NEW YORK - For at least 30 cash-strapped states counting on federal stimulus money, the news was a stunning blow: A deficit-weary Congress had rejected billions in additional aid, forcing lawmakers into a mad scramble to balance their budgets.
Now, with a new fiscal year just days away in most states, many governors are proposing to make up for the shortfall with tax increases, cuts in essential services and potential layoffs of thousands of public employees.
"I support restraining federal spending, but cutting the only funding designed to help states maintain the very safety-net programs Congress mandates us to preserve will have devastating consequences," California Gov. Arnold Schwarzenegger said in a letter to his state's congressional delegation.
California faces a whopping $19 billion deficit - more than 20 percent of the state's total budget - despite deep cuts that have already been made to many programs. Its new fiscal year begins Thursday, and a budget deal there is nowhere in sight.
Arizona has faced budget deficits for the past two years, and it's the same story for the state's new budget that begins Thursday. State analysts are projecting deficits that range from $368 million to $1.3 billion, even before the spending starts. The size of the deficit hinges on the outcome of two ballot measures in November and whether Congress approves another dose of stimulus dollars.
The federal stimulus program enacted last year is set to expire in December. Much of the money goes to states to provide unemployment insurance and to help offset cuts to education, health care and public safety brought on by the recession.
Congress was poised to extend some funding to states through June 2011, including $35.5 billion for unemployment benefits for the long-term jobless and $16 billion for Medicaid, the public health care program for the poor. But the measure died in the Senate earlier this month, blowing a hole in the states' budgets and bouncing thousands of unemployed workers off the rolls.
The stimulus money represents just a fraction of the help states typically receive from the federal government, but it's the kind of targeted relief states count on during a poor economy, when revenue is falling.
The news came as a shock to many state lawmakers, who until recently had been assured the money was virtually certain to come their way. Several governors planned to travel to Washington this week to make their case for the additional aid.
Without the extra money from Washington, states will be forced to divert cash from other programs to shore up Medicaid, which has swelled to a record enrollment during the economic downturn.
In Alabama, where the Legislature has already passed a $1.6 billion budget that included $197 million in additional Medicaid money, lawmakers warned of devastating consequences if the money is not restored.
Democratic state Sen. Roger Bedford warned of potential cuts to medical care for children or a reduction of nursing home beds for the elderly.
"I hope our senators look at how devastating it would be to our senior citizens and children not to get this funding," Bedford said.
The Legislature in Alabama and those in several other states have already adjourned for the year, but some will have to return to revise their budgets if the expected federal money does not materialize.
A few states that counted on additional stimulus money to balance their budgets drafted contingency plans in case the money did not come through.
In North Carolina, where lawmakers will vote on a budget that includes $525 million in additional stimulus money, a contingency plan was established to hold back a scheduled $139 million contribution to the state employee retirement account and to levy a 1 percent across-the-board spending cut that could result in numerous layoffs.
In Massachusetts, the loss of an estimated $687 million in federal funds forced budget negotiators to come up with two versions of the state budget - one that included the money and one that did not.
To help close the hole in the version of the budget without the extra federal dollars, lawmakers diverted nearly $200 million from the state's "rainy day" savings account and made a series of targeted cuts in other parts of the budget.
Some states, unwilling to count on the federal assistance, crafted budgets that did not depend on extra assistance from Washington at all.
"We assumed conservatively that there would not be a bonus check," Indiana Gov. Mitch Daniels told The Associated Press. "It would have never entered our mind to put funny money like that into the budget."
This article was publised in The Arizona Republic  on June 29th, 2010 and was written by Beth Fouhy.