With sequestration a reality, state legislators should discuss how to provide essential services while facing possible federal aid reductions. While a majority of the states depend on federal funds, and this trend is increasing, Utah provides a great example on preparing for an uncertain economic future.
According to a report by State Budget Solutions, 42 states received more than one third of their total funds from the federal government during fiscal year 2011. Mississippi received nearly half (49 percent) of their total funds from the federal government, the highest percentage in the nation. Louisiana has the second highest percentage, relying on federal funds for 47 percent of total funds. While Alaska has the lowest federal funding percentage, the state still relies on 24 percent of federal funding for their state programs. For information on federal funding percentages in your state budget over the last four years, click here.
Not only do states heavily depend on federal funds, but the states are depending on federal funds more every year. According to US Census data, during fiscal years 2009 and 2010, federal funds as a percent of total state expenditures rose almost 10 percentage points (26 percent in 2009 to 34 percent in 2010).
Despite heavy reliance on federal funding, and the increasing likelihood that the funding will decrease, most states seem unprepared for the possibility of reductions in federal aid. State Budget Solutions has outlined some of the best ideas to help states navigate cutbacks in federal aid. These ideas include conducting public hearings on the total state revenues (including federal funds) and total state projected expenditures. Other ideas include requiring the reporting of federal receipts received by state agencies, assessing the risk of a significant reduction in the receipt of federal funds by state, and discussing methods to prepare for federal fund cuts.
States can also learn from Utah’s example in preparing for federal fund cuts. In 2011, the Utah legislature passed H.B. 138, The Federal Receipts Reporting Requirements Act. This bill required all state agencies to disclose total federal receipts, including the percentage of their respective budget, and also to disclose what their specific contingency plan is if federal receipts are diminished. By developing a plan to operate state agencies in case federal funds are diminished, Utah has a stable economic outlook. The state’s strong fiscal management record has even earned Utah strong AAA ratings from Moody’s, Standard and Poor’s, and Fitch.
At a time when federal funding to the states is facing severe cuts, or extreme uncertainty at best; states can follow Utah’s example by preparing now for a challenging fiscal future.
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