* Debt negotiations on Capitol Hill keep states guessing
* Automatic cuts would be triggered in 2013
* Medicaid exempt from triggers
By Lisa Lambert and Jim Christie
Nov 18 State and local governments say there is
only one sure effect of the current U.S. deficit negotiations
on their budgets: cuts.
And with their tax revenues still not back to pre-recession
levels after being hit hard during the financial crisis, state
and local governments are keeping a careful eye on the events
As tax revenues slid, state and local governments
responded by slashing spending, hiking taxes, borrowing and
turning to the federal government for help over the last three
The bipartisan "super-committee" made up of members of both
houses of the U.S. Congress has until next week to introduce a
plan to reduce the federal deficit by at least $1.2 trillion
over the next 10 years, but its negotiations appeared near
collapse on Friday.
"Nobody is quite sure what's going to happen," said Marty
Brown, director of the state of Washington's office of
Without a plan, automatic spending cuts totaling $1.2
trillion, split evenly between military and domestic programs,
will begin in 2013 as part of the deal President Barack Obama
struck with Congress this summer on the country's $1.3 trillion
deficit and $15 trillion debt.
"I keep joking that the watchword is 'uncertainty,'" said
Scott Pattison, executive director of the National Association
of State Budget Officers. "The folks I talk to seem to be
accepting, although they'd prefer a lot more predictability."
Brown said Washington can only make "contingency planning
at the margins because you don't know what to plan for."
Lawmakers in Washington are considering how any cuts could
affect the state as they prepare for a special session to find
ways to keep the current budget in balance, said Brown.
The $600 billion in automatic cuts on defense spending
would pose real risks to Washington, where Boeing Co. , a
major military contractor, is the marquee employer.
The automatic cuts would not hit Medicaid, the healthcare
program for the poor administered by the states with
reimbursements from the federal government, or food stamps.
The super-committee, however, has the freedom to lower
Medicaid funds. That, too, would hurt Washington because
Medicaid provides more than half the money for its healthcare
programs, Brown said.
California, the most populous U.S. state, likewise is
grappling with uncertainty The many moving parts of the deficit
deal keeping the state's finance department guessing, said
spokesman H.D. Palmer.
"A lot of these are what Donald Rumsfeld would call 'known
unknowns,'" Palmer said, referencing a quote from the former
defense secretary under President George W. Bush. "The question
will be if the changes are front-loaded or back-loaded."
States rely on federal funds directly and indirectly. As
their budgets fell into distress in 2009, the federal
government's economic stimulus plan included the largest
transfer of money to states in U.S. history. When that money
ended this year, states said they fell off a "funding cliff."
Time is on the side of the states in the deficit deal, said
David Quam, director of federal relations at the National
Governors Association, noting the automatic spending cuts would
not "hit until 2013."
Quam said governors have been in "constant contact" with
the 12 members of the super-committee.
MUNICIPAL MARKET IS WATCHING
In addition to the need for states to adjust their budgets
in response to federal cuts, they also may face a hit to their
credit ratings. Lower credit ratings typically result in higher
BlackRock, the world's largest asset management firm, warns
that the deficit deal, and federal trends toward austerity,
could threaten the credit quality of some states.
"Even if Medicaid and other state funding are relatively
unscathed initially, the prospect of future cuts in federal
aid, which constitutes 25 percent or more of state budgets, is
obviously negative for all state and local governments," it
wrote in a report released this week.
In October, Janney Capital Markets told investors in the
$3.7 trillion municipal bond market that the automatic spending
cuts "could be a credit positive for state governments compared
to other alternatives because Medicaid is exempt."
It added some states are balancing their budgets by cutting
money for local governments, which could continue if states
have fewer federal funds.
"We believe local governments will ultimately be able to
pull through the fiscal stresses even though potential
consequences from lower federal spending could be more
'painful' than at the state level," it wrote.
ZEROING OUT FEDERAL AID
In total, cities derive about 5 percent of their revenues
from the federal government, according to the National League
Cities that do not rely heavily on federal funds are
removing that line item from budgets, said Christopher Hoene,
research director for the group representing civic officials.
"The simplest thing to do is say, 'We're going to assume
there's not the federal aid,'" he said.
After the last few years of fights over the economy, city
leaders are "somewhat inured to the gyrations of the Washington
process," said Mark Muro, senior fellow and policy director at
the Brookings Institution's metropolitan program.
"There will likely not be a lot of good for cities and
regions in this process either way it unfolds, but at the same
time it won't be a crashing arrival of a disturbing new
situation," he said.