The debt is alarmingly high, healthcare costs—especially Medicaid—are increasing, stimulus spending has dried up, and officials are faced with an unappetizing choice of raising revenues, cutting services, or both. The looming "fiscal cliff" would make things even more dire.
Unless you've been living under a rock, you recognize that scenario as the one facing a cranky, lame-duck Congress, whose members are back in town trying to avert further economic damage. But the same troubles are facing the states, according to a new report by Harvard University's Institute of Politics, the University of Pennsylvania's Fels Institute of Government and the American Education Foundation. The report by The States Project finds that states and local governments are shouldering $7 trillion in debt. Further, states have an aggregate budget shortfall of $55 billion this fiscal year, a consequence of the end of federal stimulus funding. Instead of raising revenues, states have responded by cutting things like K-12 education and infrastructure—evidence that while conservatives assailed the federal stimulus as ineffective and expensive, cash-strapped states were relying on the money to hire teachers and fill other critical services.
And while members of Congress are mulling reforms of Social Security and Medicare to bring the budget under control, states are also being squeezed by entitlement spending. Medicaid, the federal-state health program for the poor and disabled, is now in its third year of being the largest single expenditure for states. Fully one fifth of Americans are on Medicaid, and the costs have risen by 2 percent over last year. The mandatory spending has been accompanied by cuts in elementary and secondary education as well as infrastructure.
And if Congress allows the country to go off the "fiscal cliff?" States would fare even worse, according to the report. Grants to states make up 40 percent of discretionary spending in the budget, making it a heavy casualty of sequestration and a prime target for cuts if Congress indeed comes up with its own budget-cutting plan.
State and local government have long been easy victims of federal budget cuts and policies. Congress has a tendency to come up with what they think are great ideas—such as No Child Left Behind—and then fail to provide states and localities with the money to implement them. Unlike the federal government, states cannot run structural deficits. They don't get to take certain items (like Congress did with the Afghanistan and Iraq wars) and call them "emergency spending," keeping them out of the budget-balancing equation. Congress and the White House—not just the current teams, but those going back many years—are rightly being chastised for failing to impose fiscal discipline and taxpayer responsibility. But it's worse because it has a tremendous ripple effect on smaller jurisdictions.
The stakes for the federal government and budget are high in the holiday season negotiations on the Hill. The stakes for states—which do not have seats at the negotiating table—are even higher.