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The Impact of Sequestration
(and other federal
activities…) on State
Budgets
Association for Budgeting &
Financial Management
October 3, 2013
Scott Pattison
Executive Director
National Association of State Budget Officers
444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org
NASBO 2
The New Normal
NASBO 3
Background on State
Fiscal Situation
NASBO
Slow Budget Growth
-8
-6
-4
-2
0
2
4
6
8
10
12
%
General Fund Expenditure Growth (%)
*36-year historical average annual rate of growth is 5.5 percent *Fiscal 2014 numbers are recommended
Source: NASBO Spring 2013 Fiscal Survey of States
*Average
NASBO 5
Federal Fund Expenditures by
Function, Estimated Fiscal 2012
Elementary &
Secondary Education
10.9%
Higher Education
3.5%
Medicaid
43.9%
Public Assistance
2.6%
Corrections
0.2%
Transportation
8.0%
All Other
30.9%
Source: NASBO State Expenditure Report
NASBO 6
Total State Spending by Function,
Estimated Fiscal 2012
K-12
19.8%
HigherEducation
9.9%
Medicaid
23.9%
Public Assistance
1.4%
Corrections
3.2%
Transportation
8.1%
All Other
33.7%
Source: NASBO State Expenditure Report
NASBO 7
General Fund Expenditures by
Function, Estimated Fiscal 2012
Elementary &
Secondary Education
34.7%
Higher Education
10.0%
Medicaid
19.6%
Public Assistance
1.5%
Corrections
7.0%
Transportation
0.5%
All Other
26.6%
Source: NASBO State Expenditure Report
NASBO 8
Sequestration
NASBO
Impact of Sequestration on
State Budgets in 2013
9
Source: Federal Funds Information for States (FFIS) (Note: Above figures only include programs that are part of
FFIS VIP Series.)
 The largest grant
programs (in terms of
funding) are exempt
from sequestration
 82% of federal funds
for major grant
programs to states
are exempt
NASBO
Impact of Sequestration on
State Budgets in 2013
10
Source: Federal Funds Information for States (FFIS) (Note: Above figures only include programs that are part of
FFIS VIP Series.)
 Sequester affected the
majority of grant
programs for states,
which are mostly
discretionary,
however…
NASBO
The Example of Maryland:
Sequester Impacts
 $1.6 billion in foregone wages by MD workers
 $2.1 billion total economic impact from
sequester
 MD has set $100 million aside in anticipation of
lost revenues due to the sequester.
11
NASBO
Other Examples
 Virginia – Sequestration contributed to sales tax
decline since April; state missed revenue
estimates for all tax sources
 Connecticut –concerned about long term
economic impacts more than direct budget
effects of the sequester
 Wisconsin – Concerned about economic effects
more so than grant funding losses
12
NASBO
Sequestration: How it Works
in FY 2014 and Beyond
 For FY 2014-2021, works differently for
discretionary programs
 Implemented by reducing BCA spending caps
 Still 50/50 split between defense and nondefense
 Cuts administered through appropriations process
(in theory)
 Enforced by sequestration (triggered after
Congress adjourns in January)
 Cuts to non-exempt mandatory programs work
same as in FY 2013
13
NASBO
Sequestration: Economic
Effects
 On September 26, 2013, CBO released a letter
on how cancelling automatic spending
reductions would affect 2014 economy
 CBO estimated that cancelling the cuts
(beginning in FY 2014) would increase GDP by
0.6 percent and increase employment by 800k
by the last quarter of calendar year 2014
 Although output and employment would be
higher, cancelling the cuts would lead to
greater federal debt
14
NASBO
Major state grant programs
affected by sequestration
15
 Major discretionary programs covered by
sequester include…
 Title I Education grants
 Special Education (IDEA) grants
 Head Start
 LIHEAP
 Women, Infants and Children (WIC) nutrition
grants
 Few mandatory programs affected
 Example: Social Services Block Grant (SSBG)
NASBO
Major state grant programs
exempt from sequestration
16
 Most mandatory programs are exempt, such as:
 Medicaid and CHIP
 SNAP (food stamp program)
 Child nutrition programs
 Temporary Assistance for Needy Families (TANF)
 Most highway and other surface transportation
programs also exempt
NASBO
Sequestration
Implementation Issues
17
 State contingency planning challenges
 In general, states do not have funds to make up
for all federal cuts
 Looming uncertainty, first over whether sequester
would be triggered, now over whether it will
remain in place
 Lack of clear guidance from federal agencies
 Legal questions and conflicts
 Secure Rural Schools
 Mineral royalty payments
NASBO
Overall Impact on States
18
 Most grant funding exempt from sequester, but
numerous programs will be affected (especially
in education)
 Grants that support local programs
disproportionately affected
 States are generally more concerned about
indirect effects than direct budgetary impact
 Lower tax collections, economic slowdown,
especially in states with many federal employees
and/or large defense presence
NASBO 19
Shutdown…
NASBO 20
Federal Dysfunction
“Today the country’s main businesses sit on
nearly $2 trillion in cash, afraid to invest in
part because corporate bosses cannot
imagine any of Washington’s feuding
partisans fixing anything.”
The Economist, March 16, 2013
NASBO
 MD OMB Secretary Eloise Foster said that every
day that the federal government is shut down
would cost the state $5 million in lost revenue,
including about $1 million in lost sales-tax
dollars.
 VA Secretary of Finance Ric Brown said “The
biggest impact on us is probably the economic
impact on the federal workforce.”
 CT OPM Secretary Benjamin Barnes said a
shutdown could have “a serious negative impact
on state revenues,”
21
NASBO
 Exempted Active Guard and Reserve members
may be waiting a while to get paid, but will be
paid retroactively once Washington funds the
government again. The members that are under
emergency furlough will not get retroactive pay
unless Congress passes a law authorizing that
pay.”
22
NASBO 23
Future Outlook
NASBO 24
Shutdown Outlook?
NASBO
Future of Sequestration
 House wants to keep sequester in place, but
reallocate cuts to protect defense
 Nondefense programs would see even larger cuts
 Senate and President Obama want to replace
sequester with a combination of targeted
spending cuts and revenue increases
 Chained CPI proposal
 No “grand bargain” in sight
 May be modest changes made, but will likely stay
in effect for the most part
25
NASBO 26
www.nasbo.org
Scott Pattison
Executive Director
(202) 624-8804
spattison@nasbo.org

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The Impact of Sequestration... (Scott Pattison, 2013 ABFM Conf)

  • 1. The Impact of Sequestration (and other federal activities…) on State Budgets Association for Budgeting & Financial Management October 3, 2013 Scott Pattison Executive Director National Association of State Budget Officers 444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org
  • 3. NASBO 3 Background on State Fiscal Situation
  • 4. NASBO Slow Budget Growth -8 -6 -4 -2 0 2 4 6 8 10 12 % General Fund Expenditure Growth (%) *36-year historical average annual rate of growth is 5.5 percent *Fiscal 2014 numbers are recommended Source: NASBO Spring 2013 Fiscal Survey of States *Average
  • 5. NASBO 5 Federal Fund Expenditures by Function, Estimated Fiscal 2012 Elementary & Secondary Education 10.9% Higher Education 3.5% Medicaid 43.9% Public Assistance 2.6% Corrections 0.2% Transportation 8.0% All Other 30.9% Source: NASBO State Expenditure Report
  • 6. NASBO 6 Total State Spending by Function, Estimated Fiscal 2012 K-12 19.8% HigherEducation 9.9% Medicaid 23.9% Public Assistance 1.4% Corrections 3.2% Transportation 8.1% All Other 33.7% Source: NASBO State Expenditure Report
  • 7. NASBO 7 General Fund Expenditures by Function, Estimated Fiscal 2012 Elementary & Secondary Education 34.7% Higher Education 10.0% Medicaid 19.6% Public Assistance 1.5% Corrections 7.0% Transportation 0.5% All Other 26.6% Source: NASBO State Expenditure Report
  • 9. NASBO Impact of Sequestration on State Budgets in 2013 9 Source: Federal Funds Information for States (FFIS) (Note: Above figures only include programs that are part of FFIS VIP Series.)  The largest grant programs (in terms of funding) are exempt from sequestration  82% of federal funds for major grant programs to states are exempt
  • 10. NASBO Impact of Sequestration on State Budgets in 2013 10 Source: Federal Funds Information for States (FFIS) (Note: Above figures only include programs that are part of FFIS VIP Series.)  Sequester affected the majority of grant programs for states, which are mostly discretionary, however…
  • 11. NASBO The Example of Maryland: Sequester Impacts  $1.6 billion in foregone wages by MD workers  $2.1 billion total economic impact from sequester  MD has set $100 million aside in anticipation of lost revenues due to the sequester. 11
  • 12. NASBO Other Examples  Virginia – Sequestration contributed to sales tax decline since April; state missed revenue estimates for all tax sources  Connecticut –concerned about long term economic impacts more than direct budget effects of the sequester  Wisconsin – Concerned about economic effects more so than grant funding losses 12
  • 13. NASBO Sequestration: How it Works in FY 2014 and Beyond  For FY 2014-2021, works differently for discretionary programs  Implemented by reducing BCA spending caps  Still 50/50 split between defense and nondefense  Cuts administered through appropriations process (in theory)  Enforced by sequestration (triggered after Congress adjourns in January)  Cuts to non-exempt mandatory programs work same as in FY 2013 13
  • 14. NASBO Sequestration: Economic Effects  On September 26, 2013, CBO released a letter on how cancelling automatic spending reductions would affect 2014 economy  CBO estimated that cancelling the cuts (beginning in FY 2014) would increase GDP by 0.6 percent and increase employment by 800k by the last quarter of calendar year 2014  Although output and employment would be higher, cancelling the cuts would lead to greater federal debt 14
  • 15. NASBO Major state grant programs affected by sequestration 15  Major discretionary programs covered by sequester include…  Title I Education grants  Special Education (IDEA) grants  Head Start  LIHEAP  Women, Infants and Children (WIC) nutrition grants  Few mandatory programs affected  Example: Social Services Block Grant (SSBG)
  • 16. NASBO Major state grant programs exempt from sequestration 16  Most mandatory programs are exempt, such as:  Medicaid and CHIP  SNAP (food stamp program)  Child nutrition programs  Temporary Assistance for Needy Families (TANF)  Most highway and other surface transportation programs also exempt
  • 17. NASBO Sequestration Implementation Issues 17  State contingency planning challenges  In general, states do not have funds to make up for all federal cuts  Looming uncertainty, first over whether sequester would be triggered, now over whether it will remain in place  Lack of clear guidance from federal agencies  Legal questions and conflicts  Secure Rural Schools  Mineral royalty payments
  • 18. NASBO Overall Impact on States 18  Most grant funding exempt from sequester, but numerous programs will be affected (especially in education)  Grants that support local programs disproportionately affected  States are generally more concerned about indirect effects than direct budgetary impact  Lower tax collections, economic slowdown, especially in states with many federal employees and/or large defense presence
  • 20. NASBO 20 Federal Dysfunction “Today the country’s main businesses sit on nearly $2 trillion in cash, afraid to invest in part because corporate bosses cannot imagine any of Washington’s feuding partisans fixing anything.” The Economist, March 16, 2013
  • 21. NASBO  MD OMB Secretary Eloise Foster said that every day that the federal government is shut down would cost the state $5 million in lost revenue, including about $1 million in lost sales-tax dollars.  VA Secretary of Finance Ric Brown said “The biggest impact on us is probably the economic impact on the federal workforce.”  CT OPM Secretary Benjamin Barnes said a shutdown could have “a serious negative impact on state revenues,” 21
  • 22. NASBO  Exempted Active Guard and Reserve members may be waiting a while to get paid, but will be paid retroactively once Washington funds the government again. The members that are under emergency furlough will not get retroactive pay unless Congress passes a law authorizing that pay.” 22
  • 25. NASBO Future of Sequestration  House wants to keep sequester in place, but reallocate cuts to protect defense  Nondefense programs would see even larger cuts  Senate and President Obama want to replace sequester with a combination of targeted spending cuts and revenue increases  Chained CPI proposal  No “grand bargain” in sight  May be modest changes made, but will likely stay in effect for the most part 25
  • 26. NASBO 26 www.nasbo.org Scott Pattison Executive Director (202) 624-8804 spattison@nasbo.org