Grappling With Budget Deficits, Nation's Governors Sit Down With President Obama

WASHINGTON, Feb. 28, 2011 -- With fierce budget battles looming back in their home states, a bipartisan group of governors sat down with President Obama today at the White House, where the focus was on spending cuts, health care, economic growth and job creation.

Unlike lawmakers in Washington who continue to argue over how to approach the skyrocketing national deficit, Democratic and Republican governors are sounding strikingly similar when it comes to the need for dramatic budget cuts to tackle massive deficits yet maintain a commitment not to raise taxes.

Twenty-nine new governors were elected last fall and many now face tough decisions on how to balance their budgets while retaining public services. All told, states face a combined $125 billion deficit, according to the left-leaning Center on Budget and Policy Priorities.

Today at the White House, President Obama acknowledged the obvious dilemma the state executives have back home.

"Those of you who are in this room obviously are on the front lines of this budget debate," he said. "You face some very tough choices at this point on everything from schools to prisons to pensions."

Obama said he understands firsthand the difficult position the governors are in, likening it to his own decision to freeze the salaries of federal employees for two years.

"It wasn't something that I wanted to do, but I did it because of the very tough fiscal situation that we're in," the president said. "So I believe that everybody should be prepared to give up something in order to solve our budget challenges, and I think most public servants agree with that."

Public workers in Wisconsin and Ohio have been loudly protesting decisions by Republican governors there to support legislation to end collective bargaining agreements.

Obama tepidly waded back into that fight, saying today that public employees should not be "denigrated or vilified" during contentious budget battles.

Obama delivered opening remarks to the governors but once the cameras were turned off and the press ushered out the room, he was to take questions. The session offered Republican governors a chance to get in a few punches on the president's own turf, especially on the health care bill that mnay of the governors are fighting in court.

Almost all the states are required by law to balance their budgets; the federal government is not required to. As a result governors are taking their red pens and slashing their budgets.

"The four big things that [governors] spend their money on is education, health care, transportation and public safety. We're seeing pretty big cuts in all of those," said Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities.

Those cuts are not being well received by Americans. A recent poll by the Pew Research Center found that while Americans are not calling for increased government spending, they have strong opinions about cutting those services to bring down deficits.

Seventy-nine percent said they would not support cuts in funding for K-12 education, 76 percent are opposed to cuts to health care services, and 66 percent said no to cuts to public colleges and universities.

California is facing a $25 billion budget deficit and newly-elected Gov. Jerry Brown has his critics howling in protest over his call for large cuts in Medicaid and higher education.

"The times call out for vision and for discipline," the Democrat said in his state of the state address last month. "Discipline so that we live within the revenue which the state collects each year, and vision so that we rise above mere party, act as Californians first, and put our trust in the people."

Brown also ordered government agencies to stop purchasing new cars and to get rid of ones that are not "essential" to state business. He has asked state workers to give up 48,000 cell phones, a move that could save the state $20 million.

In New York, Democratic Gov. Andrew Cuomo called his state "functionally bankrupt" and called for cuts to education and Medicaid to close a $10 billion budget deficit.

In Florida, Republican Rick Scott rode the support of the Tea Party movement to victory in last November's gubernatorial race. He's now under pressure to make good on his pledges to close the budget gap and cut taxes.

In the budget outline he released earlier this month, Scott proposed cutting state spending by $5 billion, with more than $3 billion cut from education spending. Scott also called for a rollback of corporate income taxes and a reduction in property taxes, adding up to more than $4 billion in tax cuts over two years.

Arizona Gov. Jan Brewer has taken the unusual step of asking the federal government for a waiver so the state can remove nearly 300,000 adults from its Medicaid rolls.

Obama's Recovery Act, which went into effect in February 2009, gave nearly $150 billion in assistance to cash-strapped states over two years. But that money is set to run out in June.

Cuomo compared the federal stimulus dollars to an addictive substance. "We inhaled it and injected it into our body," Cuomo said. "And now it is gone."

The combination of still weak tax revenues and the federal stimulus money running out are creating the budget headaches for governors and state legislatures. State tax revenues are gradually recovering from the economic crisis but most economists and policy experts say they will not fully recover until the nation's employment stabilizes, which could take years.

"At at time when states' own tax revenues are still very depressed, running about 12 percent below pre-recession levels, on top of that states now have to fill in for the funds that have gone away because the federal funds are running out," Johnson said.

Tad DeHaven, a budget analyst for the libertarian Cato Institute, said states get themselves into budget trouble by failing to prepare for rainy days.

"When times are good, the economy is good and when revenues are coming in, they spend it," DeHaven said. "They make promises to the work force that can prove costly in the long term and inevitably we have a downturn, revenues dry up and they plead poverty. But the problem is they don't implement the structural reforms necessary to smooth things out."

DeHaven said "Uncle Sam" ends up filling that void.

"In the long term there's a lot of questions about the federal government's ability to keep doing this, given its own financial problems," he said.

There are also questions from Democrats about whether the bailout money allowed states to keep workers and services and from Repbulicans about whether it just let the states put off making the cuts needed to get their budgets in order.

Either way, it does not look like any more money is heading out of Washington to state governments. The House Republican majority has made it quite clear that they are unwilling to give any new federal funding to states -- "bailout" has almost become a dirty word.

"There will be no bailout of the states," said House Majority Leader Eric Cantor, R-Va. "The states can deal with this and have the ability to do so on their own."

"There era of the bailout is over," said Rep Patrick McHenry, R-N.C.

On the Senate side, Minority Leader Mitch McConnell also ruled out any new funding for states. "There will be no bailouts, I can tell you that," the Kentucky Republican said. "No bailouts."

As an alternative, Congress is considering legislation that would allow states to declare bankruptcy. Currently only cities and some local municipalities can file for federal bankruptcy.

"We're exploring that as a reasonable option," Sen. John Cornyn, R-Texas, said of bankruptcy for states. The possibility of that passing both the House and Senate is slim, given the Democrats' majority in the Senate. It's also unlikely that any governor would take the bankruptcy option. At the NGA conference this weekend, governors from both parties slammed the idea.

"Suggestions have been brought forward and some speculation that states are teetering on the brink of bankruptcy. I'm here to say I believe that's a dangerous development," Utah Gov. Gary Herbert said at a panel on the state of public finance at the National Governors Association winter meeting. "It has risks to our municipal markets, to those who invest in our states wondering about the economic viability of our states. This is coming from incomplete and in many times inaccurate information."

"The reality for all of us is this whole conversation about bankruptcy has chilled some of the economic development conversation," North Carolina Gov. Bev Perdue said. "These are dangerous times that we live in when we have people fueling things that really can hurt our states' economic bases. Bankruptcy ... is simply not an option that any governor would ever pursue."

ABC News' Mary K. Bruce, Matthew Jaffe and John Parkinson contributed to this report.