JIM LEHRER: The nation's governors are gathering in Boston today for their annual conference. And their major agenda item is the bleak budget forecasts they face.
Margaret Warner has our story.
MARGARET WARNER: Nearly every state in the union began a new fiscal year this month, and the picture isn't pretty.
With unemployment still hovering just below 10 percent, most states are being hit with a higher demand for services and lower-than-expected tax revenues. That's led to predictions of a combined states' budget shortfall of as much as $140 billion this fiscal year, and state spending cuts that could cost up to 900,000 public and private sector jobs.
To make matters worse, Congress has stalled action on bills worth about $40 billion to help states pay for Medicaid programs and to retain teachers. And the state aid from last year's $787 billion stimulus package is due to run out at the end of this fiscal year.
All that adds up to a very busy agenda at the National Governors meeting this weekend.
We're joined now by the group's current president, Vermont Governor Jim Douglas, a Republican, and his immediate predecessor, Pennsylvania Governor Ed Rendell, a Democrat.
And welcome to you both.
Governor Douglas, beginning with you, how bleak a picture is it out there? Are some state doing OK and others really in trouble? Or is it fairly consistent?
GOV. JIM DOUGLAS, R-Vt.: Well, there is some variation among the states.
We, of course, are coming out of the great recession, the longest and deepest of our lifetime. And it's going to take some heavy lifting on the part of states and the federal government to get us through back on the path to prosperity. Some states, like Vermont, have a balanced budget. We actually reduced taxes this year.
But other states are facing some real budget shortfalls. Governors have been making tough decisions, reducing spending in many areas, in some case proposing tax increases, depleting reserves in some states, borrowing more. But there's still going to be some heavy lifting until we get back where we need to be.
MARGARET WARNER: Governor Rendell, how does it look where you sit?
GOV. ED RENDELL, D-Penn.: Well, Pennsylvania has done very well comparative to most big states. And we have seen some real signs of the recovery starting to happen.
In the last three months, the last quarter, we gained 76,000 new jobs. And, in June, our revenues exceed estimate for the first time since December of 2007. So, those are positive signs. But the big storm cloud for us, Margaret, is if the Congress doesn't enact the president's proposal to extend the Medicare benefits that were in stimulus for an additional six months.
That would mean for Pennsylvania a loss of almost a billion dollars. We would have to lay off close to 20,000 workers. And that includes teachers, policeman, firemen, state workers. And that makes no sense, after we are experiencing this job gain and our economy is just starting to turn the corner, job gain in every sector, manufacturing, construction, you name it. And then to lose these jobs makes no sense at all.
MARGARET WARNER: Governor Douglas, is that the problem, that states have been banking on this additional money from the federal government, even though it had not been appropriated yet?
GOV. JIM DOUGLAS: Many states have. Vermont is not among them. I didn't assume additional Medicaid dollars in the budget, although I would welcome them.
But, earlier this year, 47 governors signed a letter to the Congress urging them to approve the six-month extension of these Medicaid dollars. So, we hope they will do it. We understand that there are a lot of issues they need to wrestle with, but states really need the help.
GOV. ED RENDELL: And, Margaret, understand that the Congress has passed this in different bills. The House passed it once. The Senate passed it several times, or vice versa. They have passed it. The president was for it.
That's why 30 out of the 50 states have relied on it. And for 47 governors to agree on anything -- I mean, I'm not sure we could get 47 governors to agree that today's Friday.
MARGARET WARNER: No, maybe not.
Well, Governor Douglas, I read -- in fact, it's a National Governors Association report -- that states in the aggregate or combined are actually going to grow state spending this year, this coming year, for the first time since '08.
Now, given the dicey situation, some might look at that and say, well, why isn't further, at least holding the line, if not belt-tightening, in order?
GOV. JIM DOUGLAS: Well, it certainly is in order. And governors and state legislators have been doing a lot of that over the past few years. Governors and their colleagues in the general assemblies have cut huge amounts of money, have laid off employees.
As Governor Rendell noted, we have closed some welcome centers. We have cut hours at historic sites. We have made cuts to all kinds of programs. And that's happening across the nation.
But the sad irony of a recession is that, when revenues are soft, the demand for the safety net social services is even greater. So, for the first couple of years after the end of the recession, people aren't back to work. They don't have the resources to pay their families' bills. And so we have to help them get through that difficult time.
GOV. ED RENDELL: And, Margaret, a lot of those costs that Jim referred to -- and he is absolutely right -- they are mandated.
So, for example, if people are eligible to sign up for Medicaid, we can't turn them away, nor should we, but we have to pay for that. If the judges send prisoners, additional prisoners, to our state correctional institutions, we have to pay for that.
So, these are mandated costs that we really have no discretion over, we can't say no to.
MARGARET WARNER: Now, Governor Rendell, we should point out to our viewers that, unlike the federal government, states are absolutely required -- well, 49 of the 50 -- I think Vermont is the exception -- are required to have balanced budgets.
So, if Congress doesn't pass this additional money -- and there are a couple of different bills out there -- what are you going to do? How big are the cuts going to have to be, and where would they fall?
GOV. ED RENDELL: Well, I would bring the legislator, not back, but the leaders back. I have promised to consult with them. And we would cut $850 million out of our spending.
We would put things into budgetary reserve. We would lay people off, with the hope that, somewhere down the line, we could bring them back. And I think you are looking at somewhere between 15,000 and 22,000 layoffs in Pennsylvania.
MARGARET WARNER: Alone?
GOV. ED RENDELL: Well, alone, just layoffs. And it makes no sense at all.
And, you know, I saw someone, a parent, carrying a sign saying, "I didn't know that cutting spending meant laying my daughter's teacher off." And, you know, that's one of the things we have to grapple with.
And I will say that David Walker of the Peterson Foundation, a very respected deficit hawk foundation, said it right. You can at the same time prepare a long-term plan to cut the deficit and cut our national debt and at the same time make targeted investments to keep people working, to extend unemployment benefits for people who are desperately looking for jobs, and to stimulate the economy.
And that's exactly what we should be doing. And it's what Congress has not done.
MARGARET WARNER: Well, Governor Douglas, that's, of course, because, here in Washington now, there is a huge debate or a push-pull between the urge to spend more and spend our way out of this recession to a greater degree, and this hot breath of the voters of both parties saying, oh, my God, this deficit, skyrocketing deficits are mortgaging our future.
Your own party is, in particular, using that as a central argument for the fall elections. So, how can you be coming -- what do you say to the Republican members of Congress when you ask them for more money?
GOV. JIM DOUGLAS: Well, I -- what I say is, we have got to find the right balance. I certainly understand the need to address the federal debt. The $13 trillion that we're passing on to our kids and grandkids is not acceptable.
And, on Sunday, at our meeting here in Boston, we're going to hear from the co-chairs of the president's new fiscal reform commission, Senator Simpson and Mr. Bowles. And we hope it will be a spirited conversation about what to do for the long-term.
But, in the short-term, when states are now realizing revenue performance that's lower than it was four years ago, when the demand for Medicaid and other safety net services is greater, we have to help the neediest among us get through this difficult time. So, it can't go on forever. We don't expect it to, but we are asking for six months more.
MARGARET WARNER: And, Governor Rendell, really the same question to you. I mean, there are plenty of Democrats on the Hill who are turning into deficit hawks, who are deficit hawks. And, within the White House, there is considerable division with the political advisers to the president reported to be the ones who are saying, we have got to hold the line.
What do you say to them?
GOV. ED RENDELL: Well, just what I said and what David Walker of Peterson said. You can do both. We can have targeted investments that retain -- help people retain jobs, grow some jobs, and at the same time factor in a long-term, layer in a long-term deficit reduction plan.
And we hope that the Bowles-Simpson commission is going to come up with a plan. And we hope that everyone in Washington shows some guts and does the things that are necessary to reduce the debt over the long-term. But, in the short-term, let's keep Americans working and let's get Americans back to work.
MARGARET WARNER: OK, but you are both political animals. Neither of you are running again in November, but you have been through many campaigns.
So, my question to you is, I understand what are you saying on the merits, but how do you sell that politically? I mean, the polls seem to suggest something quite different.
GOV. ED RENDELL: Well...
MARGARET WARNER: Oh.
GOV. ED RENDELL: Go ahead.
GOV. JIM DOUGLAS: Well -- well, I think that we have to find that balance. There has got to be some real reform, some real structural change, so that the huge debt that we have amassed does not continue to grow.
Governors have done some heavy lifting. We're going to do some more. But we're asking that, in a program like Medicaid, which, as Governor Rendell noted, is a federally required one, that the feds have to meet their obligation.
Now, there is another way to go about this. And, in the letter that 47 governors signed earlier this year, we said, you could alleviate that mandate. You could say we don't have to have as extensive a program in each state, and give us some more flexibility. That's another approach.
MARGARET WARNER: And, Governor Rendell, how do you make the political argument, not the merits, really, but to the public?
GOV. ED RENDELL: Well, I think the public would understand if it was explained to them the right way.
Invest in targeted things now. Get a long-term plan to reduce the deficit. Remember, we talk about the deficit. And Jim accurately quotes $13 trillion, but do you know, Margaret, what the deficit is today? It's less than $2 trillion today. And I'm not saying that that is little.
But it's the long-term deficit that's scary. And we have some time to address that long-term deficit. We have got to keep people working and get people back to work. That's the foremost challenge for our country.
MARGARET WARNER: All right.
GOV. ED RENDELL: And I think people will understand that.
MARGARET WARNER: Governor Ed Rendell and Governor Jim Douglas, thank you both.
GOV. ED RENDELL: Thank you, Margaret.
GOV. JIM DOUGLAS: Thank you, Margaret.