The debt-ceiling deal promises that major federal spending cuts are coming, whether or not the congressional “supercommittee” comes up with a deal. Big federal cuts will invariably squeeze the states, which rely on federal funds for roughly a third of their spending. And states that rely most heavily on federal funding could be hit hardest by the Budget Control Act.
This chart shows how much each state receives in federal expenditures per capita, the U.S. Census Bureau’s Consolidated Federal Funds Report . To be sure, some major sources of funding below would be spared: Even if the supercommittee reaches a deadlock, triggering automatic across-the-board cuts, Social Security, Medicaid and other low-income entitlements will be spared. Even so, this graphic paints a rough portrait of which states could be hardest hit by broad-based federal cuts.
The states most dependent on federal spending could also see their credit ratings fall in the wake of a major deficit reduction deal if they fail to adapt accordingly. In a report released today, Standard and Poor’s warns of the fiscal challenges ahead: “From the perspective of state and local governments, the credit implications of these recent events [in Washington] stem more from potential reductions in federal funding than from the U.S. downgrade itself.” S&P report notes, however, that even if they face big federal cutbacks, state and local governments would likely have enough time “to implement budget adjustments that ... could prove important in the maintenance of their credit quality.”
Under a debt-ceiling deal, the most economically vulnerable states may be those that already have a negative credit forecast and also rely heavily on federal spending to prop up their GDP. Under S&P’s rating system, that would be Arizona and Maine, both states with a negative credit outlook whose federal dollars spending to GDP ratio in fiscal year 2009 exceeded 25 percent. By contrast, the state with the lowest federal spending to GDP ratio — Delaware, at 11.3 percent — has a AAA rating from S&P and a stable outlook.