Anxiety rises as stimulus dries up

Federal cuts may stall state recovery

By Casey Ross
Globe Staff / August 22, 2011

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Massachusetts is running low on tools to boost the economy as the state exhausts its federal stimulus money amid renewed economic turmoil and looming budget cuts in Washington that could strip millions of dollars from key programs.

Of the $7.4 billion in US stimulus funds awarded to the state in 2009, only about $300 million, or roughly 4 percent, is left to deploy, according to officials in Governor Deval Patrick’s administration. Most of the stimulus programs will wind down during the next six months - when officials said the state will most need help in staving off a second recession.

“We’ve got to keep up a head of steam right now, and I wonder whether we’re going to be able to keep it going,’’ said Jeffrey Simon, director of the Massachusetts Recovery and Reinvestment Office, charged with overseeing the state’s stimulus funds. “I see the positive impact it’s had on people here, so I’m a little puzzled by what’s going on in Washington.’’

Although economists debate the overall impact of the $787 billion stimulus package, most agree on two points: It acted as a buffer against the worst downturn since the Great Depression by creating much-needed jobs; at the same time, however, it has failed to lift the economy out of a malaise that appears to have deepened in recent weeks.

By some measures, the Massachusetts economy is faring better than the nation’s, buoyed in part by job growth in its large education and health care sectors.

The state’s Executive Office of Labor and Workforce Development reported last week that the state gained 12,700 jobs in July, keeping its unemployment rate at 7.6 percent - below the national rate of 9.1 percent.

But in recent weeks the outlook has worsened, with multiple 400-plus point losses in stock markets, the first-ever downgrade of the nation’s credit rating, and mounting worries about debt problems in several European countries.

Adding to those pressures are impending cutbacks at the federal level. Certain unemployment benefits and payroll tax cuts are scheduled to expire at the end of the year, and President Obama and Congress agreed after months of haggling to cut $25 billion in spending from the budget that will take effect in October.

“I think it’s a real worry. You have all these things happening at once and an expansion of the economy that is not firmly established,’’ said Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government who served as an economic adviser to President Clinton.

Jay Gonzalez, Patrick’s secretary of administration and finance, said the immediate concern is how the $25 billion in federal spending reductions will be parsed among states. At stake for Massachusetts is a $2.6 billion pool of funding for initiatives ranging from clean energy and transportation to public health and affordable housing.

“We have no idea how much could get cut,’’ Gonzalez said. “They haven’t made any decisions yet about the amounts or how they will be distributed. We really can’t plan in that environment.’’

Gonzalez and other Patrick administration officials said federal stimulus money has softened the recession in Massachusetts, creating or savings jobs for more than 82,500 people. Some of those jobs lasted only weeks, others years. Gonzalez said more than half of the stimulus money, some $4 billion, was used to plug holes in state and municipal budgets, paying for health care for low-income residents and saving the jobs of teachers, public safety employees, and others. That category of money ran out June 30, the close of the state fiscal year.

The state used another $2.3 billion in stimulus funding for transportation improvements, solar installations, and weatherization projects in more than 10,000 homes.

Some of the money went to new roads and utility upgrades to support private development projects that are taking root in several municipalities. In Somerville, the state constructed an access road to the $1.5 billion Assembly Row project, where builders are planning to begin construction this fall of hundreds of homes and stores. In Weymouth, construction of a new parkway has jumpstarted construction of a minicity called SouthField that will eventually include 2,800 homes, movie studios, a golf course, offices, and stores. And in Burlington, road improvements laid the groundwork for new stores, offices, and homes at Northwest Park.

Together, those developments promise to create thousands of jobs in coming months.

“The stimulus has been profoundly important for our economy,’’ said Gregory Bialecki, Patrick’s secretary of housing and economic development. “And that’s not just because we were able to keep a lot of people working. It’s also because we were able to set the table for a lot of substantial projects.’’

Bialecki said the sudden drop in federal funding could have a significant impact. He noted that in addition to the stimulus winding down, federal programs including community development initiatives for housing and other local economic projects may be hit by upcoming budget cuts.

The possible impact of cuts to those programs is illustrated by a key fact: Even with stimulus spending on private-sector development, Massachusetts is not collecting as much tax revenue as it did in fiscal year 2008, a sign of underlying economic weakness from consumers pulling back on spending and employers putting off hiring.

“The hope was that by now the private sector would be taking the baton from the federal government and running with it,’’ said Mark Zandi, who is the chief economist for Moody’s

“But that really hasn’t happened, at least not yet,’’ he said.

Casey Ross can be reached at