INDIANAPOLIS, Ind.—Under normal circumstances, Congress failing to adopt an annual budget before the federal fiscal year begins Oct. 1 would be cause for alarm in state capitals across the nation.
But when House Speaker Kevin McCarthy (R-Calif.) announced on Aug. 14 that he would introduce a stopgap funding measure rather than push to complete deliberations on the Fiscal Year 2024 (FY24) budget when Congress returns from recess on Sept. 12, it came as no surprise to state lawmakers and fiscal analysts attending the Aug. 14-16 National Conference of State Legislatures (NCSL) 2023 Legislative Summit in Indianapolis.
“I think there will be a short-term CR [Continuing Resolution] through the end of the year,” NCSL Senior Federal Affairs Counsel Susan Frederick said during one of more than 200 presentations staged over the NCSL’s three-day summit attended by more than 5,000 state legislators, legislative staffers, lobbyists, and non-profit advocates.
“So,” she continued, “I’m going to say through the end of the year, we’re going to have short-term CR without a lot of movement.”
This is what Mr. McCarthy is proposing—a Continuing Resolution to extend FY23 spending levels to sustain funding for government operations into December, giving the House two months to adopt 11 of the budget’s 12 components and begin negotiations with the Senate.
The Senate has adopted all 12 of its annual appropriations authorizations. The House has passed just one, the Military Construction-VA component, and would only have about 12 legislative days to move on the other 11 authorizations to meet the Oct. 1 deadline.
Conservatives, spearheaded by the House Freedom Caucus, want spending held to FY22 top-line levels. The Senate’s proposed budget exceeds spending caps in the Biden-McCarthy debt-ceiling deal. President Joe Biden’s request for $40.1 billion in supplemental spending for Ukraine, disaster relief, and the border further aggravates the chambers’ divergence.
Many fear the budget standoff could extend into 2024 and foster the shutdown of the federal government, which would create a ripple of discord in state programs either fully funded or subsidized by federal money.
Among them: Rep. Tony Gonzales (R-Texas), who warned in an Aug. 14 post on X, formerly Twitter, “It’s clear President Biden and Speaker McCarthy want a government shutdown, so that’s what Congress will do after we return in September. Everyone should plan accordingly.”
“I don’t think anybody wants a government shutdown,” Ms. Frederick said, “but it may be inevitable because, where things stand now, there is a huge disparity between what the Republicans in the House want to do and what the Senate, which is controlled by the Democrats, will agree to.”
“There’s about a $50 billion gap in the Health and Human Services, and the Education appropriations bills, which is where you [state legislatures] get all your money” for many programs, Federal Funds Information for States (FFIS) Executive Director Marcia Howard told lawmakers and staffers.
Fears of Extended Impasse
While the federal fiscal year begins annually on Oct. 1, 46 states begin their fiscal years on July 1. New York’s FY24 began April 1. Texas’ fiscal year begins Sept. 1, and two states—Alabama and Michigan—begin theirs in tandem with the federal government on Oct.1.But many of the 47 already-enacted budgets plug in anticipated federal allocations into spending plans, meaning an extended Congressional budget impasse could require states fund those gaps or suspend programs.
“Yes, in fact, most of that [discord] will trickle down to us” if there is an extended stalemate, Indiana Minority Caucus Chair Sen. J.D. Ford (D-Indianapolis) told The Epoch Times. “We’re very worried watching some of the shenanigans. It is sad to see [House conservatives] use the process to play politics.”
Mr. Ford said while the impasse “could have disastrous impacts on states,” state lawmakers in both parties are concerned about the potential repercussions on constituents, especially those who rely on Social Security and other federal entitlement programs.
State lawmakers will be lobbying their Congressional representative to “at least make sure people get paychecks from the government,” he said, noting it’s not the government’s money in most cases but money recipients earned.
Minnesota Rep. Rick Hansen (D-South St. Paul), who chairs the state’s House Environment and Natural Resources Committee, said an extended impasse “could affect how state agencies and other organizations coordinate with federal partners” and cause disruptions across an array of programs and agencies.
Minnesota, with a $17.5 billion surplus in its FY24 budget, could weather such “brinkmanship,” he said, but there are other less tangible costs when Congress doesn’t do the one thing it is mandated to do each year—pass a budget.
“It’s not so much the fiscal impact as the loss of public confidence,” Mr. Hansen told The Epoch Times. “I’m hopeful they see the light and do what is best for the country and get the budget passed.”
States Flush With Federal Money
The federal standoff comes at a time when state budgets are near-uniformly healthy. According to the National Association of State Budget Officers’ (NASBO) Spring 2023 Fiscal Survey, 39 states increased the size of their reserve accounts, or “rainy day fund balances,” during their 2023 sessions.On average, the percentage of budgets state legislatures stashed into reserves increased from 11.5 percent FY22 to 12 percent in FT23, and is on track to be about 13.5 percent in FY24, NASBO calculates. At least 39 states “rainy day” accounts in the last two years.
“The bottom line here is we’re seeing the states have a lot of cash and are still in a really strong fiscal situation,” NCSL Policy Specialist Erica MacKellar said.
Of course, and ironically, one reason why states are soundly in the black is because of a pandemic-spurred March 2020-August 2022 Congressional spending spree, capped by the 2022 adoptions of the Inflation Reduction Act (IRA) and Infrastructure Investment & Jobs Act (IIJA), that fueled inflation and added $7 trillion to the nation’s debt but funneled money into state budgets.
Ms. MacKellar said states’ federal largesse was augmented by higher-than-expected revenues. States’ primary sources of income are sales taxes, licensing fees, and, in 43 states, income taxes.
State budget forecasters “were expecting to see that revenue curve slow” more than it has because many were anticipating a recession that never happened and were assembling FY24 spending plans during 2022’s inflationary wave.
Citing “very preliminary data,” she said, on average, states are “expecting modest growth” in revenues of about 1 percent.
State budgets are often passed this year for next year based on last year, NCSL Senior Legislative Director Austin Reid said.
“It feels like the political conversation seems to lag with economic reality,” he said. “So, it feels like the conversation we’re having around reducing spending” was an assessment made during “really high inflation eight, nine months ago.”
But now data “seems to indicate that [inflation] is being tamed in some ways,” Mr. Reid added. “And I do wonder if that changes, once that economic reality catches up to the political conversation, some of the calculus” in how states approach FY25 budgets when lawmakers convene 2024 sessions.
Projections of slowing revenue growth “aside, states are still in a good fiscal position,” said Ms. Howard, who leads FFIS, a subscription service that provides data and analysis in more than 200 federal grant programs for states and publishes monthly State Policy Reports.
“But of course, it is a long and winding road, and you never know what is around the next turn,” she said. “You know, the potential for a recession seems to have lessened somewhat, but there’s still a lot of economic uncertainty out there that I think states are grappling with in their revenue estimates and just overall planning.”
The bottom line, Ms. Howard said, is, “Even without a recession, states are anticipating slower growth. The good news is that states have been expecting revenue to slow for a long time. I think states are really prepared. They really built up ‘rainy day funds’” since 2020.
‘Tale of Two Types of States’
Among states not flush with banked federal money is California, with a proposed $306 billion FY24 spending plan that is $2 billion less than its FY23 budget but increases the state’s debt from a projected $22.5 billion to $31.5 billion.Part of that 1 percent decline in projected spending and the increased deficit is based on an estimated $11 billion dip in revenues collected by the state in FY24.
Utah Rep. Steve Eliason (R-Sandy) told The Epoch Times that the post-pandemic fall-out of the federal spending spree offers “a tale of two types of states—those that have a surplus like Utah and those like California, drowning in red ink.”
Montana Rep. Nelly Nicol (R-Billings) told The Epoch Times that her state used much of its federal allocations to give state taxpayers rebates, fund some one-time improvements, and boost state reserves.
Montana lawmakers have “been planning pretty well” for a lower revenues and a potential recession, anticipating the ying-and-yang of “a sugar high and now we have the low” that follows.
If an extended budget statement unfolds in Congress, Ms. Nicol said Montana could weather the storm, as could North Dakota, said Rep. Dan Ruby (R-Minot).
“When they do a budget shutdown … there are some initial adjustments until they come to an agreement,” Mr. Ruby told The Epoch Times, noting past shutdowns “haven’t affected us too much at the state level. North Dakota is the only state that has its own state bank” which can provide loans to agencies in the absence of federal money in their spending plans.
Tax Foundation Vice President of State Projects Jared Walczak told The Epoch Times that “no state budget would be substantially impacted” if Congress fails to adopt a budget by Oct. 1 or even if there is an extended impasse.
“At the state level, almost every state has a higher budget level than it did pre-pandemic,” he said, noting while revenues will decline from the artificially high levels fostered by federal pandemic assistance, state revenues are “still way higher” than they were before 2020.
“There is no budget crisis in California or any other state,” Mr. Walczak said. “Most states, even California, have significantly higher revenues” than they did before “the sugar high” boost of the last three years.
Rhode Island Rep. Grace Diaz (D-Providence) told The Epoch Times here state adopted a “drop-down $2 billion” FY24 budget based on projections of lower revenues, a potential recession, inflationary pressures, and on history repeating itself.
“I’ve seen [federal shutdowns] happen many times. It’s a political game the Republican party tries to play” anytime a Democrat is in the White House, she said
The state “anticipates losing some federal funds,” Ms. Diaz said. “Rhode Island will be okay,” but a sustained shutdown would have “a domino effect of many states.”
