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California state budget cuts could jeopardize federal aid

WASHINGTON -- As California Gov. Arnold Schwarzenegger tries to plug a budget hole that could swell to more than $21 billion by next week, he's quickly discovering a universal truth: Uncle Sam controls the strings.

The Republican governor and state officials find themselves unable to cut spending as deeply as they'd like in some areas because of the potential loss of federal funds. Schwarzenegger wants to save $750 million by rolling back the state's Medi-Cal program, tightening eligibility and reducing benefits.

It won't necessarily be easy.

To get his way, the governor needs special permission from the federal government, which pays the lion's share of the costs. It's an example of the many restrictions that Congress ties to it programs, making it more difficult for states to act on their own when times get tough.

While "maintenance of effort" payments by states have been required for years in some federal-state programs such as Medi-Cal, the web of strings has grown with the recent infusion of federal stimulus dollars.

State officials around the nation often complain about interference from Washington, but the architects of the federal programs say restrictions are necessary to maintain minimum standards and to spend money as Congress intends.

"The federal government wouldn't want to give a state a billion dollars for healthcare and then find out they spent it on highways," said Brian Riedl, senior federal budget analyst with the Washington-based Heritage Foundation. "They have to provide some rules."

On average, Riedl said, the federal government pays 57 percent of all Medicaid costs. And he noted that states have an option if they don't want to put up with Washington's restrictions.

"Nobody's forcing states to participate in these programs," Riedl said. "If they don't like federal rules, they can simply opt out. ... If you don't like the rules, don't take the money. What states generally want is all of the money with none of the strings."

In California, according to one estimate, only $38 billion of the state's $92 billion general fund -- roughly 41 percent -- can be targeted for cuts because of a combination of federal strings and constitutional protections.

State officials learned how difficult it can be to make cuts just last week, when the Obama administration accused the state of running afoul of stimulus rules and threatened to withhold nearly $7 billion in federal aid.

The administration told the state it must scrap its plan to reduce the state's contribution for home-healthcare workers from $12.10 to $10.10 per hour. The home-healthcare workers are members of the Service Employees International Union, which endorsed Obama's election. And many Republicans say the administration intervened to benefit its political allies.

"I'm upset about it, but that's what you would expect the Obama administration to do, is screw the taxpayers and reward the unions," said Republican Rep. Tom McClintock of California's 4th District. "That's been a pretty clear pattern since Day One." But he had harsh words for state officials as well, saying "there's never been a state as fiscally irresponsible as California."

Republican Rep. Dan Lungren of Gold River was equally irked: "I mean, this is crazy. We've got a huge budget problem in California." But he said the case makes a broader point: "Once the federal government starts calling the tune, you gotta dance to it."

Addressing a roundtable discussion in San Jose earlier this week, Schwarzenegger called the dispute with the Obama administration "an additional challenge." The governor said the state was accused of violating a "maintenance of effort" clause that prohibited the cuts, but he said the reductions were negotiated in mid-January, even before Obama was sworn in.

"We of course didn't violate anything," Schwarzenegger said. "Our budget was done way before and we made the cuts way before. ... So we are disputing that and I will always fight for every dollar that we can get for the state of California, no matter what. And so I think we will clear this problem and I think we will resolve it within a short period of time."

Asked if he could legally make his proposed cuts without violating maintenance-of-efforts provisions, Schwarzenegger noted that the state had been successful in getting waivers approved in the past.

"We will try," he said. "As I have said many times, that we have a good relationship with the administration and we will go back and explain to them why this is very important for us to work together on that. And we think that it is possible, yes."

State officials say they're doing the tedious and time-consuming work of sorting through all of the rules and regulations for more than 300 pots of money included in the massive stimulus bill, which was approved by Congress in February. It's expected to send nearly $50 billion to the state, but most of the money is targeted for special programs, such as transportation and healthcare, and cannot be used to balance the general fund.

While Schwarzenegger is proposing big cuts in education, the state is planning to keep spending at 2006 levels, eliminating the need for a waiver. To satisfy the federal government, the state must also maintain minimum funding standards for programs involving transportation, welfare, AIDS/HIV treatment and substance-abuse treatment, among others.

Making cuts to the Medi-Cal program could be especially tricky. State officials say that while some waivers can be approved by Obama's Health and Human Services Department, changing eligibility rules would require an act of Congress because those guidelines were specifically included in the stimulus bill.

Paul Weinstein, a senior fellow at Johns Hopkins University and the Democratic Leadership Council, said Congress attaches strings to its programs just as the state attaches strings to its programs for cities and counties and other local units of government.

"They have a series of goals they want met. ... There's nothing wrong with the federal government attaching strings to money if there's things that are in the national interest," he said. "I wish we were in a better fiscal position at the federal level to help the states more. Unfortunately, we're not."

Weinstein said states usually target cuts at items that do not require federal approval, such as administrative costs, supplies, vehicles and office space. And of course, states are free to lay off workers, as Schwarzenegger is proposing.

"They're another easy target," said Weinstein.

Riedl said no waivers would be needed if states financed programs on their own, eliminating the federal government as a middleman. And he said states such as California that seek waivers "are scapegoating Washington" for their inability to manage their budgets.

"It's tough to be sympathetic for California when they've been increasing spending so fast themselves," Riedl said. "California has to take some responsibility for their own tax and spending decisions. ... States shouldn't be relying on Washington to finance all of their programs to begin with and then making demands that Washington not tie any strings to their handouts."