Many local programs at risk of ‘fiscal cliff’ cuts

Congress returned to Washington on Nov. 13 for a lame-duck session centered on finding a resolution to the “fiscal cliff” deadline of Jan. 2.

The so-called fiscal cliff is a combination of two major policy events: the expiration of Bush-era tax cuts and the implementation of a sequestration process mandated by the Budget Control Act of 2011, a deficit-reduction measure that requires dramatic across-the-board cuts of 8 percent to 10 percent to most federal spending in order to attain $1.2 trillion in deficit reduction by 2020.

Most non-defense discretionary accounts that fund programs relevant to municipalities, like Community Development Block Grants, Title 1 and the Individuals with Disabilities Education Act, Community-Oriented Policing Services, and State Revolving Funds, would see cuts of 8.2 percent through the sequestration process.

Entitlement programs like Social Security, Medicaid and the Children’s Health Insurance Program are exempt. Medicare would be cut by 2 percent. Programs funded by trust funds, such as transportation, would be largely exempt.

Speaking at the Nov. 13 meeting of the Local Government Advisory Commission, Massachusetts Administration and Finance Secretary Jay Gonzalez noted that the spending cuts would cost the state up to $300 million this fiscal year, and up to $1 billion in the next fiscal year.

A study by the Pew Center on the States finds that 5.5 percent of the Commonwealth’s revenue is federal grant funding that is subject to sequestration. Additionally, 4.9 percent of the gross state product comes from federal spending on procurement and salaries, with 3.7 percent from federal defense spending, which is also subject to the spending cuts.

In the face of sequestration, Congress and the president are expected to negotiate an alternative deficit-reduction plan that includes a mix of spending cuts and revenue. If they do not reach agreement by Jan. 2, the spending cuts will occur and the impact will begin to be felt in municipalities.

It is possible that a deal will not be reached by Jan. 2, but that a retroactive deal to mitigate some of the cuts will be reached very early in 2013.

While House Speaker John Boehner had maintained through much of the year that the House would not support any deal to avert sequestration that included new revenues, he has since indicated some receptivity to the idea.

Reports indicate that the private sector has slowed hiring and postponed capital investment due to the fiscal uncertainty posed by the federal budget situation. It is estimated that implementation of the Budget Control Act would cause a loss of 2.14 million jobs nationally, increasing the unemployment rate by 2 percentage points and triggering a recession.