Over a year ago, we wrote our first post advocating in favor of federal assistance for state governments. The reasons were simple enough: a slowing economy causes revenues to decline and demand for services like Medicaid to rise; recessions always hit states later than the federal government; and the General Assembly is required by law to pass a "balanced" budget.

The Obama administration delivered with its $789 billion economic stimulus bill. Illinois received $2.9 billion in Medicaid relief, $1.6 billion in education money, and another $374 million in flexible state block grants. (The last figure was supposed to be considerably higher, but was cut during negotiations to appease "conservative" Democrats in the Senate.) These resources prevented devastating cuts to the state's human care infrastructure and saved thousands of jobs, a fact conservative critiques of the stimulus plan consistently overlook.

But Illinois' FY 2011 budget deficit will be even wider than it was this year.  Indeed, it's currently estimated at $12.8 billion, thanks to declining tax receipts, loads of borrowing, and the fact that the remaining $1.4 billion in federal aid is scheduled to run out at the end of 2010. Nationwide the situation is no different, with states facing their largest collective budget shortfall in recent memory.

In a new paper published today, the Center for Budget and Policy Priorities (CBPP) offers a novel solution for policymakers in Washington: buoy states by approving additional fiscal relief. Without it, social services will be slashed and unemployment rates nationwide could skyrocket:

Some private forecasters have begun to ask whether the state budget cuts and tax increases that lie ahead will stall the economy. Goldman Sachs estimated last July that the fiscal drag from state budget cuts and tax increases could reduce GDP by 0.6% to 0.7% over the coming year as states move to close their deficits. The outlook for state fiscal year 2011 is even grimmer; as noted, actions states will have to take to eliminate deficits for that year are likely to drag down GDP by more than 0.9% and could cost 900,000 jobs.

The implementation of such a plan would be very simple; Robert Reich writes that Congress could just cut 50 checks asking states to commit to (at least) maintaining their current taxing and spending policies. The politics of Obama's "second stimulus" would be a little bit trickier, especially with health care and cap-and-trade legislation moving forward. But state governments, which will begin crafting their new fiscal budgets in the coming weeks, are running out of options. And time.

Read the whole report here.

(H/T Heartland Alliance)

UPDATE (12:51 PM): Want some more evidence that Illinois could use an outside boost? A new report from the Pew Center on the States lists Illinois as one of 10 states pushing toward "economic disaster." The Gatehouse News Service has more:

Authors of the report cited Illinois for "its lack of fiscal discipline to balance its state budget." They noted that Illinois' $13.2 billion budget gap for fiscal year 2010 was among the top three in the country.

"Officials have used all sorts of short-term approaches to address the budget gaps, but two of the most significant and consequential are to put off paying bills and skimp on the state's annual pension payments."

Image used under a Creative Commons license by Flickr user myoldpostcards.