Amid calls for state government reform, federal budget cuts present economic challenges

In a recent Wall Street Journal article there was a survey in which an overwhelming number of voters desired state government reform. Additionally, I thought it was interesting that 78 percent of those polled felt that the states were in crisis. So I felt that it would be quite timely for me to share my perspective on the continuing challenges that the states are facing in the current economy and since most states are now into the planning cycle for their next budgets.

The Wall Street Journal survey findings were interesting given the states have demonstrated an ability to balance their budgets with available resources, although in many states it has resulted in reduced services. Over the past four years, the states have faced cumulative revenue shortfalls of more than $500 billion, but have managed to balance their budgets each appropriation cycle. And as the Center on Budget and Policy Priorities just reported, the states also recently projected a $103 billion dollar shortfall for state fiscal 2012 alone.

Today, I believe an under recognized concern facing the states is the potential unintended consequences of federal cost cutting actions. Here’s an interesting stat: more than 20 cents of every dollar spent by the average state is a federal dollar. It should be obvious that planned cuts to federal domestic discretionary spending will have a direct impact on states,particularly in areas such as education and Medicaid, which have large proportional expenditures of federal dollars.

That is not to suggest that Congress should not be acting assertively to address the federal debt issues. Rather, it is important that Congress fully contemplate the impact of its actions on the states, and in the areas where cuts are required, work to assure that states are given adequate flexibility to manage their finite resources in an as efficient a manner as possible.

A corollary concern is the impact of federal deficit actions on state credit rating. As previously shared, there are already five states that have been threatened with credit downgrades: Maryland, Virginia, New Mexico, Tennessee and South Carolina. It is likely no coincidence that these are states with large federal installations and significant federal jobs.

Although there’s a lot coming out of Washington that impacts states, there is also much that Washington can learn from the states. The states have demonstrated that they can meet their obligations with budget reductions that have frequently been in the five 5 to ten percent range. Washington can learn from states on how to approach challenges.

As always, I look forward to your comments.

Mr. Robert N. Campbell III is Vice Chairman, Principal, Deloitte LLP and is the U.S. State Government Leader, based in Austin, TX

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