Federal System Paul L. Posner George Mason University Outline: - PowerPoint PPT Presentation

Fiscal Austerity and the Federal System Paul L. Posner George Mason University

Outline: Autonomy and Interdependence in American federalism  Basic architecture: “fend -for-yourself- federalism”  Substantial State and local fiscal autonomy  Budget, tax and debt constraints mainly at the state and local levels  Increased fiscal interdependence over time  More federal transfers and mandates  Erosion of cooperative institutions  Paradox of more interdependence and less intergovernmental cooperation

THE RISE OF FISCAL INTERDEPENDENCE  Growth of Federal Intergovernmental Aid  953 separate federal grants in 2009  Totaled $607 billion in FY 2014  23.2% of State/Local expenditures in 2013  16.6% of total Federal expenditures in 2013  Growth of “federally induced costs” for state and local governments: mandates and preemptions

Vertical Equalization: The Obama Stimulus

Rise of Federal Mandates G N T C AC R T R A

Current U.S. federal fiscal system is unsustainable  Major shifts in social and economic forces generating revenue and spending pressures  Globalization  Advancing technologies  Knowledge based economy  Aging of population  Rise in health care costs

BABY BUST, BABY BOOM, BABY BUST Fertility Rate (Births per woman) Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports. Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds .

LABOR FORCE GROWTH Percent change (5-year moving average) Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports. Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds .

Medicare Beneficiaries

GAO Long Term Budget Outlook

Future Federal Aid at Risk: Long term Budget Trends

Exhaustion of social security and medicare trust funds 24

Future Federal Aid at Risk: Federal Budget “Sequester”

State and Local Fiscal Gap

Composition of State and Local Spending

State sales tax bases have been eroding 28

State and Local Funded Ratios with Liabilities Discounted by Riskless Rate Alicia Munnell, Jeanne-Pierre Aubrey and Mark Caferelli, The Funding of State and Local Pensions, 2013-2017 (Boston,

Centralizing Effects of Deficit Commission Proposals  Reduced discretionary budgets will prompt cuts in federal grants  Tax expenditures reexamined  State and local deduction  Tax exempt bonds  Cost shifts and mandates  Extend social security coverage  Revenue nationalization - VAT  Cap and consolidate  Medicaid long term care  Homeland security grants

Federalism in an Age of Austerity  Go it alone federalism  Partial and ineffective solutions  Public confusion  Cost shifting  Unfunded mandates  Fiscal substitution  Fiscal coordination  Win-win strategies  VAT  Sorting out responsibilities

The Case for Fiscal Collaboration  Health care costs and coverage  Economic growth in an aging society  National infrastructure investments  Revenue productivity 33

A Federalism reform agenda? Tax policy  Tax expenditure reform  Consumption taxation  Tax base sharing  Grants  Sorting out  Consolidation/performance grants  Targeting  Regulatory  Unfunded mandates act  Performance outcomes  Variable speed federalism  Institutions  National/federal for engagement  Fiscal impacts  State capacity for engagement 

Future Prospects for Reform: Intergovernmental Institutions:  2013  1980  CBO cost estimation  ACIR  GAO  OMB  GAO  Congressional IGR subcommittees  Academy for State and Local Government

Federalism in Uncertain Economic Times G. William Hoagland Sr. Vice President Bipartisan Policy Center August 4, 2015

37 Economic Environment: Economic Forecasts Calendar Years 2014 - 2016 Forecast Forecast 2014 2015 2016 Real GDP Growth – CBO +2.2 +2.8% +3.0% – Blue Chip +2.4 +2.4% +2.8% – Administration +2.2 +3.0% +3.1% Inflation (CPI) – CBO +1.6* + 2.0% +2.1% – Blue Chip + 1.7% + 2.2% +0.3% – Administration +1.4% +1.9% Unemployment Rate – CBO 6.2%* 5.5% 5.4% – Blue Chip 5.3% 4.9% – Administration 5.4% 5.1% 10 Year Note – CBO 2.5%* 2.8% 3.3% – Blue Chip 2.3% 3.0% – Administration 2.8% 3.3% Sources: Congressional Budget Office, January 2015; Blue Chip Economics Forecasts, July 10, 2015 ; President’s FY 2016 Budget February 2015. * = Actual WWW.BIPARTISANPOLICY.ORG

Total Budget Surplus/Deficit FY 1971-2025 Total Budget Surplus/Deficit FY 2016 Budget Resolution 400 Actual Projections S.Con.Res.11 200 Surplus 0 Deficit -200 -400 Dollars in Billions -600 Trend -800 -1000 -1200 -1400 Recession as -1600 announced by National Bureau -1800 of Economic Research -2000 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 Year Source: An Update of The Budget and Economic Outlook: Fiscal Years 2014 to 2025, and Analysis of the President’s 2016 Budget. Congressional Budget Office; January 2015, March 2015. CBO March 2015 Baseline. Concurrent Resolution on the Budget for Fiscal Year 2016, S.Con.Res. 11, April 29, 2015. WWW.BIPARTISANPOLICY.ORG

Budget Outlook FY 2012 – 2025 (In Billions of Dollars – % of GDP) % ∆ 2012 2013 2014 2015 annual 2016 2017 2018 …2025 Actual Actual Actual 2014- Proj 2025 Receipts 2,450 2,774 3,021 3,191 3,470 3,601 3,728 5,030 + 4.7% Spending 3,537 3,455 3,506 3,677 3,925 4,056 4,217 6,069 + 5.3% Deficits 1,087 680 485 486 455 455 489 1,038 +8.8% % of GDP 6.8% 4.1% 2.8% 2.7% 2.4% 2.3% 2.4% 3.8% NA 11,983 Public Debt 11,281 12,780 13,366 13,897 14,428 14,983 21,182 + 4.4% 73% 72% 74% 74% 74% 73% 73% 77% % GDP 16,027 16,699 26,926 17,781 18,473 19,144 19,794 20,502 +4.0% Debt Subject Limit 100% 101% 98% 103% 103% 102% 100% 100% % GDP CBO estimate of nominal GDP growth increase 4.3% annually 2015-2025. Source: Congressional Budget Office, The Budget and Economic Outlook 2015-2025. Updated Projections. March 2015. WWW.BIPARTISANPOLICY.ORG

The Accumulation of Public Debt Debt Held by the Public -- Exceeds 100% of Economy 2038 Source: CBO The 2014 Long-Term Budget Outlook, July 2014; The Budget & Economic Outlook: 2015 to 2025, January 2015. WWW.BIPARTISANPOLICY.ORG

Federal Spending Projected for 2025 Medicaid Social Medicare Security (10%) (16%) (26%) Other Health Programs (2%) Other Mandatory Spending Net (10%) Defense Interest Domestic Discretionary (12%) (11%) (14%) Agriculture (0.3%) “Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending ; Department of Defense Medicare- Eligible Retiree Health Care Fund (including TRICARE for Life ); Children’s Health Insurance Program, and other programs. Source: The Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2014 to 2025, January 2015. WWW.BIPARTISANPOLICY.ORG

Growth in Net Interest Average Annual Growth, 5-year periods (1965 – 2020) % Growth Nominal Growth Real Growth in 2005 $ 19.8 19.7 20 17.7 17.3 16 13.5 12 10.8 10.0 9.4 7.3 8 6.0 4.7 4.1 3.3 4 2.1 1.3 0 -0.8 -1.1 -2.4 -4 -3.8 -3.8 -6.0 -6.2 -8 1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05 2005-10 2010-15 2015-20 Source: “The Budget and Economic Outlook Fiscal Years 2013 to 2023: Congressional Budget Office, February 2013” plus historical data.

Projected Growth in Major Budget Categories 2012-2025 (% GDP) WWW.BIPARTISANPOLICY.ORG

Social Security and Disability Trust Funds’ Exhaustion Social Security Trust Fund Ratios Assets as Percent of Annual Cost Trustees Report Intermediate Projections 450% Historical OASDI 2014TR 400% OASI 2014TR DI 2014TR OASDI 2013TR 350% OASI 2013TR DI 2013TR 300% 250% OASI 200% OASDI 150% 100% DI 50% Tax Rate Reallocation 0% 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 44