The Week in Public Finance: What the Budget Deal Means for States and Localities

After a brief shutdown on Friday, the House voted just before dawn on a two-year spending plan.
by | February 9, 2018
Puerto Rico will receive $2 billion to rebuild its power grid, which was destroyed by Hurricane Maria last September. (Shutterstock)

Congress agreed on a two-year bipartisan spending deal just before dawn on Friday, after a brief shutdown of the federal government, which was the second shutdown in as many months.

The agreement, which President Trump has indicated that he will sign, increases spending by $300 billion over the next two years. Slightly less than half of that increase is slated for domestic programs.

John Hicks, executive director of the National Association of State Budget Officers, called the deal “the first salvo of federal budget certainty” that state and local governments have enjoyed in the Trump era.

That said, he adds, House and Senate appropriators have the next six weeks to incorporate the additional funds into a 2018 spending plan. Trump is also expected to announce his 2019 budget on Monday, which will outline administration priorities.

This all means that some states could benefit or take a massive hit financially, depending on how closely appropriators align themselves with the administration. For example, in Maryland, Trump has called for Congress to eliminate money for the Chesapeake Bay, a pair of high-tech biodefense laboratories in the state and several programs at NASA Goddard Space Flight Center.

“That program-by-program specificity is yet to be determined,” Hicks says. “So as states are putting their budgets together now … it helps at least resolve some of the overarching framework at the federal level, but not the details.”

This week’s agreement avoids addressing the fate of the Dreamers, who face deportation after being brought to the U.S. illegally as children. That omission threatened to derail the bill entirely as top House Democrat Nancy Pelosi urged Democrats to oppose it and mounted a daylong filibuster earlier this week in attempt to force a later vote on legislation that would protect the Dreamers. Congressional leaders said Friday that vote will happen in the coming weeks.

Other key areas affecting state and local governments in the new budget deal are as follows:

 

Disaster Relief

The agreement calls for nearly $90 billion in disaster relief in response to last year’s hurricanes and wildfires. The money would represent the third -- and largest -- funding package for those communities hit by natural disasters since last summer.

Lawmakers have earmarked more than $23 billion for the Federal Emergency Management Agency's primary fund for recovery and repair programs, which was nearly tapped out in 2017. It also provides an additional $28 billion for block grants to rebuild housing and essential infrastructure.

Puerto Rico and the U.S. Virgin Islands, which were decimated by hurricanes Irma and Maria, will get nearly $7 billion in aid. Most of that will go to cover Medicaid costs. Puerto Rico will also receive $2 billion to rebuild its power grid, which is operating at just 80 percent of capacity nearly five months later.

 

Health Care

The agreement provides long-term funding for several major health programs.

The Community Health Center Fund, which serves more than 27 million mostly low-income Americans, was reauthorized for four years.

The deal extends to 10 years total the federal funding reauthorization for the Children’s Health Insurance Program, which covers 9 million low-income children and pregnant women

And a federal program that provides home visiting services to at-risk mothers-to-be and new moms was reauthorized for five years.

The deal slates $6 billion over two years to address the opioid crisis and mental health. But the amount is small in comparison to what state and local governments are spending annually on the  epidemic and S&P Global Ratings analysts told Governing the amount "is not likely to have a large impact on state finances, especially as there are likely restrictions tied to the use of these funds."

 

Infrastructure

Lawmakers are putting aside $20 billion in federal infrastructure spending over the next two years, a fraction of the $200 billion over 10 years Trump has previously outlined.

That has led some to chastise parts of the deal as mere gestures, rather than real action.

“We’re a long way with this bill for claiming we’ve done something about opioids and infrastructure,” says G. William Hoagland of the Bipartisan Policy Center.

The infrastructure funds would go toward existing projects for water and energy infrastructure, as well as expanding broadband to rural regions and improving surface transportation.

While calling the investment important, industry groups stopped short of applause.

Marc Ott, the executive director of International City/County Management Association, notes that localities stood “ready to work with the private sector and the federal government as strong partners who recognize that there aren’t a lot of state and local [funds available to fill] the backlog of infrastructure needs.”

 

The Muncipal Market

It’s not just state and local governments that crave certainty from the feds. Municipal bond investors like it, too, and this week’s agreement gives them stability in at least one area.

The deal lifts the debt limit until March 2019. While that has been criticized by fiscal hawks, it pushes future confrontations over that issue until after the midterm elections. In the past, when the federal government has come up against the debt limit, it has threatened the stability of certain types of municipal bonds.

Still, it ended up keeping cuts imposed by sequestration in 2011 that trimmed federal subsidy payments made to issuers of Build America Bonds after initial reports suggested the deal would reinstate the full subsidies. Those cuts have left state and local governments scrambling to fill the void and in some cases, it cost them millions per year.

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*This story has been updated.