"Fiscal Austerity & the Federal System" presentation by Paul Posner, George Mason Unviersity, presented during "Sequestration's Impact on State Budgets" plenary session, 2013 ABFM Annual Conference, October 3, 2013

1. Fiscal Austerity and the Federal
System
Paul L. Posner
George Mason University

2. Current U.S. federal fiscal system is
unsustainable
• Major shifts in social and economic forces
generating revenue and spending pressures
– Globalization
– Advancing technologies
– Knowledge based economy
– Aging of population
– Rise in health care costs

3. BABY BUST, BABY BOOM, BABY BUST
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1920 1940 1960 1980 2000 2020 2040 2060 2080
Fertility Rate (Births per woman)
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds.

4. LABOR FORCE GROWTH
0
1
2
3
1975 2000 2025 2050 2075
Percent change (5-year moving average)
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds.

5. Medicare Beneficiaries

7. SOURCE OF LONG-TERM GROWTH
(CBO’S ALTERNATIVE BASELINE, PRIMARY SPENDING AS A PERCENT OF GDP)
Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009),
http://www.cbo.gov/doc.cfm?index=10297.
Note: The Alternative long-term baseline follows CBO’s published 10-year baseline projections with some changes
to the economic and demographic assumption which incorporates policy changes that are widely expected to occur and
that policymakers have regularly made in the past.

8. FACTORS EXPLAINING FUTURE FEDERAL SPENDING ON
MEDICARE, MEDICAID, AND SOCIAL SECURITY
( AS A PERCENTAGE OF GDP)
Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009),
http://www.cbo.gov/doc.cfm?index=10297.

12. All Proposals Exceed the
2014 Cap
2012
Enacted
2013
After
Sequester
2014
Caps
2014
House
2014
President
& Senate
Defense
Discretionary
554 509 498 552 552
Non-Defense
Discretionary
517 477 469 415 506
Total 1,071 986 967 967 1,058
Source: Barry Anderson, National Governors Association. August, 2013.

13. Long Term Federal Debt

14. State sales tax bases have been eroding
14

15. The Great Recession and States

16. Long Term State and Local Fiscal
Outlook

17. State and Local Fiscal Gap

18. Composition of State and Local
Spending

19. The evolution of fiscal interdependence
and conflict
• Dual Federalism
• Cooperative Federalism
• Coercive Federalism
• Contentious Federalism

20. 20
State Revenues:
Key and Increasing Role of Federal Grants
Source: GAO Analysis of U.S. Census Bureau Government Finance Statistics.
Note: The components of general revenue are own-source revenues (taxes, charges, miscellaneous revenues, etc.) and intergovernmental revenues (revenues received from
federal and local government). These data represent aggregates for the sector. State revenue sources vary considerably by state. For example, seven states have no state income
tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

21. 0
100
200
300
400
500
600
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2011
Constant(FY2005)Dollars
Year
TRENDS IN FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS
(Outlays in billions of dollars)
Payments for Individuals
Physical Capital
Other Grants
Total

22. Federal Grants to State and Local
Governments
• Categorical – Over 900 programs
• Block Grants – 25 programs
• General purpose assistance – 0 programs
• Tax expenditures
– Deductibility for state and local taxes
– Tax exemption for state and local bonds

23. Tools of Regulatory Federalism
• Direct order mandates
• Program Specific Grant Conditions
• Crosscutting Requirements
• Crossover Sanctions
• Preemptions
– Total
– Partial

24. Centralizing Forces
• National and global economy
• Shifting nature of political incentives
• Growth of more competitive national media
• Interest group activism
• Collapsing constraints on the federal role
• Chronic federal fiscal pressures
• Eclipse of federalism as a primary value

25. Number of Federal Preemption Statutes Enacted per Decade

26. State Driver’s Licensure: Growing Federal
Encroachment
• Air quality requirements
• Motor voter registrations
• Drunk driving requirements
• Commercial drivers license requirements
• Real ID Act

28. Emergence of State Resistance
• No Child Left Behind
• Real ID
• Recovery Act programs
• Health Reform

29. Growing Role of States

30. Inflection Point? Fiscal Austerity and the
Intergovernmental System
• Fiscal Pressures Sweep in From Outside the Beltway
• The Three Fiscal Commissions
• Conservative Tide in the Congress and the States
• Federal Retrenchment May Affect The Federal Role
– Banker for Recessions
– Federal Grants
– Regulations
– Tax expenditures
– Tax policy

31. Centralizing Effects of Austerity for the
Federal System
• Growing Federal Reliance on States for
Implementation of Federal programs
• Growing Federal Reliance on Mandates
• Growing Dependence of States on Federal
Grants
• Potential Nationalization of State Tax Sources

32. Centralizing Effects of Deficit
Commission Proposals
 Reduced discretionary budgets will prompt cuts in
federal grants
 Tax expenditures reexamined
 State and local deduction
 Tax exempt bonds
 Cost shifts and mandates
 Extend social security coverage
 Revenue nationalization - VAT
 Cap and consolidate
 Medicaid long term care
 Homeland security grants

34. Federalism in an Age of Austerity
 Go it alone federalism
 Partial and ineffective solutions
 Public confusion
 Cost shifting
 Unfunded mandates
 Fiscal substitution
 Fiscal coordination
 Win-win strategies
 VAT
 Sorting out responsibilities

35. Barriers to Intergovernmental
Collaboration
• Weak electoral incentives for national leaders
• Conflict among state and local officials
• Insufficient focus on long term
• Absence of national intergovernmental
institutions

36. Expand States’ Capacity to Cope in An Age
of Austerity
• Strengthen capacity of state groups to represent
longer term states’ interests
• Rainy day fund expansions
• Long term budgeting
• Enhance collective capacity for joint national, not
federal, programs
– Sales tax simplification
– Insurance standards
– Potential collective action for pension solvency?

37. Future Prospects for Reform:
Intergovernmental Institutions:
• 1980
– ACIR
– OMB
– GAO
– Congressional IGR
subcommittees
– Academy for State and
Local Government
• 2010
– CBO cost estimation
– GAO