How the Stimulus Money Will Flow

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Some state-administered programs, such as unemployment and food stamp benefits and Medicare, follow clear-cut formulas for allocation. A $55 billion category known as state stabilization funds will be distributed based on the share of the total U.S. population as well as the state's school-age population. Most of that will go for health care, K-12 education, higher education, public safety, and transportation.

Feeding Frenzy

Certain parts of the stimulus plan will be subject to state legislative action, which could slow spending as constituents and lawmakers wrestle over which projects are priorities and deserve immediate funding.

"The role of states is not adequately spelled out in the bill itself, and the potential for conflict when picking projects is astronomical," says David J. Wright, a director of the Nelson A. Rockefeller Institute of Government, an arm of the State University of New York. Adds Nicholas Johnson, director of the State Fiscal Project at the Center on Budget & Policy Priorities: "There will be hearty debates about how to use the money."

Cash-strapped states are facing a feeding frenzy among their agencies. Take Michigan, which has been decimated by the collapse of the auto industry. On Feb. 18, Governor Jennifer Granholm offered a broad outline of her spending priorities for Michigan's share of the stimulus money. Her Web site includes a more than 1,200-page list submitted by state agencies, schools, universities, and other public entities that want to get funds. In all, the 16,000 projects total $59 billion; unfortunately, the Center for American Progress projects the state will oversee only $18.44 billion in funds. Granholm acknowledges that not all the projects will be funded.

The good news: Because states are in such dire straits, they'll probably waste little time spending the money, when possible. The Center on Budget & Policy Priorities estimates that the stimulus bill will cover only about 40% of states' budget shortfalls through 2011, which could lead to conflict as states try to allocate money. "Extreme need means the money may be spent quickly, but not necessarily wisely," says Binder.

Seeking Transparency

The Obama Administration claims that by disclosing the projects that get funded, the dollars spent, and the expected numbers of jobs created on a Web site, recovery.gov, it will bring accountability and transparency to stimulus spending. Peter Orszag, director of the President's Office of Management & Budget, sent a 62-page memo to federal department and agency heads on Feb. 18 outlining how to comply with the transparency and accountability provisions of the stimulus package.

States are due to begin reporting to federal agencies about their projects on July 10 and are expected to offer quarterly updates; agencies will channel the information to recovery.gov. States must include the name of each project, a description, an estimate of the number of jobs for each project, and the name of who is in charge. Only the primary recipient of funds must account for where funds have gone; contractors and subcontractors will not be tracked by recovery.gov.

The stakes are high for ensuring the funds are spent quickly and efficiently. That's because the state-administered projects are the ones that promise to stimulate the economy most, according to economists. According to Moodys.com (MCO), every dollar spent in general aid to states results in $1.36 of economic activity. Every dollar for infrastructure yields $1.59; for extending unemployment insurance, $1.64; and for temporarily increasing food stamps, $1.73. By comparison, each dollar cut from the corporate tax rate would yield 30¢ in economic activity, Moody's estimates, and a dollar spent on extending the alternative minimum tax patch—included in the final stimulus bill—yields 48¢.

Herbst is a reporter for BusinessWeek in New York.