Obama a change in direction: lawmakers hope the new president will ride in tandem with the states.

Author:Fehr, Stephen C.
Position:Barack Obama - Cover story
 
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Barack Obama takes over the presidency Jan. 20 with a promise to help state governments aching from a recession that analysts say could last into 2010.

For states, the test for Obama is twofold: How quickly can he turn around the economy? And will he strengthen the relationship between the federal government and the states that has been under stress for more than a decade?

Even before the Wall Street crisis hit in September, states already had been battered by falling home values and high energy prices that reduced tax revenue alter years of steady growth. Then came the financial meltdown, which tightened credit, raised borrowing costs, slashed the value of pension funds, increased the jobless rate and slowed consumer spending.

Faced with multi-billion-dollar budget shortfalls, legislatures from California to New York will have no choice but to consider some combination of spending cuts, service reductions, tax and fee increases and borrowing to cover the gap. Nearly every state is affected to some degree; even energy-rich states such as Alaska that initially were immune are now reporting declines in revenue.

On the campaign trail, candidate Obama evoked the eloquence and passion of John F. Kennedy. As president, he will enter office more like Bill Clinton in 1993, who pledged the day after he was elected "to focus like a laser beam on this economy."

Obama begins his administration much the way Clinton did. He is inheriting a huge federal deficit and faces an urgent need to create jobs to help pull the country out of a recession. Meanwhile, states are seeking help to reduce Medicaid costs and hoping for more money to repair aging roads, bridges and rails.

"The biggest challenge facing the next president clearly is the bad economy and the meltdown of leading financial institutions," said Darrell West, director of governance studies at the Brookings Institution in Washington, D.C. "That will take a lot of money to address, and require the new president to delay implementation of some of his own initiatives."

NEW STIMULUS PACKAGE

Obama is calling on Congress to pass a new economic stimulus package that would include direct aid to straggling state and local governments and a job-creating, short-term plan to help states build and fix highways, roads, bridges, airports and rail systems. Without help from Washington, D.C., Obama said after the election, states might have to cut more jobs and raise taxes.

"The idea of deeper cuts is almost unimaginable," says California Speaker Karen Bass.

"We have already cut more than $12 billion, and we will do our part to raise revenue in California. But it would be helpful to get assistance from the federal government."

In an unprecedented meeting between governors and a president-elect, Obama on Dec. 2 hosted 48 current and former governors at Congress Hall, adjacent to historic Independence Hall in Philadelphia. The governors asked Obama for an unspecified amount of money to cover rising costs in Medicaid, the federal-state program that insures 59 million low-income Americans. They also have told the president-elect the states have about $136 billion in...

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