Fading Federal Funds: February 2012

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Many state-federal programs will feel the pinch as Congress struggles with the deficit.

By Michael Bird and Jeff Hurley

The 2011 session of the 112th Congress provided some clarity, much uncertainty, little predictability and a dose of opportunity for states.

State lawmakers are discovering that for the current fiscal year, funds for state-federal discretionary programs are averaging 2.7 percent less because of provisions in the Budget Control Act passed last August and congressional decisions made at the end of last year. Bearing the brunt of these reductions are energy, environment, housing, justice, labor and transportation programs. Legislators should view this news as a warning of deeper reductions to come. Local government programs heavily reliant on federal money also are vulnerable.

The congressional super committee’s inability to reach consensus on a comprehensive federal deficit reduction agreement means states can expect funding for discretionary and some mandatory state-federal grant programs to decline 8 percent to 9 percent in FY 2013. There are exemptions, primarily for low-income and transportation programs, but the low-income home energy assistance program and social services block grant are not among them. Education, energy, environment, justice, community development, housing and labor programs will likely bear the brunt of spending reduction efforts.

The super committee’s failure also triggers defense spending cuts of 10 percent for FY 2013. States with economies partially tied to federal employment, procurement and defense contracting could be in for a wake-up call. There are moves afoot in Congress, however, to undo all or some of these promised defense reductions.

The Budget Control Act requires a nine-year decline in discretionary spending. But there is no way for state officials to know what programs federal policymakers will target after FY 2013. Actions taken in 2011, however, provide some insight. Passing a federal budget resolution in both houses and appropriations bills by the beginning of the federal fiscal year are unlikely. Threats to the federal government’s credit worthiness could recur. Tax policy will be fraught with disagreement, especially as 11-year-old tax cuts face sunset or renewal. Some congressmen will seek and plead for fiscal sanity and comprehensive deficit reduction, and are likely to be shouted down by party caucuses or the other chamber.

Increasing the federal debt ceiling, a foregone reality, will ignite a messy debate. Some will call for an end to tax-exempt financing. Others in Congress will label states “irresponsible” and seek legislation allowing bankruptcy and debt obligation protection and pension funding for states, even if they don’t want it.

NCSL’S Federal Deficit Reduction Task Force waded into the middle of the deficit reduction quagmire. The message delivered both in person and in writing: States expect proportionate reductions in discretionary spending and understand mandatory and entitlement programs won’t be spared since both would save the federal government hundreds of billions over a decade.

In exchange, states expect to be spared cost shifts and new unfunded mandates, to be given relief from some requirements in the Medicaid program, and the authority to collect sales tax on out-of-state Internet and catalog sales. The task force’s challenge and opportunity: To boost the position of states in the federal deficit reduction debate from one of virtual invisibility to a key ingredient, and to be an active, constructive part of the solution.