As Washington Mulls Cuts, States Prep for Impacts

State agencies examine how they'll respond to Congressional action -- without know what that action may be.
by | October 28, 2011 AT 6:00 PM

As federal lawmakers mull how they'll find more than $1.2 trillion in deficit reductions, leaders in state capitals are moving quickly to determine how those decisions will impact their own operations.

The stakes are big: the federal budget provides about 30 percent of states’ revenue, and it’s the largest single source of funds for many states. States try to maximize the amount of federal funds they get through grants and other programs, but the push for deficit reduction has caused state officials to realize those funds are now in jeopardy.

Now, they're trying to determine just how much exposure they will have to the impacts of Washington's deficit reduction push, be it super committee recommendations or a trigger of across-the-board cuts. Those efforts are complicated by the fact that nobody -- not even federal lawmakers themselves -- knows what areas will face the deepest cuts just yet.

Still, state budget officers are trying to make projections to determine what they’ll do if the cuts are particularly deep in some key areas. Essentially, their task is like aiming a gun at a moving target without first knowing the target's size, shape, or when it will appear.

“The main thing people want right now is information – not a position, not talking points,” says Marcia Howard, executive director of Federal Funds Information for States, which tracks federal spending that flows to states. “They just need the facts on what are the dollars at stake.”

As a result, states are trying to plan various contingency scenarios. Of particular concern is any action that could shift a larger portion of Medicaid spending to states. If that happens, it would affect more than just Medicaid itself, since states would likely have to pull funds from other areas to cover the expenses. But Howard’s organization has also identified about 100 key federal funds, worth about $500 billion, that are being monitored as well.

In Rhode Island, which receives more federal grant money per-capita than most other states, officials are trying to identify which agencies and programs are more heavily dependent on these grants. The effort began when the federal government nearly shut down earlier this year, and it’s continued as discussions of federal cuts have progressed, says Thomas Mullaney, Rhode Island’s state budget officer.

“Initially, the thing we’ve looked at are grants that aren’t at the core of an agency,” Mullaney says. “They’re good programs, but they’re not necessarily things we feel we need to continue.”

In many cases, if vital federal grants disappear, the state won’t make up the difference, and the positions they fund will disappear, Mullaney says. That theme has been repeated by state budget officers nationwide.

Earlier this year, Utah enacted a law requiring agencies to identify how they’d be affected by various levels of federal cuts. “If you go back 10 or 15 years, if the federal government cut a program, most of the time the states would ‘that’s a good program, we’ll step up,’” says Ron Bigelow, who leads Utah’s state budget office. Today, that’s not the case. “If they [federal officials] cut the funding, the program goes away.”

There will be some exceptions to that rule – likely programs that affect children and the disabled – but even in those cases, states would likely have to cut from other programs to protect to make up the difference. Either way, it’s a zero-sum game, and state leaders have been charged with prioritizing those programs so they'll be ready to make those calls. “We’re not going to say ‘don’t cut any money we get,’” Bigelow says. “The problem’s bad. We know it’s bad. But we say make reasonable decisions.”

In Vermont, legislators put about $10.6 million in reserves for the 2012 fiscal year that can be used to plug holes as a result of federal cuts, says Stephen Klein, chief fiscal officer with the state of Vermont's Legislative Joint Fiscal Office. That’s just a small portion compared to the $1.6 billion Vermont receives in federal funds, but the reserves are principally designed to give the state flexibility if federal cuts take effect when legislators are out of session.

And over the summer, Tennessee's finance commissioner ordered agencies to detail their plans regarding how they’d handle a hypothetical 30 percent cut in their federal funds, after bond rating agencies requested the information due to the state’s relatively high levels of federal aid, the Chattanooga Times Free Press reports.

Others are taking a different approach. Maryland has a large number of federal workers, due to its proximity to the nation's capital. So as federal agencies began hiring freezes and wage freezes earlier this year, state forecasters began incorporating the estimated impact of those decisions into their revenue forecasts, says David Treasure, director of the state's Office of Budget Analysis.

Right now, his office is focusing more on immediate issues -- next fiscal year's budget challenges -- than trying to estimate what the federal government will or won't  do.

The National Conference of State Legislatures (NCSL) is currently surveying state budget officers to determine exactly how many are developing contingencies in the event of serious federal cuts. Officials in states that rely heavily on federal funds are most likely to be taking those steps. By that measure, “You can basically gauge their level of anxiety,” says Arturo Perez of NCSL. (See chart below article, based on U.S. Census data). 

In addition to the budgeting, there’s also a lobbying effort on the part of some state leaders to influence the deficit committee. There isn’t a unified voice, given the disparate political ideologies of state lawmakers and governors. Yet, a group of state lawmakers visited Washington last month as part of an NCSL initiative to appeal  to members of the deficit committee. State legislators and governors have independently been lobbying the committee as well. In many cases, state officials aren't telling the committee to avoid cuts; they are asking the committee to avoid simply shifting costs from the federal level to the state level, especially on Medicaid.

Regardless of which approach Congress takes to make cuts, it will almost certainly result in less revenue, more costs, and tough choices for states. “Everyone’s expecting it,” says Bigelow of Utah. “Even if it’s not this year, eventually, it has to happen.”