By Amanda J. Crawford
Jan. 5 (Bloomberg) -- A U.S. judge dismissed a lawsuit asking the court to decide whether Arizona could carry out its medical-marijuana law without subjecting state workers to federal charges.
Arizona Governor Jan Brewer claimed the voter-approved measure contradicted federal law and put state employees, who are charged with approving medical-marijuana dispensaries, at risk of prosecution. Her administration refused to approve dispensary applications pending the outcome of the lawsuit.
In her ruling yesterday, U.S. District Judge Susan Bolton in Phoenix said the state failed to establish a “genuine threat of imminent prosecution.”Bolton gave the state 30 days to amend and refile the complaint. Brewer hasn't decided whether she will renew the case...
Last Updated (Saturday, 21 January 2012 16:27)
WASHINGTON — President Obama
opened the week by calling on Democrats to embrace his re-election campaign. He closed it by praising Republicans for forging a compromise to cut spending this year and avert a government shutdown.
The juxtaposition made clearer than ever the more centrist governing style Mr. Obama has adopted since his party’s big losses in November and his recapture-the-middle strategy for winning a second term.
But in agreeing Friday night to what he called the largest annual spending cut in the nation’s history, the president further decoupled himself from his party in Congress, exacerbating concerns among some Democrats about whether he is really one of them and is willing to spend political capital to defend their principles on bigger battles ahead.
The question of where Mr. Obama’s bottom line is on Democratic priorities will be that much more urgent to his party as House Republicans, energized by their success in resetting the terms of the debate in Washington, press an aggressive conservative agenda in the coming months that includes deeper spending cuts and a fundamental reshaping of the Medicare and Medicaid programs.
The president may be viewed as liberal by some of his conservative critics, but to the traditional base of theDemocratic Party he is often seen as not liberal enough. As details of the budget agreement came to light on Saturday, the first criticism came from the left, with RepresentativeJesse L. Jackson Jr., Democrat of Illinois, accusing the president of “keeping the government open on the backs of the poor and disenfranchised.”
Even before the battle over this year’s budget, many liberals were concerned that Mr. Obama’s sponsorship of a fiscal commission that recommended changes to Social Security, Medicare and Medicaid suggested a willingness on his part to go further than they would like in rethinking the social welfare system.
David Plouffe, a senior adviser to the president, dismissed the criticism and urged Democrats to “consume the details of this.”
“The easy thing to do is to go in your corner and throw political spitballs,” Mr. Plouffe said in an interview Saturday. “There are going to be plenty of times when you won’t be able to reach common ground and you have to be in pugilistic mode, but you can’t view any kind of agreement with the other side as weakness.”
The White House is hoping voters will view compromising and trying to reach consensus as signs of mature leadership in a partisan environment, not weakness — the attribute Republicans lawmakers and potential presidential candidates are most frequently trying to attach to Mr. Obama.
After Republicans found success casting Mr. Obama as a reflexive liberal intent on expanding the reach of government, the president has sought to reintroduce himself as a pragmatic leader more attuned to the political center than to the ideologies of left or right. He has talked about this brand of politics for years, but now his challenge is to employ it.
In his handling of the closing stages of the budget negotiations, he portrayed himself more as a mediator urging the two parties to do their jobs than as another Democrat at the table. As he did in December in agreeing to extend the Bush tax cuts in return for some economic stimulus measures, he proved willing to trade some of his party’s priorities in order to secure others.
Polls regularly suggest that the independent and moderate voters — particularly women — who abandoned Democrats in 2010 prefer compromise to partisan feuding, and in that sense Mr. Obama has an opportunity to win back an important segment of the coalition that sent him to the White House.
“I would not have made these cuts in better circumstances,” Mr. Obama said Saturday in his weekly radio and Internet address. “But we also prevented this important debate from being overtaken by politics and unrelated disagreements on social issues.”
The agreement the president reached with Speaker John A. Boehner and Senator Harry Reid, the majority leader, represented one of the most dramatic moments of his presidency and a sharp break from the historical parallel of the 1995 showdown between PresidentBill Clinton and Speaker Newt Gingrich. Unlike their predecessors, Mr. Obama and Mr. Boehner decided that the peril of allowing a government shutdown — and all its accompanying political and economic fallout — was too great not to agree on middle ground.
The announcement carried all the cornerstones of a campaign theme: Mr. Obama brings people together and rises above politics at a moment when Americans face all manner of challenges. Yet the elements of the deal also underscore the tensions alive in the Obama coalition.
The president’s advisers argued that the broad coalition of supporters who gave Mr. Obama 53 percent of the popular vote and 365 electoral votes in 2008 never completely matched up with the traditional Democratic base. Heading into his re-election campaign and big legislative battles centering on the 2012 budget and the need to raise the federal debt ceiling, he is now well positioned to appeal to the political center even as his allies make the case that the current Republican Party is so extreme that liberals will ultimately get behind him as the best alternative.
Mr. Obama not only helped avoid the first government shutdown in 15 years, but also pressured Republicans to remove provisions intended to restrict financing for Planned Parenthood and to limit environmental regulations. In doing so, he assumed the role of a level-headed referee, rising above the squabbling to take ownership of a solution rather than a problem.
“He’s the undisputed grownup in the group,” said Jim Jordan, a Democratic strategist who has managed Senate and presidential campaigns across the country. “Presidents almost always compare well against Congress.”
The president is not, however, the only figure who survived a test from within his own party last week and emerged stronger.
Mr. Boehner, who faced an even bigger challenge than Mr. Obama, held his fractious Republican contingent together as an intense feud raged among social conservatives, theTea Party movement and other elements of the party. But a fresh air of discipline coursed through the Republican conference, with few members speaking out against their speaker.
The budget showdown, which inched perilously close to an actual shutdown, drew attention to the ways the president’s leadership style had evolved from the early days when he often seemed deeply involved in legislative negotiations, focusing as much on details as on building a broad narrative case for his presidency. In this case, he increased his direct involvement in the negotiations in the final days, but for months let his advisers handle the details.
When an agreement was finally reached late Friday evening, Mr. Obama did not immediately rush to the cameras that had been waiting for hours. He did not proceed until Mr. Boehner had consulted Republican members, fearful that trumpeting the fragile deal from the White House could threaten it.
While Mr. Reid, Mr. Boehner and their allies traded incendiary charges throughout the final stages of the impasse — with each side racing to frame the debate — the president kept a distance. He prodded both sides in late-night appearances in the White House briefing room, never passing on the chance to seize the bully pulpit, but he did not publicly engage in the back-and-forth sniping that characterized the final days of the Congressional negotiations.
His message throughout the process was focused on the need to get results — an approach that seems to have induced some concern among Republicans that Mr. Obama has regained his political footing.
Karl Rove, the political strategist to President George W. Bush, reminded Republicans in his weekly newsletter of how Mr. Clinton benefited politically from the government shutdown on his watch, particularly from voters who perceived Mr. Clinton as a strong leader. He suggested that the same could happen to Mr. Obama.
“Republicans should be careful,” Mr. Rove said, “to not let him recover as he gears up for his 2012 re-election campaign.”
WASHINGTON — The five justices in the majority in Citizens United
, last year’s campaign finance blockbuster, appeared poised on Monday to strike down an Arizona law that provides matching funds to candidates who accept public financing.
Near the end of the argument, Justice Stephen G. Breyer, who dissented in Citizens United, asked whether the court should continue what he suggested was a harmful piecemeal approach to striking down aspects of complex campaign finance laws.
“It is better to say it’s all illegal than to subject these things to death by a thousand cuts, because we don’t know what will happen when we start tinkering with one provision rather than another,” Justice Breyer said in a frustrated tone.
The likely result in the Arizona case, though, will be an incremental step and the fifth decision from the Roberts court cutting back on the government’s ability to regulate campaign financing.
The candidates and groups challenging the law disclaimed a broader purpose and said they were not attacking public financing as such. They objected, they said, only to financing systems like that used in Arizona, ones that couple an initial grant of money with escalating matching funds based on spending from privately financed candidates and their supporters.
“What this case is about,” said William R. Maurer, a lawyer for the challengers, “is whether the government can turn my act of speaking into the vehicle by which my political opponents benefit with direct government subsidies.”
Justice Elena Kagan appeared unpersuaded. “There’s no restriction at all here,” she said. “It’s more speech all the way around.”
Justice Ruth Bader Ginsburg asked whether Arizona could give publicly financed candidates a lump sum at the outset and then take back anything left unspent. Mr. Maurer said that would be constitutional under the court’s precedents.
Justice Samuel A. Alito Jr. suggested that it would not be improper for states to make lump-sum grants based on spending in earlier races. Justice Kagan countered that the method actually used had the virtue of measurement over estimation.
The justices also debated the purpose of the law. In Citizens United, the majority said the government may restrict campaign speech to combat corruption or the appearance of corruption but not to level the playing field among competing voices.
Bradley S. Phillips, a lawyer for the state, said the Arizona system did indeed address potential corruption by encouraging candidates to accept public financing and so forgo the need to raise private money.
But Chief Justice John G. Roberts Jr. pointed to research he had conducted about the views of the commission that runs the Arizona system. “I checked the Citizens Clean Elections Commission Web site this morning,” the chief justice said, “and it says that this act was passed to, quote, ‘level the playing field’ when it comes to running for office. Why isn’t that clear evidence that it’s unconstitutional?”
A lawyer for the federal government, William M. Jay, said a statement on a Web site was not determinative of the purpose of a law enacted in 1998. The federal government supports the state in the two consolidated cases heard Monday, Arizona Free Enterprise Club v. Bennett, No. 10-238, and McComish v. Bennett, No. 10-239.
There has been one change in personnel on the Supreme Court since Citizens United: Justice Kagan replaced Justice John Paul Stevens, who wrote the dissent in the case. On Monday, Justice Kagan was a particularly active questioner and seemed inclined to uphold the Arizona law.
Indeed, all eight justices who asked questions seemed to hew to their earlier views about the constitutionality of campaign finance laws, suggesting a 5-to-4 decision to strike down the law. (Justice Clarence Thomas, as is his custom, said nothing.)
There were other reasons to think the Arizona law’s chances were poor.
Last year, in an unusual move, the court blocked enforcement of the law in the middle of an election. And in 2008, in a 5-to-4 decision in Davis v. Federal Election Commission, the five justices in the majority in Citizens United struck down a part of the McCain-Feingold campaign finance law in some ways similar to the Arizona law.
Citizens United itself was animated in part by the libertarian theory that more speech in election campaigns is better than less and that voters may be trusted to decide which ideas they considered most persuasive.
On Monday, Chief Justice Roberts said that persuading voters was not the only interest in play.
“Political scientists sometimes tell you that it’s not persuasion, but simply playing to your base, getting them more actively involved,” the chief justice said. “So it’s not the somewhat more academic view that people are going to sit down and just regard which one is persuasive.”
Last Updated (Saturday, 21 January 2012 16:50)
As Brad Williams walked the halls of the California state capitol in Sacramento on a recent afternoon, he spotted a small crowd of protesters battling state spending cuts. They wore shiny white buttons that said "We Love Jobs!" and argued that looming budget reductions will hurt the Golden State's working class.
Mr. Williams shook his head. "They're missing the real problem," he said.
The working class may be taking a beating from spending cuts used to close a cavernous deficit, Mr. Williams said, but the root of California's woes is its reliance on taxing the wealthy.
Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.
Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."
New York, New Jersey, Connecticut and Illinois—states that are the most heavily reliant on the taxes of the wealthy—are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.
Arriving at a time of greatly increased public spending, this reversal highlights the dependence of the states on the outsize incomes of the wealthy. The result for state finances and budgets has been extreme volatility.
In New York before the recession, the top 1% of earners, who made more than $580,000 a year, paid 41% of the state's income taxes in 2007, up from 25% in 1994, according to state tax data. The top 1% of taxpayers paid 40% or more of state income taxes in New Jersey and Connecticut. In Illinois, which has a flat income-tax rate of 5%, the top 15% paid more than half the state's income taxes.
This growing dependence on wealthy taxpayers is being driven by soaring salaries at the top of the income ladder and by the nation's progressive income taxes, which levy the highest rates on the highest taxable incomes. The top federal income-tax rate has fallen dramatically over the past century, from more than 90% during World War II to 35% today. But the top tax rate—which applies to joint filers reporting $379,000 in taxable income—is still twice as high as the rate for joint filers reporting income of $69,000 or less.
The future of federal income taxes on the wealthy remains in flux. The top tax rate is 35%, following the Congressional tax battle last year. But in 2013, the rate is scheduled to go back to 39.6% unless Congress takes further action.
State income taxes are generally less progressive than federal income taxes, and more than a half-dozen states have no income tax. Yet a number of states have recently hiked taxes on the top earners to raise revenue during the recession. New York, for instance, imposed a "millionaire's tax" in 2009 on those earning $500,000 or more, although the tax is expected to expire at the end of 2011. Connecticut's top income-tax rate has crept up to 6.5% from 4.5% in 2002, while Oregon raised the top tax rate to 11% from 9% for filers with income of more than $500,000.
As they've grown, the incomes of the wealthy have become more unstable. Between 2007 and 2008, the incomes of the top-earning 1% fell 16%, compared to a decline of 4% for U.S. earners as a whole, according to the IRS. Because today's highest salaries are usually linked to financial markets—through stock-based pay or investments—they are more prone to sudden shocks.
The income swings have created more extreme booms and busts for state governments. In New York, the top 1% of taxpayers contribute more to the state's year-to-year tax swings than all the other taxpayers combined, according to a study by the Rockefeller Institute of Government. In its January report downgrading New Jersey's credit rating, Standard & Poor's stated that New Jersey's wealth "translates into a high ability to pay taxes but might also contribute to potential revenue volatility."
State budget shortfalls have other causes, of course, from high unemployment and weak retail sales to falling real-estate values and the rising costs of health-care and pensions. State spending has expanded rapidly over the past decade. California's total spending grew from $99.2 billion in 2000-01 to a projected $136 billion in 2010-11, not including federal funds, according to the state Department of Finance. Though California's spending slipped by 15% during the recession, it has since returned to near prerecession levels.
Some states may get a lifeline this year from the financial markets. Starting late last year, California, New Jersey and others began seeing higher-than-expected income-tax revenues and capital-gains revenues, suggesting the start of the next boom cycle. Still, because many states based their spending plans on the assumption that the windfalls from the wealthy would return every year, they are now grappling with multibillion-dollar shortfalls.
A recent study by the Pew Center on the States and the Rockefeller Institute found that in 2009, states overestimated their revenues by more than $50 billion, due largely to the unexpected fall-off in personal-income taxes. Sales and corporate taxes have also fallen, but they account for a much smaller share of tax revenue in many states.
Tax experts say the problems at the state level could spread to Washington, as the highest earners gain a larger share of both national income and the tax burden. The top 1% paid 38% of federal income taxes in 2008, up from 25% in 1991, and they earned 20% of all national income in 2008, up from 13% in 1991, according to the Tax Foundation.
"These revenues have a narcotic effect on legislatures," said Greg Torres, president of MassINC, a nonpartisan think tank. "They become numb to the trend and think the revenue picture is improving, but they don't realize the money is ephemeral."
Kicking the addiction has proven difficult, since it's so fraught with partisan politics. Republicans advocate lowering taxes on the wealthy to broaden state tax bases and reduce volatility. Democrats oppose the move, saying a less progressive tax system would only add to growing income inequality.
In a blog post called "The Volatility Monster," California Democratic State Sen. Noreen Evans wrote that "the true response to solving the volatility problem is to make sure Californians are fully employed and decently paid. Preserving the state's progressive tax system is fundamental to combating the rising riches at the top and rising poverty at the bottom. Flattening our tax system would simply increase this already historic income inequality," she wrote.
U.S. Rep. Tom McClintock (R., Calif.) has for years advocated a flat tax in California to reduce volatility and keep high-earners from leaving the state. "California has one of the most steeply disproportionate income taxes in the nation," he said. "A flatter, broader tax rate would help stabilize the most volatile of California's revenues."
Rainy-day funds, which can help bail out governments during recessions, have also run into political opposition or proven too small to save state budgets. A study by the Center on Budget and Policy Priorities found that effective rainy day funds should be 15% of state operating expenditures—more than three times the state average before the crisis. Massachusetts, which saw a 75% drop in capital-gains collections during the recession, won plaudits from ratings firms and economists for creating a rainy-day fund in 2010 using future capital-gains revenues.
Economists and state budget chiefs say the best hedge is better planning. Budget staffers in New York, for instance, now spend more time studying Wall Street pay and bonuses to more accurately predict state revenues. The state's budget director avoids overly optimistic forecasts based on a previous year's strong growth.
"We're glad we have the revenue from the wealthy, and we want to encourage these people to stay and prosper," said Robert L. Megna, budget director for New York state. "But we have to recognize that because you have them, you'll have this big volatility."
The story of Mr. Williams, the former chief economist and forecaster for the California Legislative Analyst's Office, shows just how vulnerable states have become to the income shocks among the rich, and why reform has proven difficult.
In the mid-1990s, shortly after taking the job, Mr. Williams discovered he had a problem. Part of his job was to help state politicians plan their budgets and tax projections.
A lanky, 6-foot-4-inch 58-year-old, with piercing blue eyes and a fondness for cycling, Mr. Williams prided himself on his deep data dives. The Wall Street Journal named him California's most accurate forecaster in 1998 for his work the prior decade. He and his team placed a special focus on employment and age data and developed their own econometric models to make improvements.
Historically, California's tax revenues tracked the broader state economy. Yet in the mid-1990s, Mr. Williams noticed that they had started to diverge. Employment was barely growing while income-tax revenue was soaring.
"It was like we suddenly had two different economies," Mr. Williams said. "There was the California economy and then there were personal income taxes."
In all his years of forecasting, he had rarely encountered such a puzzle. He did some economic sleuthing and discovered that most of the growth was coming from a small group of high earners. The average incomes of the top 20% of Californian earners (households making $95,000 in 1998) jumped by an inflation-adjusted 75% between 1980 and 1998, while incomes for the rest of the state grew by less than 3% over the same period. Capital-gains realizations—largely stock sales—quadrupled between 1994 and 1999, to nearly $80 billion.
Mr. Williams reported his findings in early 2000, in a report called "California's Changing Income Distribution," which was widely circulated in the state capital. He wrote that state tax collections would be "subject to more volatility than in the past."
Mr. Williams wasn't the only one noticing the state's dependence on the wealthy. Economists and governors had for years lamented the state's high tax rates on the rich, and in 2009 a bipartisan commission set up by then Gov. Arnold Schwarzenegger recommended an across-the-board reduction in income-tax rates and a broader sales tax to reduce the state's dependence on the wealthy. The income-tax rate on Californians making more than $1 million a year is 10.3%, compared to less than 6% for those making under $26,600. Combined with the rising share of income going to the top, the state's progressive rates amplify the impact of the income gains or losses of the wealthy.
California's dependence on income taxes has also grown because of its shifting economy. Income taxes now account for more than half of its general revenue, up from about a third in 1981. Because the state's sales and use tax applies mainly to goods, rather than faster-growing services, it has declined in importance. The state's corporate tax has also shrunk relative to income taxes because of tax credits and other changes.
By the late 1990s, Mr. Williams realized that his job had changed. California's future was no longer tied to the broader economy, but to a small group of ultra-earners. To predict the state's revenue, he had to start forecasting the fortunes of the rich. That meant forecasting the performance of stocks—specifically, a handful of high-tech stocks.
He pored over SEC filings for Apple, Oracle and other California tech giants. He met with the financial advisers to the rich, asking them about the investment plans of their clients. He watched daily stock movements and stock sales reported by the state's tax collectors.
Working with the state's tax collectors, he did a geographic breakdown of capital gains. The vast majority were in Silicon Valley.
"We knew there was a bubble," he said, "We just didn't know when it would fall, or by how much."
After the dot-com bust, the state's revenues from capital gains fell by more than two-thirds, to $5 billion in 2003 from $17 billion in 2001, while personal-income taxes fell 15% over the same period. The recession created a mirror image of the boom, with the wealthy leading the crash and dragging tax revenues down with them. By 2002, California had a budget shortfall of more than $20 billion.
The deficit lingered for years, but its lessons seemed to be quickly forgotten in the state capital. By 2005, California was enjoying another surge in spending fed by the incomes of the wealthy.
Mr. Williams started warning of another government crisis. In 2005, he released a report stating that the state's tax revenues could vary by as much as $6 billion in a single year, and that such swings were "more likely than not." He recommended several potential reforms, including flatter income-tax rates, "income averaging," which allows the wealthy to spread their tax payments for unusual windfalls over a longer period of time, and a rainy-day fund.
His proposals failed to gain any traction with the legislature. Many Democrats refused to consider tax hikes on the middle class and lower rates for the rich. In 2009, voters rejected a proposed spending cap, which among other things, would have helped to create a rainy-day fund.
One of the leading advocates for such a fund is Roger Niello, a former Republican assemblyman who has long been among the top 1% of state earners. He and his family own a chain of luxury car dealerships, and during the recession, his income fell by more than half because of the decline of auto sales. Though he's still "fine financially," he said, his personal experience taught him that "people in this income group have the most variable incomes."
Darrell Steinberg, the Democratic leader of the state senate, agrees that the dependence on the wealthy is "one of our most fundamental problems." Yet he concedes that his own spending priorities—including a large expansion of mental-health programs funded by a millionaire's tax—have added to the current mismatch between revenues and spending.
"I have no regrets given the number of people we've helped," he said. "But I guess you could say I did my part with spending."
As time went by, Mr. Williams became increasingly frustrated. To do his job properly, he had to predict the stock market. "And that's impossible," he said. He also felt that all of his research and warnings fell on deaf ears. In 2007, he decided to retire, and he now he works for a consulting firm.
"I was a broken record," he said. "I just kept saying the same thing over and over. And with my job, there was no real pleasure in being right."
The state budget squeeze is fast becoming a city budget squeeze, as struggling states around the nation plan deep cuts in aid to cities and local governments that will almost certainly result in more service cuts, layoffs and local tax increases.
The cuts are widespread. Ohio plans to slash aid to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor, John R. Kasich. Nebraska passed a law this month eliminating direct state aid to Omaha and other municipalities. The governors of Wisconsin and Michigan have called for sending less money to Milwaukee, Detroit and other local governments.
And it is not only Republicans who are cutting aid to cities: Gov. Andrew M. Cuomo of New York, a Democrat, decided not to restore $302 million in aid to New York City that was cut last year, while Gov. Deval Patrick of Massachusetts, another Democrat, has called for cutting local aid to Boston and other cities by some $65 million.
Some mayors said the proposed cuts could force them to raise local property taxes, even as many homeowners complain that they are already overtaxed. Many are combing through their budgets, looking to wring out more savings where they can. Libraries may close. Garbage collection could be curtailed. Potholes might linger a bit longer. Some warned that they could be forced to lay off more city workers, including police officers and firefighters.
For cities like Cleveland, the proposed cuts in state aid mean that the light at the end of the budgetary tunnel is that much farther off.
“We weathered the storm pretty good when other cities were having huge layoffs, and eliminating or reducing services,” Mayor Frank G. Jackson of Cleveland said in an interview. “But the impact of this will force us into that mode.”
Mr. Jackson said the city had anticipated a reduction in state aid, estimating a 20 percent dip in its most recent budget. But Governor Kasich’s budget proposal would go even deeper: it calls for cutting aid to local governments by a quarter next year, and in half the year after that.
For Cleveland, Mr. Jackson said, that would translate into deficits of $16 million next year and $24 million, or 5 percent of the city’s operating budget, the following year. Having spent down the city’s reserves to get through the recession, and used up several one-time deals to balance its budgets, Cleveland will have to come up with more money or savings elsewhere.
Other cities in Ohio are struggling as well. In Akron, Mayor Donald L. Plusquellic said the cuts would erode the third-largest source of revenue for the city’s general fund. “I fear that, as a result of this reduction, Akron will have no choice but to once again look at layoffs in the biggest part of our budget: police and fire salaries,” he said in a statement.
The reductions in state aid, along with falling property tax revenues that are finally catching up with lower home values, are major sources of fiscal stress for many cities. Ben S. Bernanke, the Federal Reserve chairman, said in a speech this month that “many localities have been hard hit by reductions in state aid, which in 2008 accounted for about 30 percent of local revenues.” And Moody’s Investors Service, the ratings agency, said in a report last week that many states “are increasingly pushing down their problems to their local governments.” The Moody’s report warned that this would be “the toughest year for local governments since the economic downturn began.”
The cuts are a vivid illustration of a fact of fiscal life: budgetary pain flows downhill. Although state tax collections are finally improving again after the longest and deepest decline on record, they remain well below their prerecession levels. Stimulus money from Washington, which helped keep many states afloat over the last two years, is drying up. So states facing large deficits are proposing cuts in local aid. Ohio’s deficit is projected to be $8 billion over the course of its two-year budget — hence Governor Kasich’s proposed cuts.
Nebraska did not just reduce local aid, it eliminated it. Much less money was at stake — the law is estimated to save the state $22 million a year — but cities are nonetheless worried about the effects of the cuts. “This year, instead of cutting us all a certain percent, they went after the state aid totally, all 100 percent of it,” said Chris Beutler, the mayor of Lincoln. Mr. Beutler said that the cut would cost the city $1.8 million a year and force it to raise property taxes or cut services.
Direct aid represents only a fraction of the money flowing from states to local governments. When Mayor Michael R. Bloomberg of New York went to Albany last month, he said that by his count the budget Mr. Cuomo had proposed would reduce aid to the city by $2.1 billion, of which only around $300 million was in the form of direct municipal aid. The rest included a reduction of $1.4 billion to the city’s public schools, which in New York City are under the control of the mayor, and $380 million in cuts and cost shifts in social services. Mr. Bloomberg warned that the city would be forced to lay off more workers if the cuts went through.
Chris Hoene, the director of research for the National League of Cities, said that many states eliminated direct aid to cities — used to keep property taxes low, ease disparities among localities and help pay for general government services — after past recessions. Now, he said, most of the coming state cuts will be in the form of cuts to specific programs. Cuts to child health care, mental health programs, libraries or transportation will all have an impact on cities. On top of that, many states also have complex revenue-sharing programs with local governments, and a number of them are proposing to keep more of the money for themselves.
Mr. Hoene said the coming cuts were “a big, scary question mark” hanging over local governments. “Cities have made their estimates, and made cuts based on revenue projections,” he said. “The factor that they can’t control, and that’s concerning for them, is what’s going to happen in the deliberations in state legislatures over the next three months.”
Local aid cuts can be like squeezing a balloon: states reduce their spending and hold down their taxes, but cities can be forced to increase their spending and raise their taxes. That is one argument being made in Minnesota, where a new Democratic governor, Mark Dayton, has been fighting cuts to local aid proposed by Republican lawmakers. The governor said aid to Minnesota’s cities had dropped by 24 percent since 2003 — and that two-thirds of the cuts were passed on to local residents in the form of higher property taxes.
Many governors say they plan to give cities and local governments tools to balance their budgets, some by reducing costly state mandates, some by weakening union protections in their states, some by encouraging cities to consolidate duplicative services. Gov. Rick Snyder of Michigan, a Republican, is cutting aid to cities, villages and towns for a net savings of $92 million. But he said he would also make $200 million available to cities and towns that “adopt best practices.” Detroit and other hard-hit cities are worried about the proposal, though.
“No city in the state has taken such an aggressive approach to such serious structural problems as Detroit,” Mayor Dave Bing of Detroit said of the proposal in a recent speech. “Yet no city would be hit harder than us. It threatens the concrete but fragile gains we have made, and we simply cannot afford it.”
DES MOINES, Iowa—Mike Huckabee rode to victory in this state's Republican caucuses three years ago on the shoulders of people like Vicki Crawford.
Over several months, Ms. Crawford devoted hundreds of hours to working phone banks, passing out fliers and signing up supporters for Mr. Huckabee's presidential campaign. So did her husband and her two homeschooled daughters.
"It was like one big civics project," Ms. Crawford said.
Iowa homeschoolers tend to be religious conservatives whose social beliefs dovetail with those of the Republican Party. With Mr. Huckabee's 2012 intentions still unknown, other likely GOP presidential contenders are racing to sew up support from homeschoolers, around 1,000 of whom packed the state capitol Wednesday for an annual day of lobbying and speeches.
Three potential 2012 hopefuls—Minnesota Rep. Michele Bachmann, Texas Rep. Ron Paul and former corporate CEO Herman Cain—flew in to address the crowd.
Ms. Bachmann, already a favorite among many tea-party groups, brings to Iowa some clear advantages in appealing to the state's homeschool crowd.
An Iowa native, Ms. Bachmann taught her two oldest children at home. But the number of foster children she took in—23, all told—later made homeschooling impossible, she said. She was a defender of at-home schooling during her years as a state senator.
"She's just a natural, easy fit," said Justin LaVan, a Des Moines lawyer and political operative for the Network of Iowa Christian Home Educators, which hosted the day's rally.
Ms. Bachmann has already won support from several prominent local Republican politicians, including Rep. Steve King and state Sen. Kent Sorenson, a rising star in the party and one of seven homeschoolers now serving in the Iowa legislature.
Speaking to a crowd on the capitol steps, Ms. Bachmann told of how she was a seventh-generation Iowan whose ancestors felled trees for farmland in the 1850s.
In an interview, Ms. Bachmann said the homeschoolers "are a very important constituency, and an important part of Iowa politics."
The state's homeschoolers are estimated to number around 9,500 families, with the number growing briskly. Alongside Iowa's large evangelical community, homeschoolers helped propel Mr. Huckabee, a former governor of Arkansas, to a come-from-behind victory in the 2008 caucus. He beat the second-place finisher by a substantial nine percentage points.
GOP activists say the homeschoolers showed their muscle less on caucus day than in the weeks and months before, when volunteers like Ms. Crawford offered an organizational boost for Mr. Huckabee.
The community is well organized, having tussled with the state government for years over educational regulations. Parents also don't hesitate to turn campaigning into a lesson plan.
"We literally used it as our government and politics class," said Ms. Crawford, whose oldest daughter, Allison, phoned voters on behalf of the Huckabee campaign.
The 2012 GOP field looks set to be more crowded with candidates seeking the social-conservative mantle than in 2008. Four years ago, Mr. Huckabee, a former pastor, had that arena pretty much to himself. This time, the result could be that the socially conservative vote divides among multiple candidates, potentially offering an opening to more centrist contenders.
Former Minnesota Gov. Tim Pawlenty, who launched the early stages of an official 2012 campaign this week, is now aggressively hiring staff here and clearly intends to make a strong play for social conservatives and homeschoolers. The same goes for former Pennsylvania Sen. Rick Santorum.
Mr. LaVan said he and his organization had sat down in recent months with representatives from nearly all the potential 2012 Republican campaigns.
As one of the state's most prominent homeschoolers, Mr. Sorenson said he had taken calls from all the potential candidates, with the exception of former Alaska Gov. Sarah Palin.
"The political world has really woken up to the importance of this constituency," Mr. Sorenson said.
The crowds who streamed through the capitol hallways Wednesday included families from all over the state.
One student, 18-year-old Sophie LaFleur, came with her mother and five of her siblings, as they have for the past three years. "We think homeschooling is important, and we're willing to stand up for it," she said, adding that her family campaigned last time for Mr. Huckabee but was trying to figure out whom to support in 2012.