Virginia closed its fiscal 2010 budget with a $403.2 million budget surplus, Governor Bob McDonell said on Thursday. That’s even higher than the $220 million surplus he previously estimated.

“But please don’t get too excited,” McDonnell said during an address to state congressional members. “Most of it is already obligated in statute or in the budget to meet various needs.”

McDonnell said much of the boost was thanks to state employees, who spent $175 million less then the budget allowed rather than whittling down balances to zero. Plus, Virginia collected $228 million more in individual tax revenues that it was expecting.

It is a veritable Virginian miracle: Despite the fiscal crises hitting states, forcing layoffs and shuttering services, Virginia managed to build a budget surplus and is feeling flush! But the article elides how painful it was for Virginia to get there. The budget surplus is due not to a dramatic growth in revenue, or sensible tax increases. It is because the state received billions in federal stimulus funding — and to make up the difference, chose and made painful cuts. The Times-Dispatch explains the process of getting to that surplus:

Gov. Bob McDonnell wants to fill a $2 billion budget shortfall by eliminating more than 500 jobs over three years, instituting 10 furlough days for state workers and slashing services for children and the sick.

But he proposes no new taxes, and he is electing to keep the $950 million-a-year car-tax break for localities.

The governor also wants to spare higher education from further cuts and seeks to restore some of former Gov. Timothy M. Kaine’s proposed cuts to public safety.

Schools and health care — the largest parts of the state’s general fund budget — take heavy hits under McDonnell’s plan, with reductions of $731 million to public education over the two-year budget period, and more than $300 million to health-care programs.

“All the cuts give me heartburn,” McDonnell said at a news conference. “All of them were difficult because I know that behind every cut there is a Virginian . . . that might be affected.”

Now, it needs a House vote and the president’s signature. The House is already on August recess. But its members might be back next week. The Hill reports that House leadership is considering calling back representatives from their campaigns in their home states. The House is not technically due back until the second week of September, but states need the funds disbursed immediately, since they have already started their fiscal calendar years.

This morning, 38 Senate Republicans voted to filibuster the bill, despite the fact that it was entirely paid for. After the vote, Democrats blasted the GOP for refusing to fund the deficit-neutral, job-saving bill — trying out a line to be used in the fall, “the GOP job-killing agenda.”

In a release, Sen. Harry Reid (D-Nev.), said, “Today we did our job as Senators: We saved people’s jobs. We’re keeping hundreds of thousands of teachers, firefighters and policemen from being fired. But those aren’t just numbers. These more a million families who need to put food on the table — more than a million people who can and want to be part of our recovery.”

He continued, “I am still simply astonished that more than 95 percent of Senate Republicans turned their backs on some of our most selfless and bravest Americans. I don’t envy them having to explain that back home.”

A spokesperson for Rep. John Boehner (R-Ohio), the House minority leader, told The Hill, “The American people don’t want more ‘stimulus’ spending – particularly spending for labor unions attached to a job-killing tax increase. Democrats would be better off listening to their constituents, who are asking, ‘where are the jobs,’ rather than returning to Washington to vote for more tax hikes and special interest bailouts.”

But how else will states patch their budget gaps? In many cases, by taking on debt, CNN reports. All states save for Vermont are barred from running deficits, meaning they need to balance their checkbooks by using rainy-day funds, slashing costs or raising taxes each fiscal year. To make up budget gaps, several states have also taken on debt, mostly by selling bonds. All in all, states increased borrowing 10.3 percent over the last year

Experts in the article note that no state is “becoming the next Greece.” (Now is actually a good time for states to take on debt, because interest rates are so low.) But economists argue the situation is unsustainable, and states are simply saddling themselves with debt problems for years. Plus, on a national scale, such state deficits winnow down the impact of the federal stimulus: every dollar that state government cuts cancels out a dollar that the federal government spends.

While official Washington and much of the media focus on the great health-care struggle, the administration’s economic advisers have been busy reviewing proposals to create jobs, aware that pressure on them will grow to deal with high unemployment that threatens to persist through Election Day next year. President Obama’s aides insist that they knew all along that the original stimulus, as one of them put it, would “never fill the full gap from the recession.” Whether or not they anticipated this, they’re planning to act, even though — for political reasons — what comes next will not be called “a second stimulus.”

Instead, Democratic leaders are eying proposals more likely to gather support on both sides of the aisle, including an extension of the $8,000 new homebuyers’ tax credit, additional funding for unemployment insurance, Medicaid and food stamp assistance, and perhaps the launch of a new tax credit for businesses that hire new workers.

It won’t be easy. While employment figures are always among the last indicators to rebound from recession, the extent of the current job losses has caught many economists off guard. Indeed, the Labor Department last week revealed that employers shed 263,000 more workers than they hired last month, bumping the country’s unemployment rate to a 26-year-high of 9.8 percent. And experts on both sides of the aisle are predicting that the numbers will remain elevated through 2010.

If those projections play out, then the thorniest debates on the campaign trail a year from now will have very little to do with health care reform.

California Capitol dome. (praptis flickr)

This is the third part in a three-part series on a new economic stimulus package. For the first part, see “Can Green Industry Save the Economy?”; for the second, see “Building Out of Economic Chaos.”

As Washington policymakers joust over the need for more federal spending to stabilize the sinking economy, they can take solace in at least one thought: They aren’t in the states’ shoes.

Faced with declining revenues, rising unemployment and a growing demand for social services, states across the nation are confronting budget shortfalls not seen in decades. By some estimates, the gap could collectively hit $30 billion this year — and is likely to grow, according to an analysis from the Center on Budget and Policy Priorities, combined with local reports. Required by law to balance their annual budgets, states are responding by sharply cutting jobs and services, adding pain where there is already plenty of it.

The troubling trend hasn’t been overlooked in Congress. Democratic leaders are pushing another economic stimulus bill that would likely include billions of dollars for infrastructure projects and direct aid to struggling states. Supporters say that package is needed to curb rising jobless rates and get consumers spending again — much as the Wall Street bailout was designed to get banks lending again.

Illustration by: Matt Mahurin

“We certainly know that families are hurting back home,” said Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, during a panel hearing on the stimulus bill Wednesday. He vowed “to see what we can do to provide the assistance to local and state government as we have found ourselves able to do with our banking and finance industry.”

It won’t be easy. In September, House Democrats passed a stimulus bill that focused largely on funding for states and infrastructure projects. Senate Republicans, rallying behind a veto threat from President George W. Bush, defeated it.

On Thursday, Edward Lazear, chairman of the Council of Economic Advisers, seemed to reiterate the administration’s opposition to a new stimulus bill. The $700-billion Wall Street bailout, he contended, is enough to get the economy back on track. “That’s a huge amount of money,” Lazear said, “and we believe that it’s targeted at exactly the right thing.”

Yet the news from around the country is grim. California faces a $10-billion budget shortfall and will hold a special legislative session to deal with the gap. In New York, officials are scrambling to plug a $1.5 billion budget hole. In Georgia, the deficit is $1.6 billion. The list goes on.

The estimated $30-billion shortfall in states’ budgets sounds tiny compared with $700-billion bailouts and a possible $1 trillion federal deficit next year. Yet Washington has an advantage that the states and the District of Columbia don’t have. It can run a budget deficit. The Keynesian method of dealing with economic downturns — borrowing to increase government spending– is not available to them because they must by law balance their books.

As a result, states are cutting services. Earlier this month, the Center on Budget and Policy Priorities, a liberal policy-analysis group, reported that 14 states have reduced funding for low-income health-care programs; 17 states have slashed spending on public colleges and universities; and 13 have cut money to elementary, middle and high schools. More cuts are likely as the crisis grows.

Elizabeth C. McNichol, a senior fellow at CBPP, estimates that states’ total shortfall could reach $100 billion by the end of fiscal year 2010. A quick cash injection from Washington, she said, would go a long way to mitigate the fallout of that. “If you want to avoid some of these bad cuts, especially cuts in health care, sooner is certainly better than later.”

Democratic leaders in Congress are working to help the states. Their plan, which they want to take up during a scheduled lame-duck session after the election, is expected to hike spending on social services, such as food stamps and unemployment insurance; expand federal assistance to state Medicaid programs; and include vast new funding for infrastructure projects. To be effective, some economists have called for the new spending to be in the $300-billion range — far above the $58 billion sought in the bill’s earlier version.

State officials hope for quick approval. “It should happen post-election, not post-inauguration,” New Jersey Gov. Jon Corzine (D) told members of the House Transportation and Infrastructure Committee Wednesday.

The White House, however, opposes most of the Democratic proposals. Increased Medicaid spending, for example, is “not an appropriate tool to influence short-term economic developments” was how the official veto threat of September’s House-passed bill put it. The food-stamp program already “has been well-funded. ” Infrastructure projects “require lengthy time periods to plan and build and would not create a substantial number of jobs in the near future.”

White House officials suggested this week that the best way to stir the economy would be through passage of a controversial free-trade agreement with Colombia. That long-stalled Bush-administration initiative would bolster U.S. exports, the administration claims. It remains, however, a non-starter among Democrats.

Republican congressional leaders, meanwhile, are pushing for sweeping tax cuts as their stimulus plan.

Many economists warn that the current economic downturn could be steeper and last longer than previous recessions. With that in mind, they contend that more infrastructure funding would be effective even if it comes late to the game. “While past recessions lasted an average of only about 12 months,” Martin Feldstein, Harvard economist and John McCain adviser wrote in The Washington Post Thursday, “this downturn is likely to last much longer, providing the scope for successful counter-cyclical spending.”

The economic turmoil is especially tough on states. The evaporation of home equity has reduced Americans’ aggregate wealth by roughly $3 trillion since the housing peak in 2006. That decline has forced consumers to cut back their spending to the tune of $300 billion a year, economists estimate. That, in turn, has lowered sales-tax revenue for states.

Simultaneously, states are being pinched as rising unemployment lowers income-tax revenues and creates greater demand for expensive social programs like Medicaid.

Some states are feeling the pain more than others. In Rhode Island, unemployment hit 8.8 percent last month — the highest in the country. The news has made the state’s congressional delegation that much more adamant about the need for a November stimulus package.

Sen. Sheldon Whitehouse (D-R.I.) points to roughly $57-million in state road and bridge repairs he says are ready to go immediately. “We will have to do this water and transportation infrastructure work sooner or later,” Whitehouse wrote to Senate leaders last week. “Best to do it now when the economy so badly needs the jobs.”

States are also feeling the effects of decreased gas-tax revenues, which help pay for roads and mass transit systems. The sharp rise in fuel prices earlier this year apparently has forced Americans to cut back on their driving. The trend has some officials calling for Washington lawmakers to revisit how it pays for transportation needs.

“When you’re talking about a country that has an energy policy to drive less and drive hybrid,” Louisville Mayor Jerry E. Abramson told a House panel on Wednesday, “the paradigm has got to be changed in terms of how you’re going to fund highways and public transportation.”

Testifying before the House Ways and Means Committee Wednesday, New York Gov. David Paterson (D) argued that lawmakers, having found $700 billion to help Wall Street, could certainly “find a a fraction of that amount” to help everyday folks.

“States didn’t cause this crisis,” Paterson said, “and we shouldn’t be left to deal with it alone.”