For States, Debt Deal is Short on Details

By: and - August 2, 2011 12:00 am

As state officials begin to decipher Washington’s spending reduction deal, it’s clear that federal aid to states for certain programs will take a hit over the next decade. But it will be a while before they know exactly which programs and how big a hit.

That’s because the deal, which the U.S. House passed Monday night (August 1), leaves a lot of choices hanging into the future. It calls for billion in deficit reduction over 10 years by setting caps on discretionary spending. But exactly how to meet those caps — and what funds to states might be cut — is a question for Washington to answer another day. Also undetermined is how much a joint congressional committee charged with finding another .5 trillion in deficit savings would cut from aid to states.

So for states, which have been waiting anxiously to see whether the federal government would soon begin defaulting on its payments, there is relief — but also more waiting ahead.

John Nixon, budget director in Michigan, says his state has been preparing for the prospect of big federal cutbacks for a while, by examining programs that rely heavily on federal funding in hopes of finding efficiencies. “We’ve always known that big reductions were coming,” he said Monday. “Now, it’s just a matter of figuring out where they’re going to come and how quickly. But from a state-level perspective we’re thrilled to see a deal.”

In New Jersey, Republican Governor Chris Christie chided Congress and President Obama for taking so long to reach an agreement at a press conference on Monday. “I think we have to look at the specifics of it as to whether it’s going to be a good deal for the states or not,” he said . “Here’s what I’m happy about: They finally did something. I don’t know, I’m like most other citizens of this country who are sitting around saying, you know, what the hell are they doing down there?”

Medicaid mechanics

Among the biggest concerns for states was — and remains — the fate of Medicaid, the joint state-federal health insurance program serving more than 60 million poor Americans. That’s because Medicaid is generally the biggest item in state budgets. In the short term, the debt deal appears to spare Medicaid from immediate cuts in federal support. What’s more, Medicaid was specifically exempted from a “trigger” mechanism that would reduce spending automatically if the special congressional committee does not achieve its deficit-reduction goals.

Still, some governors are worried that deep cuts to Medicaid could be an outcome of the committee’s work. Connecticut Governor Dan Malloy, a Democrat, told reporters Monday that cuts made to Medicaid after 2013 could be “devastating” to his state and others. Most states already are being squeezed by Medicaid, with enrollments rising because of high unemployment and a sputtering economy.

Another area state officials are watching is transportation. Although no specific infrastructure cuts were outlined in the debt deal, discretionary spending is expected to be slashed as a result of it, and federal money for highways, roads and bridges could be among the biggest targets.

At the very least, investments that the Obama administration hoped to make in infrastructure are likely to be scaled back or eliminated. For instance, Obama earlier this year pitched a billion competitive grant program for states that update their transportation policies by, among other things, cracking down on distracted drivers. But with such a big price tag, the idea could fall victim to the debt deal’s required budget cuts.

In the long run, a large number of state programs funded with discretionary federal dollars could be at risk of cutbacks or elimination. Discretionary funds help to pay for a wide range of state activities in the areas of education, housing, criminal justice and community development. In total, states rely on the federal government for one of every three dollars in their budgets. Roughly one-third of that amount comes from discretionary funding sources.

Some wanted more cuts

Some tea party-backed governors complained the deal in Washington did not sufficiently restrain spending. “They have not cut enough,” Florida Governor Rick Scott said at a press conference on Monday. “The federal government’s got to live within its means …. If we don’t, there’s a day of reckoning at some point.”

Nikki Haley, South Carolina’s Republican governor, echoed that sentiment. She posted on her Facebook page, “From a governors perspective, the latest DC compromise does not freeze spending, does not require that DC balance the budget, and still keeps us in jeopardy of being down graded. It’s not a time to celebrate but a time to get serious about the results we produce for the good of our country.”

The most common response from state officials on Monday, however, was to play wait-and-see. In Delaware, Democratic Governor Jack Markell said he will be watching carefully to see what the long-term impact will be on social programs, where costs can easily be shifted to the states. “The broad outlines of the federal deal are becoming clear, but there are a lot of details that still need to be worked out,” says Brian Selander, chief strategy officer for Markell. “It’s those details that make the business of governing complicated.”

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Melissa Maynard

Melissa Maynard oversees the Pew state fiscal health project’s Fiscal 50 online resource, which helps policymakers understand fiscal, economic, and demographic trends affecting their states by tracking tax revenue, reserves, employment rates, Medicaid spending, and other issues important to long-term fiscal health.