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What the Debt Limit Deal Means for States

The debt limit deal inevitably will lead to large federal cuts in programs that directly benefit families and communities, adding to the deep and widespread cuts that states have made in their programs — everything from preschool to services for the elderly.

The recession triggered the largest decline in state revenues on record, opening up more than $430 billion in budget shortfalls over the past four years (see graph).  States have balanced their budgets mostly by cutting services and shedding employees:  34 states have cut K-12 education, 43 have cut college funding, 29 have cut services for the elderly, and 31 have cut health care.

To cite just a couple of examples, Texas is eliminating state funding this year for pre-K programs that serve around 100,000 mostly at-risk children, and Arizona is eliminating Medicaid coverage for 100,000 poor adults who otherwise would qualify.

States and localities have also shrunk their workforces by 577,000 jobs since 2008 and continue to shed tens of thousands of jobs per month.

Now, the federal government will pile on by making deep cuts.  We do not yet know exactly how Congress will meet the savings targets in the new debt limit deal, but we know that:

  • The required cuts in federal “non-security discretionary” funding will likely hit states hard. Fully one-third of this category of federal spending flows through state governments in the form of funding for education, health care, human services, law enforcement, infrastructure, and other services that states and localities administer.  The debt limit deal likely will lead to well over half a trillion dollars in cuts in non-security discretionary funding over the next decade.  Large cuts in federal funding to states would force states to make still-deeper cuts in their budgets.Congress could spare aid to states while taking all the required savings from purely federal areas of spending, like the FBI and the National Institutes for Health.  But that’s extremely unlikely, since the resulting cuts in those areas would be prohibitively large.
  • There’s a significant threat that the committee charged with recommending further deficit-reduction measures will find large Medicaid “savings” that merely shift costs to states. The deal exempts Medicaid (as well as Social Security and several other programs) from the automatic, across-the-board cuts that will occur if Congress fails to pass at least $1.2 trillion in deficit-reduction measures by 2013.  But the bipartisan “supercommittee” that will recommend further cuts will be free to include large reductions in federal Medicaid funding.   Reductions would require states either to increase their own Medicaid funding to compensate  — leading to state-level tax increases or cuts in other areas like education — and/or make cuts both to Medicaid beneficiaries and to the providers and managed care plans that serve them.So, from a state’s perspective, the debt limit deal means that it will have to scale back or eliminate many education, health, public safety, and other services that the federal government has helped support unless the state comes up with replacement dollars — dollars that most states just don’t have.