Federal funds now account for a larger portion of the state's revenue stream than any other source
Tuesday morning, the Federalism Commission engaged in a discussion about how the state can prepare for the future potential reduction of federal funds. Or even just the reduction in value of those funds due to inflation. You can see the slide presentation here.
Within the last six or seven years, the portion of the state budget coming from the federal government has increased substantially, to about 27 percent. While that is down from 34 percent last year, driven by pandemic-related programs, federal funds are now the largest part of the state’s revenue stream. This means that income tax and sales tax make up less of state revenue than federal (borrowed) funds.
Federal money cannot be the state's backup plan
For many states, the federal government has been their backup plan during downturns. It’s clear that with a federal government over $31 trillion in debt, this can’t go on forever and states need to prepare for the eventuality that it all comes to a screeching halt.
Federal debt servicing recently grew to 31 percent of discretionary federal spending. That means that debt payments are eating up nearly one-third of the money that Congress has any ability to control. As interest rates rise, it only gets worse from here. Compare that with Utah, which spends less than 1 percent of our money on debt servicing.
As the percentage of federal money necessary to cover interest payments grows, the proportion available for discretionary spending shrinks. This makes it significantly more difficult for the federal government to bail out states in future downturns.
Utah has put regulations in place to begin to prepare for reduced federal funds
Every December, according to Utah law, each state agency must present contingency plans to the legislature which project potential reductions in federal funding. This allows our agencies to be prepared if cuts were to occur.
What more can the state do?
Jonathan Ball, Director of the Legislative Fiscal Analyst Office, presented a number of potential next steps:
Revamping the contingency plan statute that currently requires yearly planning by state agencies for 5 and 25 percent federal reductions. Instead, it could require that state agencies provide priorities regarding which federal programs state government could take on as federal support declines.
The state legislature could create ongoing revenue set-asides to begin to transition high priority federal programs to the state over time.
Institute a federal rainy-day fund that would allow deposits from both the state’s General Fund and Education Fund.
Include federal programs in future budget stress testing that the state already undergoes.
It is wise for the state to begin taking bigger steps to provide for its duties to Utah residents as federal support will surely wane in coming years.