Fewer cops, more potholes: How debt deal could hit states hardest

“When workers receive lower pay or lose their jobs, they consume less, and the ripple effect continues throughout the state’s economy, costing even more jobs,” says a June report by the CBPP.

Still, most states are relieved to see a deal that averts government default – particularly the handful of states that faced credit rating downgrades if the federal government failed to pay its bills. In addition, the ballooning federal deficit was unsustainable, says Robert Ward, deputy director of the Rockefeller Institute of Government in Albany, N.Y.

“If Congress had done nothing, what would the impact have been for states then?” asks Mr. Ward. “It’s hard to argue that the status quo could simply continue forever.”

The deficit reduction law includes a second phase of cuts worth up to $1.5 trillion. The plan calls for a joint committee in Congress to recommend savings, which could take the form of tax increases, entitlement reforms, or more spending cuts. If the recommendations aren’t acted upon by the end of the year, automatic reductions of $1.2 trillion will be applied to defense and domestic programs, including Medicare.

More than two-thirds of the federal funds flowing to states go to mandatory programs, including cash assistance and Medicaid. Medicaid alone accounts for nearly half – about $248 billion – of the $586 billion states will receive from the federal government this year.

For this reason, many analysts are convinced the joint committee will recommend changes to Medicaid, possibly restricting the number of recipients and shifting more costs to the states.

“Medicaid will almost certainly be on the table,” says Ward. “The looming deficits are just too big to ignore, and too big to close with tax increases or military reductions alone.”

Though Congress has yet to target specific programs for reductions – the most severe of which won’t take effect until after the 2012 elections – advocacy groups are already bracing for a new era of austerity.

In New York City, a group called New Yorkers Against Budget Cuts planned to meet on Wall Street Tuesday afternoon to protest the debt law.

“We’re calling people out to vent their frustration with the cutbacks at the federal level,” said Larry Hales, one of the group’s co-founders, before the event.

Mr. Hales, who lives in Jersey City, N.J., has been unemployed since 2009, when he was laid off from a job as a community organizer. Earlier this year, Hales’ unemployment benefits expired, and the state stopped sending him a monthly cash assistance check. He says he doesn’t expect either to be restored.

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