Debt Ceiling Deal Leaves States with Grim Future

E-newsletter Issue #76 | August 18, 2011

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.

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. He’ll be a featured speaker during The Council of State Governments’ National Conference and North American Summit Oct. 19-23 in Bellevue, Wash.

“(State officials) need to know the great milk cow in the sky dropped dead and that it’s over,” Simpson said in an interview for the March/April Capitol Ideas. “If they’re waiting for the next injection of some kind of funding from the feds to get the states propped up, … they probably saw the last one go by with the last compromise, which added almost $1 trillion bucks to the deficit without any reduction in spending.”

The new deficit reduction committee is looking at spending across the board. In fact, if the bipartisan committee can’t reach agreement, a series of cuts in everything from social programs to defense will take effect early next year. That’s part of the “sequestration” rule included in the debt deal reached earlier this month.

Simpson told Newsweek the debt-ceiling deal is a start, “and that’s all you can charitably say.

“It really doesn’t get to the big numbers. It doesn’t get to the big spending issues. It doesn’t get into Medicare, which is on automatic pilot, which is going to eat through the whole budget. It doesn’t get into Social Security solvency. Defense is not sacrosanct,” he told Newsweek. “For heaven’s sake, we found enough fat in there that would choke a horse.”

The National Commission on Fiscal Responsibility and Reform’s report, “The Moment of Truth,” said, “by 2025 revenue will be able to finance only interest payments, Medicare, Medicaid and Social Security. Every other federal government activity -- from national defense and homeland security to transportation and energy -- will have to be paid for with borrowed money. ... Interest on the debt could rise to nearly $1 trillion by 2020.”

President Barack Obama charged the commission with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Its primary purpose was to propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. It also was asked to develop recommendations to improve the long-term fiscal outlook, including changes to entitlement spending.

The commission says its six-part plan, released last December, would reduce the debt by $4 trillion through 2020, reduce the deficit to 2.3 percent of GDP by 2015, reduce tax rates, cap spending at 21 percent of GDP and ensure lasting Social Security solvency. The plan also would stabilize the debt by 2014 and reduce debt to 60 percent of GDP by 2023 and 40 percent by 2035.

CSG Resources

Other Resources

Also in this Issue: