Federal debt deal's impact on Pennsylvania murky

| Monday, Aug. 8, 2011

It's a good thing Pennsylvania didn't spend the $800 million the state unexpectedly collected in taxes last year, Gov. Tom Corbett said.

The way the federal debt deal is playing out, "we certainly may need it," Corbett said.

Congress and President Obama agreed to cut up to $2.4 trillion from the deficit, and state leaders are wondering if they'll get stuck with the bill. If Congress cuts federal aid to states, the Legislature might face unpleasant choices.

Legislators might vote to pave fewer roads and fix fewer bridges. They might need to cut education again, beyond the $1 billion cut this year. There could be less money for mass transit systems and people who get Medicaid assistance.

"I don't think anyone knows what the impact is going to be. They're still working out the final details. We've been in contact with the congressional delegation," Corbett said. "A number of governors, I think, have started talking about it. We have to see what money comes down in what categories."

Standard & Poor's decision on Friday to cut the country's credit rating created even more uncertainty for states, said Michael Bird, federal affairs counsel for the National Conference of State Legislatures.

"If the federal government's hands have been slapped, does that mean the (debt reduction) targets are low• Should they shoot higher?" Bird said. More cuts at the federal level could likely mean even less money for states. "There's just no way to know right now."

At $22 billion next year, federal aid to Pennsylvania equals nearly the entire general fund. About two-thirds of it goes to the Department of Public Welfare for Medicaid and other low-income assistance programs.

"We're very concerned about it," said Senate Minority Leader Jay Costa, D-Forest Hills. "The problem for us is to get our arms around exactly where these cuts are going to take place."

Medicaid was exempted from the budget-cap part of the debt deal, but it's fair game for a joint committee that Congress tasked with finding $1.5 trillion to cut the nation's deficit. Every recent stab at deficit reduction -- from Obama's 2012 budget proposal to Wisconsin Republican Paul Ryan's austere spending plan -- included Medicaid cuts.

"Medicaid is where we get the most (federal) money," said Senate Appropriations Chairman Jake Corman, R-Centre County. That money comes with tight restrictions. Federal rules require states to accept people into the program if they meet certain criteria. "If they are going to make cuts in Medicaid, hopefully they'll give us more flexibility to deal with the program."

Education and transportation get the next-largest chunks of federal funding at about $2 billion each.

"We've extracted nearly $1 billion out of the education budget, and the impact has been felt by our school districts and the higher education community. There aren't many places for us to go," Costa said.

Cuts in transportation funding mean less money for mass transit and infrastructure repairs, which ultimately mean fewer people on the job, Costa said.

"It impacts our work force," Costa said. "That's why the stimulus package, particularly as it related to the transportation piece, was so valuable. ... It put people to work. That's all going to be slowing down."

That could create a bigger problem for the state. If the economy slows, that could drag down employment. More unemployed people means less tax money for the state and more demand for social programs.

"It creates a tremendous amount of uncertainty. You're seeing that in the stock market," Costa said. "I personally feel uneasy about where we're going over the next six to 12 months."

The good news is next year probably won't be so bad, Bird said. The way Congress structured the deal, next year's federal budget will be only about $7 billion less than this year's -- a mere sliver of the government's $3.8 trillion budget.

But Congress capped the budget's growth for 10 years, cutting $917 billion it would have spent. That means each year, the gap between the cost of today's programs and the amount of money government can spend grows larger.

"Beyond (2013) looks very precarious," Bird said.

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