Yesterday, we wrote that many state governments have blunted the impact of the stimulus by slashing spending and laying off employees. However, the federal government may also be on the verge of delivering a major blow to state budgets. That's because Congress is threatening to defeat an extension of increased funding for Medicaid, which got a boost last year from President Obama's stimulus package.

Gov. Edward G. Rendell of Pennsylvania, for instance, penciled $850 million in federal Medicaid assistance into the revenue side of his state's ledger, reducing its projected shortfall to $1.2 billion. The only way to compensate for the loss, he said in an interview, would be to lay off at least 20,000 government workers, including teachers and police officers, at a time when the state is starting to add jobs.

"It would actually kill everything the stimulus has done," said Mr. Rendell, a Democrat. "It would be enormously destructive."

Medicaid is a federally mandated program that provides health-care coverage to low-income individuals. It is administered by state governments, which means that national funding levels can have a huge impact in state capitols around the country. The amount of funding for Medicaid was boosted significantly by the stimulus package, but now some elected officials are now getting queasy about shoveling more money out the door.

State and congressional officials said the evolving politics of a midterm election year meant that the federal aid could no longer be taken for granted. And if it does not arrive, it will leave gaping shortages for states that are already slashing services and raising taxes to balance their recession-racked budgets.

At least one Republican governor is eager to see the federal government keep spending more on Medicaid.

"I'm very concerned about the level of federal spending and what it would mean for the long term," said Gov. Jim Douglas of Vermont, a Republican and chairman of the National Governors Association. "But for the short term, states need this bridge to sustain the safety net of human services programs and education."

Here is our question: Are political leaders in DC really prepared to blow a huge hole in state budgets? It seems like the desire to maintain fiscal discipline could be counterproductive in the short-term. What do you think? Do we need to keep spending levels up to help get out of the recession? Or would it be better for Pennsylvania and other states to lay off thousands of employees?

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