The new paradigm for state and local governments is austerity.
Hard economic conditions and efforts at the federal level to achieve a balanced budget mean that funding for municipal governments will continue to contract. How will the reductions at the federal level spill over? Blunt-talking former Senator Alan Simpson, who co-chaired the National Commission on Fiscal Responsibility and Reform, was quoted recently as saying:
“(State officials) need to know the great milk cow in the sky dropped dead and that it’s over,” Simpson said in an interview for the March/April Capitol Ideas. “If they’re waiting for the next injection of some kind of funding from the feds to get the states propped up, … they probably saw the last one go by with the last compromise, which added almost $1 trillion bucks to the deficit without any reduction in spending.”
I’m sure that former Senator Simpson echoes the beliefs of many conservatives in Congress. Money is tight at the federal level, and much of the funding to states is targeted at very low income areas. It’s hard to predict how broad-based the defense of programs such as tenet-based rental assistance and child-nutrition programs will be. But the word is that the big federal program to states, Medicaid, has escaped cuts. So this potentially leaves the other programs very vulnerable. Let’s take a look at where federal dollars flow through to the states:
Data source: Government Printing Office (GPO)
The biggest block of federal funds flows to the Medicaid program for the poor and the elderly in nursing homes. In the first 20 seconds of this Bloomberg video, Paul Keckley, the executive director of Deloitte’s Center for Health Solutions, talks about how Medicaid has been exempted from cuts in the first round of the deficit-reduction deal.
Look at the federal funds to states in the table below. Medicaid funds have been rising, but because of rising medical inflation, increased Medicaid spending on services and a surge in Medicaid enrollment thanks to lingering unemployment, costs have been rising, too.