States Need to Prepare for Likely Cuts in Federal Funding

States Need to Prepare for Likely Cuts in Federal Funding
February 26, 2014

Endless gridlock and an exploding national debt have become the new normal in Washington, DC. Despite this volatile policy environment, states continue to rely heavily on federal funds for their budgets, and, according to the nonpartisan fiscal watchdog group State Budget Solutions, this dependence is increasing every year.

A new State Budget Solutions report reveals states received 31.6 percent of their total revenue from the federal government in 2012. Reliance on federal money in state budgets ranges from nearly 20 percent of spending in Alaska to more than 45 percent in Mississippi. And the costly strings attached to the federal funds, such as burdensome “maintenance of effort” requirements, will last far longer than the federal support and will make it increasingly difficult for state governments to balance their budgets in a fiscally responsible way, the report says.

“We all know that federal spending is not sustainable and federal funding to the states will be cut. The major question for states is whether they will plan ahead for this inevitability,” said Bob Williams, president of State Budget Solutions.

Utah Leads Way

Policymakers in Utah provide a great example of how states can prepare for the fiscal challenges ahead.

"States are far too dependent on federal dollars. It would be financial malpractice for states not to create fiscal emergency plans to prepare for the inevitable time when those federal funds dwindle or disappear," said Utah state Sen. Deidre Henderson (R-Spanish Fork).

Nearly 32 percent of Utah’s state spending relied on federal money in 2012, according to State Budget Solutions.

Financial Ready Utah prepares the state for future financial stress handed down by the federal government. The initiative includes assessing the risk of a significant reduction in federal funds, developing a contingency plan in the event the federal government reduces funding to the state, and requiring the reporting of federal receipts received by state agencies. As a result, Utah’s fiscal management record has earned the state strong bond ratings from the Fitch, Standard & Poor’s, and Moody’s Investors Service rating agencies. 

ALEC Adopts Funding Policies

Looking to help other states weather future economic challenges, Henderson and Utah Rep. Ken Ivory proposed three policies that were adopted by the American Legislative Exchange Council’s Task Force on Tax and Fiscal Policy during the States and Nation Policy Summit in December.

These ideas are publicly available at www.alec.org:

"For most states, the single largest line item of their revenue is federally sourced funds,” said Ivory. “With the bipartisan fiscal recklessness at the federal level on frequent display, this largest source of revenue to the states is in jeopardy. In fact, it is already being cut back. Developing a financial earthquake plan in the states is not just good policy; it’s is an imperative going forward.

"While Washington, DC may struggle with fiscal uncertainties, states like Utah are pursuing innovative and pro-growth solutions to their financial challenges.”

The difficult work of crafting responsible fiscal policy is best accomplished before it is absolutely necessary. As any knowledgeable financial planner will say, complicated financial problems rarely improve on their own. However, prudent lawmakers can follow Utah’s example and prepare for the day when Uncle Sam calls with bad news from Washington.

Jonathan Williams (jwilliams@alec.org) serves as director of the Center for State Fiscal Reform at the American Legislative Exchange Council and is an author of Rich States, Poor States, an annual economic outlook ranking of the nation’s states, whose coauthors are economists Arthur Laffer and Stephen Moore.

Internet Info

“New data reveals amount of federal aid to states in 2012,” State Budget Solutions: http://www.statebudgetsolutions.org/publications/detail/new-data-reveals-amount-of-federal-aid-to-states-in-2012?f=puball