The Supercommittee and the states

Though revenue collections continue to show steady growth, state budgets remain under great stress. After three successive years of funding cuts, most state agencies are operating this year with appropriations that are at least 10 percent less than prior to the economic downturn. Even if the economy does not slip back into recession, the prospects are dim that revenues will grow sufficiently to restore funding to pre-downturn levels and begin to tackle our long-term obligations.

Budget-cutting efforts in Washington are adding to the perils confronting the state budget. Federal spending has a major impact on both the state economy and the state budget. The federal government spent $38.5 billion in Oklahoma last year, which works out to $10,256 for each resident.  The largest component of federal spending is for direct payments to individuals for Social Security and Medicare, along with salaries and wages to military personnel and other federal employees based in Oklahoma.

The federal government also transferred $7.8 billion in grants to state and local governments for over 530 programs.  The largest of these by far is Medicaid ($3.5 billion). In 2008, almost one dollar of every three in Oklahoma’s total state revenue came from the federal government.

Under the Budget Control Act approved this summer, the Joint Select Committee on Deficit Reduction, known as the Supercommittee, has until November to propose at least $1.2 trillion in deficit reduction measures over the next decade. If the Joint Committee fails to agree on the requisite savings, or if its recommendations are rejected by Congress or the President, then automatic procedures to achieve $1.2 trillion in deficit reduction will take effect (You can watch our video explanation of the Budget Control Act or see our summary slides). The impact that the Budget Control Act will have on Oklahoma and other states will depend decisively on whether the Joint Committee reaches an agreement, and what the agreement looks like.

Should the Joint Committee reach an agreement, the impact on the state budget will depend on the size and make-up of the deficit-reduction measures it adopts – in particular, decisions affecting Medicaid. In September, President Obama released a proposal aimed at reducing the deficit by over $4 trillion over the next ten years through a combination of spending cuts and tax increases. The President’s plan includes modest cuts to Medicaid spending totaling an estimated $66 billion over ten years, primarily by reducing limits on provider fees and phasing in a new blended match rate for Medicaid and CHIP.  His plan does not envision additional cuts to discretionary spending beyond those agreed to under the Budget Control Act. However, it is quite possible that any agreement would include much deeper cuts to Medicaid and to other federally funded state programs.

Should, however, the Joint Committee fail to reach an agreement, this outcome will trigger automatic cuts known as ‘sequestration’. Under sequestration, discretionary spending will be subject to across-the-board cuts, while most mandatory spending will be exempt. Many of the largest federally funded state-run programs will be exempt from automatic cuts, including Medicaid and CHIP, cash assistance payments, major nutrition programs such as WIC and the school lunch program, vaccines for children, child care entitlement spending, and transportation. In total, Federal Funds Information for the State estimates that of $497 billion in federal funding for major grant programs, $364 million, or 73 percent, would be exempt from cuts under sequestration.

But even if only roughly one-quarter of federal grant payments to the state are subject to cuts, the impact would be significant. The Center on Budget and Policy Priorities calculates that non-exempt programs would face a 9 percent annual cut under sequestration effective January 2013. These cuts would be above and beyond $900 billion in cuts to discretionary programs over ten years already agreed to under the Budget Control Act. Programs facing cuts include:

• almost all federal education spending, including Title I funding for low-income students, IDEA funding for students with special needs, and Head Start;
•  important social programs, including child welfare services, community service and community development block grants, low-income heating assistance, housing programs, and non-mandatory child care spending;
• law enforcement programs;
• environmental protection programs;
• agricultural programs.

It’s also important to note that if automatic cuts take effect, half of all cuts, equal to $54.7 billion each year from 2013 to 2021, must be absorbed by the defense budget.  States such as Oklahoma with a large military presence would be disproportionately affected by such deep cuts in defense spending.

The Joint Committee can avoid automatic sequestration and minimize cuts in Medicaid and other grant programs to states to the extent it achieves part of its deficit reduction goals by increasing federal revenues rather than reducing federal support to states.  Since Oklahoma is not a wealthy state, Oklahoma would likely do better under a plan that reduced deficits by raising revenues from the well-off than by cutting aid to states.

Whether states should be rooting for the devil known (the failure of the Supercommittee triggering significant cuts to many discretionary programs but exempting Medicaid) or the devil unknown (an agreement where everything is on the table, including Medicaid) can’t really be determined. Either way, we can expect that federal cuts are coming and that they will make the challenge of funding core services even more daunting in the years ahead.