Congress’s debt reduction plans have impacts on state counties, local governments

Any resolution of the so-called “Fiscal Cliff” dilemma dominating the news and hanging like a cloud over the U.S. Congress could have a trickle down effect on state and county governments. In post-election California, various agencies have been analyzing the ongoing deadlock over tax and spending policies, and some suggest it spells potential trouble. The “fiscal cliff” involves $1.2 trillion in spending cuts and tax increases (including sunset of the Bush-era tax cuts) set to trigger on Jan. 1, 2013, if Congress and the White House can’t agree on a deficit-reduction deal.

The impact of these drastic cuts, or sequestration, will be felt far and wide, including in counties. For example, FEMA Disaster Relief and HUD Homeless Assistance will face cuts. Counties also rely on payments-in-lieu-of-taxes (PILT) and the HHS Prevention and Public Health Fund, but those would be cut by at least 7 percent. In addition, funds for HUD’s CDBG and USDA’s Rural Development programs are on the chopping block.

The National Association of Counties (NACo) recently released “Federal Budget Sequestration 101: Perspectives through the County Lens,” a presentation on the cuts, which illustrates its take on how counties would be impacted by sequestration. “We wanted to provide our state association partners and our county members with a clear, succinct, easy-to-follow document that articulates the issues facing county governments in the face of sequestration,” NACo Executive Director Matthew Chase said.

According to the Auburn University Glossary of Political Economic Terms, the term has been adapted by Congress in recent times to describe a section in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985, designed to make the size of the federal government’s budget deficit a matter of “conscious choice,” rather than simply the mathematical sum of appropriations. In short, If the appropriation bills passed exceed limits Congress sets for itself in its annual Budget Resolution, and later fails to a) cut back spending or b) pass a new, higher Budget Resolution, then an “automatic” form of spending cutback takes place. This automatic cut is what’s known as “sequestration.”

Under sequestration, an amount of money equal to the difference between the Budget Resolution cap and the amount actually appropriated is “sequestered” by the Treasury and not handed over to the various destinations. In theory, every agency has the same percentage of its appropriation withheld in order to take back the excessive spending on an “across the board” basis. But, over time Congress has managed to increase the number of exempted programs … sacred cows such as Social Security and Defense Department line items. In effect, that means sequestration now has to account for the difference by taking larger shares of the budgets of the remaining programs in order to achieve the total cuts required, virtually crippling the activities of non-exempted programs.

Sequestration is supposed to be seen as a doomsday scenario so dire that Congress would be unwilling actually to let it happen. And so far that’s been the case. The net effect, however, is that Congress simply raises the Budget Resolution spending caps (and increasing the debt ceiling) toward the end of the legislative session in order to match the actual totals already appropriated. That act largely wipes out the incentives for Congress to get better control of the budget deficit.

You might have heard the term “Bowles-Simpson,” the plan named for Erskine Bowles and former U.S. Sen. Alan Simpson, bipartisan co-chairs of President Obama’s Deficit Commission, tossed about frequently in relation to deficit reduction.

At first shelved by the White House, some of the Commission’s proposals might get a second shot at realization, thanks to a new organization called Fix the Debt.

Fix the Debt is a national, nonpartisan coalition at work in Washington, D.C., and around the country to “educate people on the need for a comprehensive plan to fix our long-term debt and deficits.” County governments might not like all the proposed changes, including the following:

As part of the Bowles-Simpson proposal to reform Social Security, all state and local employees hired after 2020 must be covered under Social Security. That flies in the face of NACo’s historic position that state and local employee Social Security coverage should be optional.

And while the Commission’s report does not recommend a block grant for Medicaid and doesn’t cut other low-income entitlement programs, it does propose several changes that would affect counties. The most significant one is further restricting and eliminating the ability to use the “hospital tax,” “hospital provider fee” or “hospital bed tax” to draw down Medicaid dollars from the federal government to be used in the state’s Medicaid program. This provision would represent a cut of $5 billion in 2015, and $44 billion through 2020.

Prop 30 reassures

It’s no big revelation that support for Governor Jerry Brown’s Proposition 30, a mix of a short-term sales tax increase and tax hikes on top earners, was mostly from people looking to avert drastic cuts to education. But the ballot measure was also about additional funding for state prison realignment. Many counties are likely relieved that the measure’s passage now provides a protected revenue stream, as incarceration and disposition of thousands of nonviolent offenders were shifted to the local level.

A statement from Mike McGowan, the President of the California State Association of Counties (CSAC) and a Yolo County Supervisor, said passage of the proposition “saves our schools from devastating cuts” and “gives California counties the budget stability they need to manage public safety realignment in the manner that best suits local needs.”

A recent San Francisco’s Bay Citizen editorial made the following observations: “The realignment deal … means that counties will have even more discretion to utilize growth as they see fit. This was Brown’s philosophy from the start: that in a state as big and diverse as California, local government should be able to tailor programs to the needs of their communities. Combine this flexibility with the constitutional prohibition on new unfunded mandates (i.e., policy changes or priorities with an associated cost but no new revenue – historically a persistent thorn in the side of counties), and it’s clear the deal implies that the legislature largely intends to stay out of policymaking when it comes to realigned programs.”

Chiang: revenues, concern up

Meanwhile, State Controller John Chiang released a positive October update, showing revenues exceeding projections, but still called for financial corrections to the budget, even after state voters passed Proposition 30, Gov. Jerry Brown’s tax initiative package.

Chiang recently reported that October revenues were $207.9 million above the state’s 2012-2013 budget projections. According to Chiang, “October’s numbers were positive, due in large part to strong income tax receipts. More importantly, total year-to-date revenue is spot-on with the budget’s project,” Chiang said in his report.

According to his figures, income taxes were $378.4 million above projections and sales taxes also were up 4.4 percent. That said, Chiang added the state still has a deficit of $24.7 billion, which is being covered with $14.7 billion of internal borrowing and $10 billion of external borrowing.

Chiang applauded passage of Prop 30 as a way to patch up the state’s budget, but cautioned that fiscal reforms are necessary. “We have to do a lot of smart, small, medium and big resolutions to get California in a sound financial place,” he said.