How the Stimulus Money Will Flow

Obama's plan relies heavily on states to dole out the dollars. That could slow and complicate some of the spending

Minutes after President Barack Obama signed the $787 billion stimulus package on Feb. 17, construction crews in rural central Missouri began replacing a 1,000-foot bridge in Tuscumbia. The project was timed to be the first in the nation to commence under the stimulus plan, as Missouri transportation officials sought to show their projects are indeed "shovel ready."

The speed and effectiveness of spending the money will determine how well the package provides jobs and promotes economic recovery. Yet it's far from clear how much of the stimulus money will be deployed with the same alacrity that Missouri displayed in beginning its new bridge. Because the stimulus bill doesn't have earmarks with specific instructions, it contains varying time frames for types of spending. So while long-established, formula-based programs such as Medicaid may be easily administered, it will be more complex to allocate other funding.

In fact, for all the debate in Washington, national leaders will be forced to rely on states to implement many of the main objectives of the stimulus package, both in terms of jump-starting economic activity and promoting long-term growth.

"A Niagara Falls of Money"

"There's no one model for how and when money goes from bill and into the economy," says Sarah Binder, a senior fellow of the Brookings Institution and a professor at George Washington University. "A Niagara Falls of money will flow from Washington into the accounts of state highway commissioners, governors and legislatures, mayors and local school boards. States will play a critical role."

How much stimulus money will states oversee? The White House estimates that there is $144 billion in state and local relief in the package, but that figure doesn't include entitlement programs, infrastructure, energy projects, and other measures that states will ultimately have a role in administering. The Center for American Progress has created a state-by-state estimate of how much money each state will ultimately oversee; the chart represents 69% of the total cost of the stimulus package. According to the center's projections, Alaska will oversee $1.5 billion of spending, while California will oversee $64.72 billion.

One portion of the spending that's heavily dependent on state allocations is public works. That includes most of the $27.5 billion in highway spending, the $6 billion for clean water, the $18.1 billion for transit and railways, and the $4 billion for public housing upgrades and school and college construction projects. Each of these provisions has a different time scale.

For example, highway building funds, over which states have considerable leeway to select projects, must be deployed within 120 days or they are sent back to the federal government. Another part of the highway money, called the urban areas allocation, can be spent by 2010. Allen D. Biehler, Pennsylvania's secretary of transportation and president of the American Association of State Highway & Transportation Officials, says he is getting together a final list of his state's projects and aims to finalize it by mid-March. Biehler says the priority is for projects that will bring transportation infrastructure into a "state of good repair," as such work creates jobs most quickly. "We're planning feverishly," he says.

Other governors are still rolling out their plans for projects. Less than a day after the federal stimulus bill was signed into law, Maryland Governor Martin O'Malley outlined his state's plans for the first phase of $365 million in new transportation projects, which may generate more than 10,000 new jobs. O'Malley is planning on a $3 million renovation of the BWI Rail Station in Hanover, Md., new hybrid buses, and improvements to the Port of Baltimore. In terms of highways, the state wants to emphasize repair and preservation rather than new projects.

Some state-administered programs, such as unemployment and food stamp benefits and Medicare, follow clear-cut formulas for allocation. A $55 billion category known as state stabilization funds will be distributed based on the share of the total U.S. population as well as the state's school-age population. Most of that will go for health care, K-12 education, higher education, public safety, and transportation.

Feeding Frenzy

Certain parts of the stimulus plan will be subject to state legislative action, which could slow spending as constituents and lawmakers wrestle over which projects are priorities and deserve immediate funding.

"The role of states is not adequately spelled out in the bill itself, and the potential for conflict when picking projects is astronomical," says David J. Wright, a director of the Nelson A. Rockefeller Institute of Government, an arm of the State University of New York. Adds Nicholas Johnson, director of the State Fiscal Project at the Center on Budget & Policy Priorities: "There will be hearty debates about how to use the money."

Cash-strapped states are facing a feeding frenzy among their agencies. Take Michigan, which has been decimated by the collapse of the auto industry. On Feb. 18, Governor Jennifer Granholm offered a broad outline of her spending priorities for Michigan's share of the stimulus money. Her Web site includes a more than 1,200-page list submitted by state agencies, schools, universities, and other public entities that want to get funds. In all, the 16,000 projects total $59 billion; unfortunately, the Center for American Progress projects the state will oversee only $18.44 billion in funds. Granholm acknowledges that not all the projects will be funded.

The good news: Because states are in such dire straits, they'll probably waste little time spending the money, when possible. The Center on Budget & Policy Priorities estimates that the stimulus bill will cover only about 40% of states' budget shortfalls through 2011, which could lead to conflict as states try to allocate money. "Extreme need means the money may be spent quickly, but not necessarily wisely," says Binder.

Seeking Transparency

The Obama Administration claims that by disclosing the projects that get funded, the dollars spent, and the expected numbers of jobs created on a Web site,, it will bring accountability and transparency to stimulus spending. Peter Orszag, director of the President's Office of Management & Budget, sent a 62-page memo to federal department and agency heads on Feb. 18 outlining how to comply with the transparency and accountability provisions of the stimulus package.

States are due to begin reporting to federal agencies about their projects on July 10 and are expected to offer quarterly updates; agencies will channel the information to States must include the name of each project, a description, an estimate of the number of jobs for each project, and the name of who is in charge. Only the primary recipient of funds must account for where funds have gone; contractors and subcontractors will not be tracked by

The stakes are high for ensuring the funds are spent quickly and efficiently. That's because the state-administered projects are the ones that promise to stimulate the economy most, according to economists. According to (MCO), every dollar spent in general aid to states results in $1.36 of economic activity. Every dollar for infrastructure yields $1.59; for extending unemployment insurance, $1.64; and for temporarily increasing food stamps, $1.73. By comparison, each dollar cut from the corporate tax rate would yield 30¢ in economic activity, Moody's estimates, and a dollar spent on extending the alternative minimum tax patch—included in the final stimulus bill—yields 48¢.

Before it's here, it's on the Bloomberg Terminal.