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How states should respond to the risk of a significant reduction in federal funds

State Budget Solutions | by Bob Williams | January 2, 2013

Federal money makes up a large amount of state spending, up to 49% of total state spending in Mississippi. Over a two-year period, from FY2008 - FY2010, federal funds as a percentage of total state spending rose from 26.3 percent to 34.1 percent. It is highly likely that federal funds will be significantly reduced in the next few years. Few states appear to be prepared for such a reduction, but some states taking preemptive action to preparing for the cliff.

Vermont and Virginia have set aside state funds in anticipation of cuts to state-federal programs. Utah enacted legislation requiring all state agencies to disclose total federal receipts and develop contingency plans in the event federal funds are reduced by 5 percent or 25 percent.  Utah serves as a model for other states.

Last year Utah passed HB 138 requiring the reporting of federal receipts received by certain state agencies. That report must contain a plan to operate the state agency in the event federal receipts are reduced by 5% or 25% or more, and requires the Government Operations and Political Subdivisions Interim Committee to study whether to apply federal receipts reporting requirements to certain other governmental entities.

Led by Sen. Deidre Henderson and Rep. Ken Ivory, lawmakers developed a legislative action outline for the state's response to the risk of a reduction in receipt of federal funds, with three steps:

1.     Study and assess the risk of a significant reduction in the receipt of federal funds by the state of Utah, including establishing a process for making a revenue estimate of the amount of federal funds that the state expects to receive in the near future. 

2.     Discuss methods of preparing for, and responding to, a significant reduction in the receipt of federal funds by the state of Utah.

3.     Implement measures to respond to a significant reduction in the receipt of federal funds by the state of Utah, including a contingency plan and increasing the amount in the rainy day fund.

In addition to the legislation, which builds on the Federal Receipts Reporting Requirements, Utah legislators have formed strong alliances with their state association of CPAs, chambers of commerce, cities, counties and the Sutherland Institute. They are developing Financial Ready Utah, an education campaign to accompany the Be Ready Utah disaster preparedness site.

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