Fiscal Outlook

Fiscal conditions began to improve for states in the 2011 fiscal year. State revenue collections grew by 6.4 percent and state general fund spending increased by 4 percent following two consecutive years of declines. Additionally, the number of states making midyear budget cuts dropped from 39 states in fiscal 2010 to 19 states in fiscal 2011. In the 2012 fiscal year, states are expected to continue their recent improvement with both state revenues and state spending projected to grow. Fiscal conditions, however, remain below pre-recession levels in many states even with the recent increases. States will have to continue to make difficult decisions in the 2013 fiscal year and beyond as they contend with increased spending demands, slowly recovering revenue collections, uncertainty regarding future federal funding and long-term liabilities including pensions and retiree health care costs.

State budgets are getting better in 2012, but they’re not good yet.  “States are seeing an uptick in their revenues, but they’re still struggling to get back to prerecession levels,” said Jennifer Burnett, The Council of State Governments’ program manager for research services and special projects. “The 2012-13 budget cycle is going to be somewhat similar to last year. It’s going to be all about closing the gaps, trying to find the money to preserve funding for education and the growing cost of social services like Medicaid and unemployment.”

It’s going to be another challenging year for state policymakers—education reform, rising Medicaid costs, uncertainties caused by lack of federal authorization on transportation and education programs, coupled with the ever-present problems of gaping budget holes.
 

Now that the requiem has been written for the Super Committee the question is what does “sequestration” mean for state budgets.    The bottom line is that the collapse of Washington’s latest effort to set the federal budget on sound fiscal footing is a mixed bag for the states.   Medicaid represents the center of gravity of the state-federal fiscal relationship, and the Super Committee’s failure to reach a compromise has spared the program from near term cuts.  However, the nearly $190 billion in “discretionary” pass through grants received by state and local governments are squarely in the cross hairs of the sequestration process.

As members of the new Joint Select Committee on Deficit Reduction of the U.S. House and Senate meet to consider ways to slash the federal deficit, they’ll likely look to the work of the National Commission on Fiscal Responsibility and Reform, which last year recommended ways to cut federal spending.

Former U.S. Sen. Alan Simpson of Wyoming, who co-chaired that commission with former Sen. Erskine Bowles, told Capitol Ideas last winter that states should be prepared for major changes if the federal government is to get its fiscal house in order. Simpson will offer the fiscal keynote during The Council of State Governments National Conference and North American Summit.

In the mid-1990s, Canada was using $1 out of every $3 to service debt. The Wall Street Journalreferred to its Loonie—the $1 coin—as the Northern Peso. Linda Nazareth, an author and in-house economist for the Business News Network in Canada, said times have changed, in part because the Canadian public bought into the need to turn things around. “I don’t know if that has politically been done in U.S. yet,” Nazareth said during The Council of State Governments’ Eastern Regional Conference earlier this month.

In the mid-1990s, Canada was using $1 out of every $3 to service debt. The Wall Street Journalreferred to its Loonie—the $1 coin—as the Northern Peso. Linda Nazareth, an author and in-house economist for the Business News Network in Canada, said times have changed, in part because the Canadian public bought into the need to turn things around. “I don’t know if that has politically been done in U.S. yet,” Nazareth said during The Council of State Governments’ Eastern Regional Conference earlier this month.

States face a grim future under the federal deficit reduction deal reached to raise the debt ceiling earlier this month. Chris Whatley, director of The Council of State Governments’ Washington, D.C., office, told policymakers around the country that states stand to lose federal funding in several areas. “You’re going to get squeezed and the squeeze is going to be disproportionate to the amount of total spending on the federal side,” said Whatley.

Author David Osborne wrote the core focus of state government is to "educate, medicate and incarcerate." In this new age of austerity, however, the state-federal funding mechanisms that have underpinned these priorities for nearly half a century are beginning to fray.  The Budget Control Act of 2011 may be just one week old, but with the stock market in free-fall, it's going to have to grow up fast. Washington pundits are tripping over themselves to handicap the deliberations of the newly formed "supercommittee" and pouring through vintage 1980s news articles to learn how the Gramm-Rudman inspired "sequestration" process may play out.  

After more than six months of partisan bickering, Washington leaders managed to avert default by stealing a page from the Reagan era.   The 74 page bill approved by Congress revives and amends Gramm-Rudman, the marquis deficit reducing legislation of the 1980’s.  The full impact of the deal won’t be known until Congress translates the loose spending targets in the legislation into specific program cuts through the annual appropriations process, but it is clear that federal funding for states is set to drop precipitously. 

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