The Debt Ceiling’s Impact on Iowa

When the federal government is forced into true spending cuts, dollars sent to the states could be first on the chopping block.

There is an old adage that says a successful compromise is achieved when all parties involved walk away unhappy.  That take might be too cynical, but it is also grounded in reality.  And if that definition is accurate, then the debt ceiling deal that was just reached in Washington, D.C. must be a great compromise!  Legislation that was agreed to between the Biden Administration and House Republicans, and then approved by the Senate, has lawmakers on both sides of the aisle claiming victory, though there are still a number of officials in both parties who feel their leadership gave up too much.  In a divided government that leaves no political party with unified control, neither side is going to walk away from negotiations believing they won on every point.

Now that the debt ceiling has been lifted and spending restraints have been approved, Congress should turn its attention to crafting a balanced budget, permanently reducing the national debt, and otherwise staying far away from the debt ceiling for a long, long time.  Unfortunately, experience tells us they will likely ignore those responsibilities and we will find them negotiating another debt ceiling compromise two years from now.

When we see these disastrous situations pop up in Washington, many Iowans take comfort in the fact that we live in a state where our budget is already balanced, our spending is already restrained, and our leaders are not going through bureaucratic gymnastics to find new ways to take on more debt.  While all of that is true, Iowa’s budget may not be able to stay insulated from the federal fiscal mess.  In fact, when Congress ever gets serious about spending reductions, one of the first places they look for those savings may be the massive amounts of cash that is sent to state and local governments every year.

If the federal government were forced into true fiscal austerity, meaning it had to implement significant spending cuts, several categories of spending would likely be the first ones considered for reduction. Certainly the specific cuts will vary depending on prevailing economic and political circumstances, but the primary areas to be examined during an austerity period, if for no other reason than the amount of money required to fund them, are:

1. Defense and Military Spending: Reductions in this area can be politically challenging, and lawmakers of both parties will keep national security concerns in mind.
2. Social Programs and Healthcare: Welfare, unemployment benefits, food assistance programs, and Medicaid.
3. Infrastructure Investments: Transportation, water systems, and public facilities.
4. Education: Federal funding for education, including dollars to elementary and secondary schools.

There likely are not significant dollars going to state and local governments that could be considered defense and military spending, but there are major dollars spent on health care, education, and infrastructure.  Some of these programs are carried out through partnerships between the federal government and state or local governments.  These programs can include:

Healthcare:

1. Medicaid is the joint federal and state program that provides health coverage to low-income individuals and families.  Iowa recently received over $4 billion in federal Medicaid funding.
2. Children’s Health Insurance Program (CHIP) is a partnership between the federal and state governments that provides health insurance to uninsured children in low-income families who do not qualify for Medicaid. Iowa recently received $132 million in federal CHIP funding.

Education:

1. Iowa receives over $500 million in K-12 funding from the federal government.
2. ESEA Title I grants are federal funds provided to local educational agencies (LEAs) to support schools and districts with a high percentage of students from low-income families. Iowa recently received over $110 million in federal Title I-A Grants.

Infrastructure:

1. Iowa recently received over $2 billion in funding from the Bipartisan Infrastructure Deal (Infrastructure Investment and Jobs Act).
2. The Highway Trust Fund collects federal fuel taxes and disperses those dollars to states for highway construction and maintenance.  Iowa recently received over $500 million from the Highway Trust Fund.

Using only the programs above as examples, we have quickly identified over $7 billion worth of federal money flowing into Iowa.  These funding streams could be on the chopping block if and when the federal government can no longer kick their proverbial deficit spending can down the road.  As a point of reference, it is estimated that Iowa’s total expenditures exceeded $29 billion in 2022.  That amount included $8.1 billion of state general fund dollars, and over $11 billion of federal funds, illustrating the pain that could be caused by Uncle Sam tightening the purse strings of federal funds.

If federal cuts are made, Iowa lawmakers will have difficult decisions to make, all of which could create a multitude of consequences.

Would they choose to divert existing dollars from the state budget to fill in the federal gaps, leaving Iowa-based services unfunded?

Would they implement a hiring freeze or pursue layoffs of state employees?

Would they take on debt, increase the state’s interest payments, and saddle future Iowans with the bill?

 Would they increase taxes to compensate for the loss of federal funds?

States, including Iowa, have grown reliant on federal funds and they need to come up with a plan for the day when Washington, D.C. shuts off the funding spigot.  A good place to start would be to clearly itemize all federal funds coming into Iowa so lawmakers and taxpayers can clearly and easily see the programs that are the ultimate recipients of those funds. State agencies and departments should report not just how much federal money they receive, but what strings are attached to that money.  (Did you know states are often required to hire new employees, commit matching funds, or otherwise adhere to any number of stipulations when they accept federal funds?)

Once all Iowa stakeholders have a well-defined understanding of federal funding in our state, policymakers could develop a plan to deal with potential federal cuts and the impact they would have on Iowa’s budget and the services provided to citizens.

Utah, Idaho, Mississippi, and Indiana have all required their state legislatures to maintain an inventory of federal funds since long before this latest round of debt ceiling negotiations.  At some point in the future, the forecasted doom and gloom from a debt ceiling default (or prolonged government shutdown), could very well become a reality.  Iowa needs to prepare now to handle the fallout.