Debt-Ceiling Fallout: States to Take Another Hit

capitol buildingThe debt-ceiling drama may be over, but -- for state governments -- the ramifications are just beginning to reverberate.

The new law requires a 12-member, bipartisan "super committee" to recommend at least $1.5 trillion in spending cuts by late November. The law also caps discretionary spending, which includes funding for defense, transportation and basic research.

The budget cuts will deal another blow to state economies still struggling to recover to pre-recession levels. Many have relied on federal stimulus money to close budget gaps during the last few years.

"Now that [stimulus funds] have dried up and additional cuts are coming, states will have to take measures that will be counter cyclical to recovery," says David Adkins, executive director of the non-partisan Council of State Governments in Lexington, Ky. "Many states have gone through several rounds of right-sizing their workforces, including layoffs and furlough days and early retirement, and that will now be forced to continue."

With so many states running lean and mean, there's not much fat to cut. "In Michigan, we've already made tough cuts to get our budget into structural balance," says Kurt Weiss, public information officer at Michigan's state budget office. "We have cut health and human services, education and employee concessions." But 44% of the state's total $47 billion budget comes from the federal government, he said. "It's clear that there will be fewer federal dollars flowing into our state coffers."

For the 2012 fiscal year, about 1% of the budget will be cut. "Although there will likely be some reduction in state programs, the real pain will be felt later down the road," says Jeff Hurley, policy specialist with the National Council of State Legislatures.

Military Cuts

States with economies that rely on military installations and defense contractors are likely to be among the hardest hit, experts say. The budget agreement includes at least $350 billion in defense cuts in the next 10 years. If the super committee doesn't agree on cuts by Thanksgiving, it will trigger $1.2 trillion in automatic reductions in the coming decade, with roughly half of those cuts coming from the Pentagon.

"It's hard to know exactly what will be the final product of the super committee's work, but if they fail to act, it will have fairly devastating consequences," Adkins says.

Companies such as Boeing (BA) could also suffer pain from the cuts. Boeing has 61,000 U.S. employees working on defense programs, with the largest concentrations in Missouri, Washington State, southern California, Arizona and Pennsylvania, according to spokesman Dan Beck.

"We will do everything we can to meet demand for cost management and greater efficiencies on these programs, something the Pentagon has been pushing hard for a year now," Beck says. "We'll look at our workforce. We have had some layoffs even before this because of contracts being completed and taking the appropriate steps to adjust our workforce and consolidate operations to bring down costs."

Marty Brown, director of the Office of Financial Management in Washington state, says he's concerned about the prospect of additional layoffs. "If cuts are made [in defense], it will be tough on our economy because people will...cut back on spending," he says.

Brown also expects to spending cuts reductions in transportation and education, although he has not received any specific information. "We have asked agencies that have lots of federal grants to think, 'what if' -- what if they lose their grants, what will they do with staff, what services would be affected," he says.

Medicaid and Health Care

In addition, state officials also are concerned about health-care costs. The super committee has the ability to cut programs such as Medicare and Medicaid. States have been using federal stimulus money to cover their health-care budget shortfalls, so any Medicaid cutbacks would be particularly problematic, Adkins says. State- and local-government layoffs could boost Medicaid caseloads just as federal stimulus funds dry up and the government cuts back. "It's almost a perfect storm for a fiscal crisis for states," he says.

States are significantly increasing their own Medicaid spending in order to meet federal requirements, according to the National Association of State Budget Officers. Medicaid general-fund spending is projected to increase by $16 billion in the 2012 fiscal year.

Amid the coming cutbacks, states will be hoping for more flexibility in Medicaid rules. "Whether it's pharmacy, provider reimbursement rates, who is eligible and what kind of coverage has to be provided, states will be looking at options to deal with increasing caseloads," Adkins says. "And there are so many unknowns on how new health-care reform will affect those programs."

Tim Keen, director of the Office of Budget and Management in Ohio agrees: "Now that we'll be getting fewer federal dollars, we're hopeful that Washington will provide states with greater flexibility to manage any changes."


Federal cuts in basic research also could impact states with major universities that rely on federal grants, including Washington, Alabama, Minnesota, Ohio and Michigan, Adkins says.

"Grants to state universities come with funds for indirect expenditures to underwrite the cost of physical plants and all of the infrastructure to allow that research to go on," he says. "Many large state universities rely on those indirect dollars in the grantmaking process to fund basic operations. There won't be state funds to supplant those dollars."

Meanwhile, there's no shortage of anxiety because so much remains unclear. "We know the global targets, but we don't know how much will be cut, over what period of time and how it will be done," says H.D. Palmer, spokesperson for the California Department of Finance. "Will there only be cuts or will there be ways to close loopholes? For most states, it's just too early to know what this all means because key decisions have yet to be made."

Michigan official Weiss says he wants to make sure states have a seat at the discussion table. "There should be a strategy for making sure the states stay connected with what's going on in Washington, for the states to be involved in working with the joint committee as they make their decisions," he says.

For now, states that have spent the last few years tightening their belts will have to pull them even tighter. As Jeff Caldwell, press secretary for Virginia Governor Bob McDonnell, says: "We have continued a conservative financial approach which has resulted in two consecutive fiscal years with budget surpluses. We will use this same conservative, measured approach to addressing any necessary choices we must make going forward to balance our budget based upon any funding changes from Washington."

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State governments have plenty of room to tighten their budgets despite what the Council of State Governments ( read lobbyists) says. I live in Virginia, a state with one of the better financial positions, but even here, year after year the state budget grew at considerable multiples of the increase equivalent to population increase plus inflation rate.
More government regulations, more government employees to enforce them, more wasted tax dollars .
The states will decrease the size of government and concentrate on core government functions because they have to just as the federal government will eventually. We will all be better off because of the benefits of a leaner government.

August 06 2011 at 11:46 AM Report abuse rate up rate down Reply

With the 2012 election becoming a topic of focus, American voters need to realize that the folks we will be electing Democrats, or Republican will make promises of what they will do "now" for the betterment of America. None will say what they will do to help our country 10-20-30 years down the road. Regardless of the promises made, few will keep those promises once elected. Who we elect now will impact future generations. I went to graduation ceremony. The class was introduced as the "Class of 2023". If you have a candidate running that is not a "career politician", or has ties to the same, give that person a good look before casting your vote. As long as we keep re-electing the same old mind set that career politicians enforce, America's problems will not ever get any better. Blaming one group, rather it be the democrats, or the republicans for our country's problem is not correct. Both political parties are to blame equally. The won't govern as a team, and they have both placed the good of our country down the list of their personal political agendas. State governments can cut a lot of wasted tax dollars simply by getting rid of the 'lazy" state employees they employ. Replace them with fewer people who have better work ethics. In other words hire the person who can do the work of two lazy people during a normal day's work. States would get the same work for half the costs. Replace the supervisors who allow this laziness. I am not saying all state workers are lazy. Some have the proper work ethics, and treat their government employment as a gift, and not as a self, righteous entitlement. No we need a new breed of person running government.
Someone who acts responsibly to those who put them in office. This current crop of politicians, both republicans, and democrats, are simply not cutting it.

August 06 2011 at 10:23 AM Report abuse rate up rate down Reply

How about a 10% across the board pay cut for all federal employees and a 5-10% employee reduction across the board. this would apply to our incompetent nincompoop congressmen who helped get us into this fix by spending like a drunken sailor on the first night of liberty. How do a bunch of administrators get immunity from the recession while the private sector-who has to pay for them-gets whacked with a bigger tax bill every year. Average federal government salaries are now-including fringe-more than 30% higher than their counterparts in the private sector. What gives here and why was this abuse of taxpayer money allowed to coninue in the 2000's when the nation had gone through two recessions????????

August 06 2011 at 9:58 AM Report abuse rate up rate down Reply

Of the 27 amendments to the Constitution, seven (7) took 1 year or less to become the law of the land...all because of public pressure.
Congressional Reform Act of 2011

1. No Tenure / No Pension.
A Congressman collects a salary while in office and receives no pay when they are out of office.

2. Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Security system immediately. It may not be used for any other purpose.

3. Congress can purchase their own retirement plan, just as all Americans do.

4. Congress will no longer vote themselves a pay raise. Congressional pay will increase by the lower of CPI or 3%.

5. Congress loses their current health care system and participates in the same health care system as the American people.

6. Congress must equally abide by all laws they impose on the American people.

7. All contracts with past and present Congressmen are void effective 1/1/12. The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.

If each person contacts their representatives and a minimum of twenty people then it will only take three days for most people (in the U.S. ) to receive the message. Maybe it is time.

August 06 2011 at 9:51 AM Report abuse rate up rate down Reply

Republicans need to get their heads out of their asses. there out of touch with reality and the american people.
this Nations 1% wealthiest Americans need to start paying there fair share in taxes, You can't balance the budget the backs of this country blue collar workers alone. Why is it that for those making over 500,000. a year they only get taxed on .20 cent of each dollar earned while the rest of us are taxed on every penny of every dollar earned? It's all about corporate greed. And don't tell me they need the tax breaks so they can create more jobs, that's just a bunch of bull There raking in the profits, while out sourcing our manufacturing jobs etc.

August 06 2011 at 8:54 AM Report abuse +3 rate up rate down Reply

If the states are so concerned about tightening their belts even tighter, I see no mention about how the economy continues to be affected by these "open borders" leading into our country? I live in an area/neighborhood that is considered a major "pocket" of ILLEGAL ALIENS. In spite of these news reports, I continue to see on a daily basis, ILLEGAL ALIENS infiltrating the area and popping out ANCHOR BABIES! At the local supermarkets, these people continue to use more and more Food Stamp Cards. They continue to use the hospitals like Doctor's Offices and hospitals continue to close due to low funds. Politicians are still pushing for Nightmare Acts/Dream Acts and it seems the Liberals, Greedy Attorneys, License Plates, Drivers Licenses, etc. are still being issued by "questionable" means. These thousands and thousands of ILLEGALS are continuing to bring down the country and we American Citizens are still being told that we are going to have to "cut-back" on this and that..... Our Government and The Liberals are succeeding in bringing America into becoming very quckly, another THIRD WORLD COUNTRY!

August 06 2011 at 8:42 AM Report abuse +1 rate up rate down Reply

Republicans repeatedly assured the nation that once the debt-limit deal was done -- capping spending, cutting the budget deficit, and getting "90 percent" of what they wanted -- the economy would bounce back. No stimulus,no revenues, no demand...down we jobs..

August 06 2011 at 7:59 AM Report abuse +2 rate up rate down Reply
1 reply to tom's comment

I guess the Republicans really wanted 100% and now we have to face the music while the rich get ready to dance on our graves. No education, no research, no green jobs, no infrastructure, no medicare, no jobs, no life.

August 06 2011 at 9:25 AM Report abuse +2 rate up rate down Reply

When Obama and Boehner discussed the "grand bargain", there was real hope that compromise would bring our economy to a level we needed to build from, and instead, thanks to the selfish hypocritical hostage takers, we agreed to a puny, and ineffective deficit reduction plan. A loser across the board, and now the middle class is stuck with the bills created by a republican majority whose imprint of our problems are permanent and will last until at least the next election

August 06 2011 at 7:48 AM Report abuse +4 rate up rate down Reply

to satisfy american ego to be the number one power on earth we have spent ourselves with wars and so called defense buildups to absolute bankruptcy.

August 06 2011 at 7:38 AM Report abuse +4 rate up rate down Reply
1 reply to Paul FIQUET's comment

Osama Bin Laden got his way in the end. He said he would bankrupt us and he has succeeded. He has his 72 virgins now and we have nothing but bills.

August 06 2011 at 9:27 AM Report abuse rate up rate down Reply
1 reply to newsmyrnasuite's comment

Your unsubstantiated rant would make sense if (1) he actually had said he would bankrupt us, (2) he had not been the one for looking for a larger deal that would more likely avoid a downgrade, (3) the conservatives hadn't been the ones who stonewalled the Grand Bargain and shared sacrifice, (4) he were a practicing Muslim. (Whether he believes Christianity is no different from many politicians before him and around him who know that a non-practicing non-Christian has no chance for office: Exhibit A: Rick Perry.)

August 07 2011 at 9:36 PM Report abuse rate up rate down

News Flash - Non-Regulated Energy & the over inflation it created is probably one of the biggest factors in private spending hold back - Small business's also rely on daily energy data to make decisions - Energy cannot continue to follow the market up & down daily, or there can be no growth - There are to many in the game now and no one says a word - Yes analyst a-holes its that simple - We need a hold on affordable energy, whatever energy it is and everything will realign quickly - Hmmm do I heat, or cool my house, or buy that durable good I want?

August 06 2011 at 6:49 AM Report abuse +2 rate up rate down Reply