How States Should Prepare for Federal Budget Cuts
States face the potential loss of federal funds that may come when the 12-member Congressional “super committee” makes its recommendations for cutting $1.5 trillion from the federal deficit. The super committee will release its recommendations just before Thanksgiving, so states now have a few months to prepare for the impact of the federal government’s financial problems may have on state budgets.
State Budget Solutions recently examined the varied approaches states are taking to the address the potentially significant losses. Federal funding is a large component of state budgets. For example, 40% of Tennessee’s $30 billion budget comes from the federal government. Given the large amount of funding states stand to lose, Standard and Poor’s has warned that it could downgrade states’ credit ratings. Given the dramatic impact that the supercommittee could have on state finances, states need to be ready. Instead of raising taxes as the Maryland governor has suggested, or starting a $30 million fund like Virginia is doing, states should look to Utah as an example of the best way to prepare.
States should pass legislation similar to Utah’s HB 1381, titled “Federal Receipts Reporting Requirements.” This legislation, which Utah lawmakers wisely passed this past spring, requires that the state indicate what budget cuts would be necessary if Utah lost 5% and 25% of its total federal receipts. The bill also requires certain state agencies to report the federal receipts they have received.
As has been very clearly demonstrated, the current skyrocketing federal deficit is unreasonable and unsustainable. This legislation enables states to prepare for how to budget when Congress comes to terms with that fact. By requiring plans for cuts at two different levels, at 5% and 25%, Utah is prepared for varying circumstances. Legislators can make advance preparations to manage the state budget when the day of fiscal reality hits the federal government. Use of reality-based budgeting, which bases funding on what lawmakers have identified as the government’s core functions, makes preparing the necessary contingency plans easier. It also allows states to being the process of planning to pay its own way when the flow of federal funds dries up.
One of the many benefits of Utah legislation is increased transparency. Under the law, legislators and the public are made aware of how exposed the state is to federal grants and to other federal receipts. A requirement that agencies report their federal receipts should be in place in all 50 states. It should be clear what every agency in every state receives from the federal government. This requirement would lead to increased transparency, which is crucial to good state budgeting.
Additionally, lawmakers should require that all federal funds, including unanticipated receipts, go through the legislature. In the case of part-time legislatures, a select committee could be set up to handle the unanticipated receipts that occur when the legislature is not in session. While it is particularly relevant this fall, every state should have such a system in place, regardless of the federal government’s situation. Lawmakers should be aware of exactly how many federal funds are coming in and where they are going. Requiring that all federal funds flow through the legislature will make accounting easier and also facilitate greater transparency.
By taking following Utah’s lead, states can increase transparency and make necessary preparations so that they are prepared for whatever funds do or do not come from the federal government. Utah is positioned to both accept the fiscal reality and pay its own way. All states need to reach that point before the super committee recommendations are released in November.