Congress' decisions on debt and deficit could create havoc locally

Candidates for governor pay attention: The debt-limit fight could send us scrambling for new answers to how to finance and conduct state business. Here's a primer on how dependent we are on federal expenditures.

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Candidates for governor pay attention: The debt-limit fight could send us scrambling for new answers to how to finance and conduct state business. Here's a primer on how dependent we are on federal expenditures.

Our state government has a lot riding on the outcome of the federal debt and deficit negotiations. Washington state depends on federal grants for almost one-half of the operating budget that funds essential services. And federal funds make up a large share of all state expenditures.

Much of the national debate has focused on cuts to entitlements — Social Security, Medicaid, and Medicare — and other high profile programs such as defense and farm subsidies. Revenues, taxes and tax loopholes, have been on an off the table. But discretionary spending that includes assistance to state and local government is also on the chopping block.

Washington, D.C. now sends about $650 billion annually in grants to state and local governments across a wide spectrum of programs. Among the potential targets for cuts are non-security discretionary grants that totaled about $250 billion in FY2011

Federal grants to our state as a share of the General Fund operating budget rose from a low of 16 percent in 1984 to more than 40 percent in 2011. When stimulus grants and other federal funds are included, the federal share of all state expenditures in FY2009-11 exceeded 50 percent. Assuming federal assistance for the next two years is solid, the federal share of the FY2011-13 state operating budget of $32 billion will be $15 billion, or 47 percent. At least this is the amount that was assumed when the operating budget was written. Not counted are direct payments to state agencies, such as research grants to universities and colleges.

But federal assistance could decrease substantially in the next two years depending on how quickly Congress dives into deficit and debt reduction in a big way. Although they would achieve reductions in different ways and on different schedules, both sides in the deficit debate advocate $2-4 trillion in reductions over 10 years. Also, severe and immediate cuts would be necessary if no debt ceiling agreement is reached by early August, according to the Bipartisan Policy Center.

Most state agencies expect to receive some federal dollars. Several, such as the Department of Social and Health Services (DSHS), the Health Care Authority (HCA), and the Office of Superintendent of Public Instruction (SPI), receive large amounts. DSHS gets $5.1 billion, which is 46 percent of its operating budget. The HCA anticipates $5.6 billion. Federal grants to the SPI total $2 billion.

Some state agencies receive a relatively small amount of federal dollars, but the money still comprises a large share of their budgets. The Puget Sound Partnership will spend $15 million managing Puget Sound cleanup over the next two yearsl almost $10 million will be federal money.

Federal funding also provides significant support for the construction of state facilities and transportation systems. Federal dollars in the amount of $750 million make up 20 percent of the capital budget. A large part of this, about one-fourth, supports salmon recovery programs. Programs to preserve and improve the state’s road system garner about $1 billion, and another $366 million supports the state’s rail program

Given that the federal fiscal year ends on Sept. 30, federal spending will continue at current levels until a new budget is adopted. That budget will undoubtedly reflect a compromise of the various and widely differing deficit reduction and tax policy positions of the U.S. House, Senate, and the Obama administration.

A preview of what’s in the offing for states (and local governments) if Republicans have their way can be found in House Resolution 1, the House FY2011 budget plan. While the measure passed the House in February on a partisan vote, the Senate has taken no action on it nor has it offered an alternative.

According to the Center on Budget and Policy Priorities (CBPP), the cuts to non-security discretionary spending in HR 1 total $66 billion, or 14 percent of the president’s proposed budget. The CBPP has put together a state-by-state analysis of its impacts on key programs, including grants to higher education, K-12, housing, and environmental protection.

Washington’s K-12 schools would lose $31 million from grants for disadvantaged students and curriculum improvement. Pell Grants for college students from low-income families would experience an $82 million cut affecting 132,000 students. A $20 million slice would be taken from the grant for Workforce Investment Act job training. Several low-income housing programs would lose a combined $30 million.

In addition, the Community Development Block Grant (CDBG) would see a $42 million cut. The CDBG helps fund a broad range of community development activities, including low-income housing development and rehabilitation, homelessness programs, improvements to public facilities such as senior and youth centers, economic development, and some social services. Environmental programs also would feel the knife. The EPA’s Clean Water and Drinking Water State Revolving Fund grants would be cut by $38 million.

So, the impacts on Washington state would be considerable, and many would affect the poor and vulnerable. A coalition of national groups has petitioned the president and congressional leaders to reduce the deficit without increasing poverty. They cite previous deficit reduction efforts that protected programs for low-income Americans.

Not all think tanks and advocacy groups believe federal discretionary grants to state and local governments should be a protected category. The Cato Institute argues that with today’s large deficits, the federal government can no longer afford to fund state and local activities, and it should focus on national issues. This libertarian think tank suggests that the aid contributes to bureaucratic hurdles and reduces state policy innovation. Cato believes the federal aid system should be scaled back and ultimately abolished.

Then how do we begin to address the looming fiscal problem presented by federal deficit reduction? The state’s Economic and Revenue Forecast Council (ERFC) provides a very transparent and comprehensive forecast of state tax revenues two years into the future based on economic factors. But it does not complement it with a forecast of federal revenues.

In addition to providing an early indication of the magnitude of federal cuts, a forecast of federal revenue could also identify likely state program impacts, including programs that are crucial for economic development and job growth. Although ERFC could carry out this forecast, it would need to call on the expertise of other state agencies that receive and track federal grants. And the effort would obviously benefit from the involvement of legislative committees. A new forecasting body might be in order.

It’s grim to think gloomy thoughts after four years of retrenchment. Yet it’s possible that the state’s fiscal situation could turn sour even before the FY2011-13 biennium is over as a result of federal actions to trim the deficit and debt. And whoever takes the governor’s seat in January 2013 may be faced with proposing another austerity budget.

So it’s not too early for the gubernatorial candidates, congressional representatives, state legislators, citizens, and state agencies to begin a conversation of how we will address the possibility that the state may face a continuing financial problem.

Both major candidates for governor, Rob McKenna and Jay Inslee, seem bullish, saying that the state’s recovery from a long and deep recession has begun and will provide revenues needed to address important state responsibilities, such as education, that took a serious hit in the last two budget cycles. Let’s hope they are right.

But a substantial loss of federal funding is a possibility that the candidates can’t ignore as they campaign and lay out their programs. And the more we as citizens know about it up front the more this will help the state’s new governor and legislators to deal with further tough fiscal decisions that may be needed down the road.


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About the Authors & Contributors

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Dick Nelson

Dick Nelson is a former Washington State legislator. He currently contributes to the public debate on state and local fiscal issues through research and commentary. As when he was in the legislature, he prefers the Democratic Party.