Federal lawmakers' eleventh-hour deal to avoid the most serious economic implications of the so-called "fiscal cliff" will give state and local policymakers some certainty -- but not much -- as they examine their budgets in 2013 and beyond.
Congress successfully averted the expiration of reduced tax rates that would have affected most citizens and could have helped trigger a second recession. That's good news for local budget officers who feared that the fiscal cliff would have led to decreased revenue.
The deal means that state officials can likely anticipate continued (albeit slow) revenue growth in coming years and not have to brace for the impact of fiscal calamity. "There's a little more predictability," says Scott Pattison, head of the National Association of State Budget Officers (NASBO). "That's certainly a positive."
But the other major half of the fiscal cliff -- big, automatic spending cuts known as "sequestration" -- remain on the table. Instead of taking effect at the start of 2013, they're delayed by two months until March. The concerns that state and local leaders had about the impact of sequestration on programs like education grants, affordable housing and workforce development remain valid, and all of the nuances of which programs will be affected by automatic cuts appear to remain the same.
National League of Cities President Marie Lopez Rogers, the mayor of Avondale, Ariz., said in a statement that local leaders were pleased that federal lawmakers protected families from tax increases. But she said they're "disappointed that the automatic spending cuts to important federal programs that our cities and families rely upon continue to be an option in resolving the nation’s fiscal challenges." (Read Governing's detailed explanation of sequestration's impact here).
The full impact of sequestration in fiscal year 2013, however, will be slightly less damaging than originally expected. In addition to pushing back the cuts by two months, Congress also agreed to cover those extra two months of funding with revenue from the increased taxes on the wealthy and other sources. So instead of a $109 billion cut to federal spending split between domestic and defense programs in January, the automatic cut will equal $85 billion in March, according to Trinity Tomsic, deputy executive director of Federal Funds Information for States, which tracks how the federal budget impacts state governments.
Congress could choose a variety of methods to avoid the automatic cuts all together. But fiscal hawks could also try to force even more spending cuts to address the debt ceiling, which the federal government hit on Monday. The agreement struck by lawmakers earlier this week doesn't address the debt ceiling.
Right now, sequestration isn't poised to have a dramatic impact on state budgets since Medicaid -- the largest state program supported by federal funds -- is exempt from automatic spending cuts.
'"Sequestration) is a pain, it's a problem, but ... it's not a huge general fund hit," Pattison says.
But that could change if a renewed battle over the debt ceiling results in cuts to Medicaid.
"We know that states are more concerned about potential Medicaid changes," Tomsic says. "That's on the table. There's still a great deal of uncertainty."
The two-month delay in addressing sequestration could also cause some challenges for state budgets because some state lawmakers will likely be engrossed in their budget planning process by the time Congress figures things out in two months.
Pattison says that's part of an ongoing trend, and he frequently hears frustration from his organization's members -- state budget officers -- about the uncertainty caused by federal inaction.
The deal also didn't address the federal tax exemption for municipal bond interest -- something both state and local leaders are fighting to protect -- but it did limit personal exemptions and itemized deductions for individuals making more than $250,000 and families earning more than $300,000.
State and local leaders will fight to protect the status of municipal bonds in the comings months as well.