The State of Iowa and local governments would be wise to reduce their dependence on federal funding.
The U.S. House of Representatives returned to Washington, D.C. after its summer recess and went right to work. A looming federal budget battle may result in a government shutdown, and both chambers of Congress only have a few more working days scheduled before the September 30th deadline. A continuing resolution for temporary spending must be passed by that date to keep the federal government operating. Otherwise, nonessential federal employees will be furloughed, and discretionary programs paused until stop-gap funding is passed.
This isn’t just a federal story, though. The upcoming deadline will affect the general federal government, agriculture and nutrition programs, the federal aviation administration, national flood insurance programs, child care funds tied to pandemic funding, and some Medicaid, among other areas. Although approximately two-thirds of federal funding to states is considered mandatory spending, during previous shutdowns Iowa has had to fund the entirety of those costs. State lawmakers can reasonably anticipate some reimbursement in such cases, but states have periodically not been fully reimbursed or their payments have been significantly delayed, so Iowa must be prepared.
According to nationwide research, Iowa ranks 33rd out of the 50 states in terms of federal dependency. The most-recent Iowa data on federal funds shows fiscal year 2021 hitting a new high of $11 billion. Health and Human Services received half of Iowa’s federal funding, followed by Education and Workforce Development. While the significant increase from the $6.9 billion Iowa received in 2019 was due to COVID-19 federal relief, historical figures show a significant amount of federal money coming into Iowa each year. For context, in FY2021 the state of Iowa itself only collected a total of $10.6 billion from taxes and fees.
The federal government has experienced 20 shutdowns since 1977, the most recent being in 2018–2019, when the federal government shut down for 35 days. As the longest in U.S. history, that shutdown resulted in reductions to SNAP (food stamp) payments, IRS delays processing tax refunds, and staff shortages at the Transportation Security Administration, causing airport terminals to close. In total, the last federal government shutdown cost taxpayers $5 billion.
This time around, even if Congress meets its September 30 deadline, the Fiscal Responsibility Act includes a penalty for the use of continuing resolutions in fiscal year 2024, reducing both defense and nondefense funding levels by 1 percent if appropriations bills are not enacted by January, which will also directly affect the states.
As disruptive as shutdowns can be, there is no doubt the federal government has an unsustainable spending problem, and a large portion of that spending goes to the states in the form of federal grants. For short-term stability and long-term solvency, the State of Iowa and local governments would be wise to reduce their dependence on federal funding. The more reliant a state becomes on Washington, D.C. to support state programs, the more vulnerable its people become to future shocks. Iowa is not alone in this problem. States generally have become increasingly dependent on federal funds, and most would be unprepared to provide essential government services on their own.
The reliance on federal funds is an issue that simply cannot be ignored. Many accounting professionals have warned that the unsustainable federal financial situation is not political, but a mere matter of math. States must be prepared for the possibility of funding shortfalls. Iowa has done an excellent job of budgeting prudently over the last few years, and Governor Kim Reynolds and the legislature are following a policy of fiscal conservatism, laying a stable financial foundation. Nevertheless, even the most fiscally conservative state budget would be significantly harmed by a reduction in federal funds.
Preparation and transparency are key to securing the long-term well-being of Iowans. Some of the basic policies our state can adopt to hedge against future federal funding reductions include:
Whether the issue is tax reform, trade policy, farm bills, or other federal actions, Iowa will be affected by decisions made in Congress. Yet, our state must be responsible for itself and its citizens. Iowa lawmakers must understand and have a full accounting of all federal funds under their purview and have plans in place in the event Uncle Sam is no longer able to give “free” handouts.