Some have claimed that the fiscal cliff threatens doom for state and local governments-are they right?
Well, there would be cuts, but let's maintain perspective. There are some important mitigating factors to consider.
State and local governments' most direct exposure to the fiscal cliff is through the spending cuts portion known as "sequestration." Sequestration dates back to the summer of 2011's debt ceiling deal and would total $984 billion in cuts over nine years, split evenly between defense and non-defense programs. The non-defense cuts affect some Federal grants-in-aid programs to state and local governments.
The first mitigating factor to consider is that the defense and non-defense cuts compose only 11% of the total fiscal cliff (see Table 1).
The second mitigating factor is that the cuts are really caps. With the exception of 2013, annual outlays would not be reduced, or even frozen. Sequestration would effect a reduction in projected funding levels, by around 8% in initial years, declining to 5.4% in later years (see Table 3).
Third, much is exempt from the cuts. According to the Peter G. Peterson Foundation, over 100 accounts will be untouched by sequestration (including the "Pensions for Former Presidents" account!). Congress exempted most of the big ticket grants-in-aid programs such as Medicaid and Temporary Assistance to Needy Families (TANF). The exempted programs noted in gray in the Table below add up to at least 2/3 of the total annual federal aid to state and local governments.