Federal Assistance: Temporary State Fiscal Relief

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.