Federal Budget Deal Could Provide Temporary Relief for States

If passed, the two-year budget deal would shift planned spending cuts and alleviate some of the funding uncertainties that have plagued state and local governments.

U.S. House and Senate leaders have announced a two-year budget deal that, if approved, would shift planned spending cuts and alleviate some of the funding uncertainties that have plagued state and local governments.

Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, and Sen. Patty Murray, D-Wash., chairwoman of the Senate Budget Committee, announced the bipartisan deal Tuesday night.

“This agreement breaks through the recent dysfunction to prevent another government shutdown and roll back sequestration’s cuts to defense and domestic investments in a balanced way,” Murray said in a statement. “It’s a good step in the right direction that can hopefully rebuild some trust and serve as a foundation for continued bipartisan work.”

The Bipartisan Budget Act of 2013 would set overall discretionary spending for the current fiscal year at $1.012 trillion—about halfway between the Senate and the House’s desired budget level . The agreement would also free up $63 billion for spending over two years, split evenly between defense and non-defense programs.

Defense programs were slated to take most of the planned spending cuts for fiscal year 2014, which began on Oct. 1. Now, defense discretionary spending would be set at $520.5 billion, and non-defense discretionary spending would be set at $491.8 billion. (The initial 2014 caps were $498 billion for defense and $469 billion for non-defense.)

To pay for the increase, the budget proposes savings elsewhere, including dozens of deficit-reduction provisions. The agreement would reduce the deficit by an extra $20 billion atop sequestration. It would also double fees on airline tickets to $10 roundtrip to pay for airport security.

Although modest in scope, the agreement would provide a temporary reprieve from the partisan bickering that's led to stalemates on Capitol Hill, continuing resolutions passed at the 11th hour and a 16-day government shutdown in October. The federal chaos has only exacerbated an era of fiscal uncertainty and a volatile economy that states and localities have been grappling with ever since the federal stimulus program ended in 2010 and the nation’s economic recovery continued along slowly. Scott Pattison, executive director of the National Association of State Budget Officers, called the proposed deal a positive development for states and the economy because it provides increased certainty about federal funding levels for the next two years.

The increased caps for non-discretionary spending may also be good for states as they could end up increasing funding levels for certain grant programs, such as education programs, "though likely not by much," Pattison said. "We will need to wait for appropriators to unveil spending legislation to know the actual impacts on individual programs," he added.

Additionally, the budget seems to have answered the pleas of state and local government associations who have asked Congress not to balance the federal budget by passing unfunded mandates down to the states. For the most part, cuts have a limited impact on states. Pattison does note that Medicaid spending is slated to go down very slightly (by $1.4 billion) due to one provision in the agreement that allows states to delay paying certain Medicaid claims if other insurance is available, such as through a non-custodial parent.

However, the deal could reopen the possibility that the Federal Reserve would begin tapering its municipal bond purchasing, Michael Hewson, chief market analyst at CMC Markets UK, told CNN Money. Hewson noted that “window of opportunity” could open up as early as next week. Last summer, when former Fed Chairman Ben Bernanke hinted at tapering, the municipal market’s interest rates spiked, causing financing troubles for localities that were issuing bonds at the time.

Congress said they would finalize a budget deal by Dec. 13. But they have until Jan.15, 2014 until they risk another federal government shutdown. The House of Representatives is expected to take up the Bipartisan Budget Act first, followed by the Senate. If this bill is signed into law, the appropriations committees will then be able to work on spending bills at an agreed-upon level in advance of the Jan. 15 deadline.

Having a budget in place while states and localities are writing their 2015 budgets could make budgeting easier as it will bring more stability, Saint Paul, Minn. Mayor Chris Coleman said.

"We’re certainly happy there seems to be movement heading towards a budget agreement," said Coleman, who is also National League of Cities President. "We just can’t go through what we went through this past year, the uncertainty for our communities but also the uncertainty for the market and for businesses. It’s a disaster."

Liz Farmer is a former GOVERNING fiscal policy writer.