States need to prepare for massive cuts in federal funding

Sven Larson Contributor
Font Size:

Fiscal conservatives are looking forward to November 23, the day that the congressional super-committee, which is tasked with finding $1.5 trillion in budget cuts, will unveil its recommendations.

But not everyone is as jubilant. State legislators and governors fear that the super-committee will target the half trillion dollars that the federal government sends to states each year through a program known as Federal Aid to States (FAS). If these funds do become the target of budget cuts — which is very likely — unprepared states could find themselves in far worse fiscal conditions than they are today.

To prepare their states for the almost inevitable cuts, state officials should begin reforming federally sponsored programs now. So far, however, state officials’ only reaction to the threatened cuts has been to plead with Congress not to cut the funding.

FAS is effectively an umbrella for a long list of spending programs. Among the best known are Medicaid, Temporary Assistance for Needy Families (TANF) and No Child Left Behind. In 2009, Congress funneled $552 billion into state coffers through FAS. This represented a 17 percent increase over 2008.

It gets worse. In 2010, the federal government sent a whopping $630 billion to the states, up 14 percent over 2009. In two years, the flow of federal money into state coffers has increased by 34 percent.

When the federal government is borrowing 40 cents of every dollar it spends, such a no-holds-barred spending spree is of course unsustainable. It would almost be dereliction of duty if the congressional super-committee did not suggest cuts in FAS spending.

But the states seem to be entirely unprepared for any such cuts. Just months after the passage of the 2009 stimulus bill, which increased funding for FAS, the National Governors Association was begging Congress to perpetuate the elevated FAS funding levels.

This summer, when it looked like the federal government might shut down, Massachusetts Governor Deval Patrick gave voice to many governors’ fears of even briefly losing federal funds. One can only imagine how they would react if Congress actually started cutting FAS funds.

The bottom line is that most states are entirely unprepared for a reduction in FAS funds. The situation is worse for the 24 states that, as of 2009, depended on the federal government for at least four dimes of every dollar they spent.

If we add the money they had to spend to get those funds — known as Maintenance of Effort (MoE) — their effective dependency on FAS was even higher. In 2009, FAS and MoE funds constituted more than half of the state budgets of New York, Pennsylvania, South Dakota and Arizona. A re-calculation for the just-released 2010 figures will in all likelihood show states even deeper in the pockets of the federal government.

Again, the federal government will have to start cutting FAS funds, and it will have to start doing so sooner rather than later. Here’s an estimate of how much funding states will lose for various programs over the next two years purely as a result of the 2009 stimulus funds drying up (based on the new 2010 FAS figures):

  • Medicaid: $33.2 billion (not counting adjustments for Obamacare)
  • Education: $27.6 billion
  • Housing and Urban Development: $1.2 billion
  • TANF (welfare): $721 million

Remember, these are just one-time adjustments at the end of the stimulus bill. Permanent spending cuts will of course have a much bigger impact on state budgets.

Only the fiscally reckless would deny that Congress needs to embark on a long journey of spending cuts. However, if those cuts are not executed in an orderly fashion, and if states do not prepare themselves and make the necessary adjustments ahead of time, the cuts could do more harm than good. They would hurt people who depend on government for Medicaid or welfare without necessarily increasing their chances of becoming self-sufficient.

On the other hand, if state officials start preparing their states for the funding cuts now, they’ll be able to treats the cuts not as a threat to society’s most vulnerable members but rather as an opportunity to restore state sovereignty.

Sven R. Larson is a research fellow with Wyoming Liberty Group, a free-market think tank. He has written two books and numerous research papers and articles about economic policy, state budgets, health reform and the welfare state. He is often interviewed by TV, radio and newspapers on his topics of expertise.