News generally breaks down into two kinds: good and bad. The good news on Tuesday was the United States of America did not default on its financial obligations, although a Chinese credit rating agency was unimpressed and downgraded U.S. debt anyhow.
The bad news is states will almost certainly feel like they got a sucker punch come the holidays. There is almost no way that states and cities can win in the next Washington spending cuts scenario. On Wednesday analysts were trying to answer, What Does It Mean?
“The bad news is for states and cities, uncertainty remains,” said Kil Huh, research director at the Pew Center on the States. “As part of the deal to raise the debt limit Congress capped discretionary spending, expecting to save over $900 billion over the next ten years. What that means for states and cities is that they’re uncertain about where the cuts are going to come from, how deep they’ll be, or the timing of those cuts.”
Congressional leaders will name a twelve-member super committee – six Republicans, six Democrats – within two weeks. The lucky dozen will propose at least $1.2 trillion in spending cuts before Thanksgiving. Everything will be on the table – including Medicaid, Medicare, Social Security, defense spending and assistance to states. The Senate and House will vote before Christmas. Across-the-board spending cuts will happen if committee proposals fail.
The impact in Georgia could again be life changing as the definition of affordable government service continues to shrink. The state has gone well past fixing its financial challenges by closing unnecessary museums. There is only so much you can accomplish with attrition and furlough days. At some point entire government service sectors might become unaffordable.
“Spending cuts will certainly be painful for state and local governments that have become addicted to federal dollars, but that should not be an excuse to avoid meaningful spending reduction,” said Kelly McCutchen, president of the Georgia Public Policy Foundation.
All this is happening as Georgia and other states move into new fiscal years without federal stimulus funds that enabled them to claim balanced budgets. Last year Georgia received $1 billion; the new Fiscal 2012 budget was balanced without stimulus funds. Politically, stimulus funds are an idea whose time has come and gone.
Next year budget planning is underway without any real idea how much federal support will be available. Georgia received $8.5 billion in total federal assistance during Fiscal 2010, the last year for which audited data is available. That included $5.4 billion for Medicaid.
About one-third of state budget dollars nationwide come from the federal government. It should be clear now that shrinking state governments will need to shrink even further.
“Part of Georgia’s issues are going to come from where we are already relatively efficient — depending on your viewpoint — in Medicaid and social services so cuts in these areas are going to be felt more keenly,” said Carolyn Bourdeaux, associate director at Georgia State University’s Fiscal Research Center.
States are fearful of ObamaCare legislation that will expand Medicaid eligibility starting in 2014. The total could be several hundred thousand persons in Georgia. That is one reason more than two dozen states including Georgia challenged ObamaCare in federal court.
Plenty of Georgia budget sectors that could be impacted by Washington spending cuts. What kind of transportation budget can it anticipate? The Fiscal 2010 budget had nearly $900 million in federal funds. Federal education dollars are 14 percent of the state budget.
Will decisions in Washington have an impact on Georgia’s unfinished tax reform? The state is trying to reduce its reliance on personal income tax revenue. Legislators almost finished tax reform this year before they lost confidence in the financial analysis.
Carolyn Bourdeaux again from the GSU Fiscal Research Center: “My quick assessment is there are going to be two issues coming out of the federal discussion that might influence tax reform. One is going to be whether the state wants to make up the difference for lost federal dollars which it could do even post tax reform.
“Two, if Congress takes up federal tax reform this may have a ripple effect on state taxes. For instance, our income tax is linked to the federal income tax. Georgia policy makers may want to see what happens with this,” Bourdeaux said.
The bottom line on tax reform: It was important before. It becomes more important now.
Georgia will also pay close attention to possible reduced defense spending. Georgia lost Forts McPherson and Gillem, the Navy Supply Corps School in Athens and Naval Air Station Atlanta as part of military base realignment recommendations that became law six years ago.
Overall, however, the state was a winner. It gained 4,000 military and civilian personnel plus their dependents because of expansion, much of it at Fort Benning in Columbus. Georgia also has vast military employment in Atlanta metro, central Georgia and on the coast.
If you’re into countdown clocks, the Congressional super committee is down to 112 days. They will not be comfortable days for anyone trying to measure how this will affect Georgia.