Fail! What the Super Committee's Failure Means

Medicaid cuts are off the table. Housing programs aren't. See what else is affected by sequestration.
by | November 21, 2011
 

For full coverage of the fiscal cliff's impact on states and localities, click here.

Now that the so-called congressional “super committee” has failed to come up with a plan to reduce the country’s deficit, across the board cuts of $1.2 trillion cuts are scheduled to take effect in January 2013. For state governments, that may not be bad as it sounds.

For starters, those cuts will be split evenly between defense spending and non-defense discretionary spending. The good news for states is that Medicaid is exempt from the cuts, meaning that their largest expense won’t be affected by part of the sequestration process.

Also exempt from the automatic cuts: the Children’s Health Insurance Program, Temporary Assistance for Needy Families, Supplementation Nutrition Assistance Program and even highway programs. In fact, nearly three-fourths of the federal grant funding that states receive is immune from cuts that come automatically in the sequestration process, said Marcia Howard, executive director of the Federal Funds Information for States, which tracks federal budget state for state officials.

Other good news for state and local governments: the cuts don’t take effect until January 2013. If the super committee had successfully crafted a deficit reduction package, the cuts would have come a year earlier in 2012. That buys states and localities extra time to grow revenue to make up for some of those cuts.

And advocates for state and local governments say that across-the-board cuts might even be better than the alternative: that the committee simply would eliminate some domestic programs. But the rules of the sequestration process are not set in stone, and Congress can change them. That's caused some advocates to fear that federal lawmakers, bowing under pressure from the Defense Department, could decide to shift a larger proportion of the cuts on to domestic programs. President Obama pledged tonight he'll veto any efforts to nix those cuts.

The cuts shake out like this: After all the math is done, the cuts for non-defense, discretionary spending – the programs state and local governments care most about – amount to $4 billion a year, according to Howard's organization. That’s about an 8.8 percent budget cut.

All total, about 75 grant programs of significance to states would be affected by the sequestration cuts. According to FFIS, those cuts – along with others in recent years – would bring their budget down from $190 billion in FY 2010 to $169 billion in 2013.

Given the exemptions, those taking the biggest hit would be education programs and community and regional development programs such as low-income housing. In many of those cases, while the funds flow through the states, they eventually end up in localities who will feel the impact of those cuts, Howard said.

The federal Women, Infants, and Children program, for example, would see funding drop from $6.7 billion to $6.1 billion in 2013, according to FFIS. The LIHEAP program, which helps poor people pay their heating bills, would drop from $4.7 billion to less than $4.3 billion.

Scott Smith, mayor of Mesa, Ariz. cited cuts to affordable housing programs and homeland security grants as other big losses that could potentially affect cities. “We’re where all the societal problems and challenges come home to roost,” Smith said of localities. “The frustrating this is that many in Congress that I talk to are completely oblivious to real issues and the real problems because the debate has been so political in nature and not realistic in nature.”

Still, the lack of any cuts to Medicaid is being seen by some as victory for states, which spent more than $220 billion in federal Medicaid funds in FY 2010, according to the National Association of State Budget Officers.

The president’s own deficit reduction proposal would have reduced Medicaid funding by $72 billion over 10 years, causing some to speculate that if the super committee did somehow reach an agreement, it was likely to include cuts to that program.

Another victory for states and localities is the committee’s failure to agree upon the president’s plan to tweak the tax-exempt status of municipal bonds in a move states and localities feared would vastly increase their cost of borrowing.

Still, most state and local government leaders that spoke to Governing agree: it’s unclear whether the failure was a good thing or a bad thing in the long-run.  State and local leaders had been lobbying the committee to reach an agreement, despite the cuts that they may have suffered, since they were aware of the significance of the deficit.

"We don't want anyone kicking the can down the road," Ellen Roberts, a Republican state senator from Colorado told Governing earlier this fall.

For states, the lack of action by the super committee does little for the clarity of their future budget situation. States have waited for months – since the super committee was created in the wake of the debt ceiling crisis – to see what it would do.

But states are already ready planning for their FY 2013 budgets, and budget officers will make their initial presentations in January 2012. That summer, states will have to vote on their FY 2013 budgets -- six months before sequestration might (or might not) take effect. Essentially, they're crafting budgets without knowing how much revenue they'll have.

"They feel frustrated with uncertainty," said Scott Pattison, who leads the National Association of State Budget Officers. "It's hard to make decisions based on what's going to happen because so much can change."

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