained that the IRS gives them a cold shoulder. “There’s apparently an institu- tional resistance to rewarding whistleblowers that will take some time to dissipate,” said Mi- chael A. Sullivan of the law firm Finch McCranie, who represents whistleblowers. “Counterproduc-


tive rules such as this one may be a result of that resistance,” he said.


When information from whis- tleblowers helps the IRS recover unpaid taxes, the informants are entitled to as much as 30 percent of the proceeds. However, the new manual explains that the tipster is out of luck if, instead of yielding a payment to the IRS, the tip stops a refund or reduces a credit. Sen. Charles E. Grassley (Iowa),


the ranking Republican on the Fi- nance Committee, recently called on the Treasury Department to delay implementation of the re- vised Internal Revenue Manual (IRM). “I have serious concerns that


the new IRM provisions will deter whistleblowers from filing claims,” Grassley said in a June 21 letter to Treasury Secretary Timo- thy F. Geithner, whose depart- ment includes the IRS. Grassley, who spearheaded a


2006 revision of the whistleblow- er law, wrote that “naysayers” at


Treasury and the IRS may be un- dermining it. The IRS would not answer questions about the revised man- ual. “The senior leadership of the Internal Revenue Service believes that the Whistleblower provisions are an important and valuable tax administration tool that can help to improve tax compliance,” IRS spokesman Frank Keith said in a two-sentence written response. “We are fully committed to using these provisions for the benefit of all taxpayers in this country who pay the taxes they owe.” The new manual appears to


conflict with a federal regulation that says rewards can be paid “if the information leads to the deni- al of a claim for refund that other- wise would have been paid.” The manual also says rewards cannot be paid based on criminal fines, but the federal whistleblow- er law, as described on a page of the IRS’s own Web site, says whis- tleblowers are eligible for rewards based on “penalties . . . and other


amounts collected as a result of any administrative or judicial ac- tion resulting from the informa- tion provided.” Allegations that IRS employees are hostile to whistleblowers are nothing new. In a statement to the Senate Finance Committee in 2004, an unnamed informant from a Wall Street bank said his dealings with the IRS were frus- trating and often unproductive as he tried to expose tax schemes costing the government at least $400 million annually. IRS em- ployees did not understand the fi- nancial intricacies and did not welcome his assistance, he said. Part of the problem was that auditors did not want to reopen audits that had been closed; an- other factor was that auditors seemed loyal to companies they audited from on-site offices and at which they might one day seek employment, the informant said. After leaving his position as


chief counsel of the IRS during the Bush administration, Donald


L. Korb publicly opposed the whistleblower program. “I believe that it is unseemly in this country to encourage people to turn in their neighbors and em- ployers to the IRS as contemplat- ed by this particular program,” Korb, now a lawyer in pri- vate practice, said in a Janu- ary interview with the pub- lication Tax Notes.


Whistle- Birkenfeld


blowers have helped the government


collect substantial sums. Former Swiss banker Bradley C. Birken- feld led the U.S. government to obtain a $780 million settlement with UBS, Switzerland’s largest bank. The bank admitted that it helped clients in the United States hide money from the IRS. Erika A. Kelton of the law firm Phillips & Cohen said one of her


clients who works on Wall Street blew the whistle on tax shelter schemes used by several dozen companies. Kelton said the infor- mation her client gave the IRS years ago has led to the recovery of more than $14 billion. So far, the client, whom she would not identify, has received “well less than 1


⁄4 of 1 percent” of


the amounts attributable to his information, Kelton said. The whistleblower office at the IRS sought to issue a higher reward in 2008, and an ad hoc review board at the IRS agreed, but a top IRS of- ficial overrode that decision, Kel- ton said. In his letter to Treasury, Grass-


ley demanded an explanation of the case, saying the decision to overrule the independent whis- tleblower office was “contrary to law.”


hilzenrath@washpost.com


Staff researcher Eddy Palanzo contributed to this report.


S


Economy & Business


A11


CBO says tax cuts dim deficit forecast Obama panel is told


health-care law makes small dent


by Lori Montgomery


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