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States Likely to Get Hammered If 'Cliff' Talks Fail

When state governments suffered big revenue losses during the Great Recession, the federal government came to the rescue with $150 billion in stimulus funds that saved jobs, repaired roads and maintained health care services. Now, almost four years later, states risk losing billions of dollars in block grants if no fix is found for avoiding the billions in spending cuts and tax hikes set to take effect next year.

"These block grants are a prime target for cuts," Meredith Bagby, resident fellow at the Harvard Institute of Politics, tells The Daily Ticker. "Citizens will be greatly affected if these block grants are cut too deeply."

The cuts will affect state education, police, health care and infrastructure spending. Cities—especially smaller cities—are the most vulnerable because they rely on state block grants for 34% of their revenues, according to Bagby.

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The block grant cuts couldn't come at a worse time for state and local governments. Facing a $55 billion shortfall in the current fiscal year, many states have already slashed spending for education, infrastructure and other services in order to balance their budgets, which is mandated by law. But that had no effect on the $7 trillion in debt and unfunded liabilities they've accumulated over the years.

Cuts to education could be the cruelest of all, says Bagby.

"The more education you have the better you'll do in the economy," says Bagby. The corollary is also true. Government statistics show the unemployment rate for those who finish college is half that of those who never went to college.

Related: A College Degree Doesn't Guarantee a Good Job: Gary Shilling

"States that tend to invest heavily in education also do better," says Bagby, who is also the executive director of the American Education Foundation (AEF) and publisher of the recent State of the States report, sponsored by the AEF, Harvard's Institute of Politics and the University of Pennsylvania's Fels Institute of Government.

Education figures prominently in the report's ranking of states, which also looks at fiscal stability, debt levels, economic opportunity and health and wellness. The five states that ranked highest — Virginia (#1), Minnesota (#2), New Hampshire (#3), Utah (#4), and Massachusetts (#5) — all stressed education, says Bagby. The states that scored the lowest — Mississippi (#50), Nevada (#49), Louisiana (#48), West Virginia (#47), and Alabama (#46) — did not.

"With cuts in federal block grants it will be tougher for those states to bridge the gap [in education spending]," Bagby says. "My concern is that states that are poorer or don't have a strong tax base will find it very, very difficult to maintain their education levels."

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