How the Debt Ceiling Debate Puts State and Local Dollars at Risk

As the drama over preventing the nation from defaulting on its debts unfolds in Washington, counties and housing advocates say they are worried that the political standoff could lead to cuts in funding for everything from preventing homelessness to transforming rural economies.

In return for agreeing to increase the nation’s borrowing limit, newly empowered House Republicans, concerned about the nation’s rising deficit and what House Majority Leader Steve Scalise called Democrats’ “drunken” spending spree, are demanding reductions.

Lowering spending to where it was before Congress passed its $1.7 trillion “omnibus” budget in December could mean funding across a range of non-defense programs would drop by about $147 billion, or roughly a third, according to a recent analysis by the Libertarian Cato Institute.

Republicans have yet to identify what exactly they want to cut. But bringing spending back down to where it was before the omnibus would jeopardize increases included in the spending package for a wide variety of programs. These include mental health initiatives, and funding for a new program to create research and manufacturing hubs in smaller and rural communities.

“A return to FY22 funding levels would really limit the ability of counties to serve communities’ needs,” Mark Ritacco, chief government affairs officer for the National Association of Counties, said in a statement to Route Fifty 

“Returning to 2022 spending levels is short-sighted, inefficient, and problematic for counties that depend on federal partnership to support election security, mental health, the safe reduction of jail populations, public lands management, and so much more,” he said.

Republicans’ calls for cuts are causing some mayors to worry that a budget deal could incorporate clawbacks of Covid relief dollars from the American Rescue Plan Act that cities and states haven’t spent yet. The chairman of the House Committee on Oversight, Rep. James Comer, lent some credence to these concerns in comments on Monday.

“There’s still a lot of Covid money that still hasn’t been spent out there,” Comer said during an appearance at the National Press Club. “And that’s going to play a role as we talk about the debt ceiling negotiations.”

Comer’s committee has a hearing scheduled for Wednesday on fraudulent unemployment claims paid by states during the pandemic. It is the first of several hearings that the panel is planning on Covid spending. The Kentucky Republican indicated that GOP lawmakers may try to rescind relief funds that they consider to have been spent in wasteful or fraudulent ways. 

“Surely, we can agree that Covid spending needs to be looked into. We need to make sure there weren’t massive amounts of waste, fraud and abuse. And if there were, if there was any way to claw some of that back” the committee should look into it, he said.  

Beyond Covid aid, the possible spending reductions in play could “have a huge impact on housing investments,” said Sarah Saadian, the National Low Income Housing Coalition’s senior vice president for policy and field organizing, in an interview.

Decreases along the lines of what Republicans are considering could imperil, among other things, a $50 million increase in the omnibus for Housing Choice rental assistance vouchers, which are expected to assist 12,000 more households.

Stripping out the increases would mean losing ground on efforts to deal with rising rents and housing costs, Saadian said. “It would mean less money to help construct and build new affordable housing. Less money to address homelessness,” she added. 

Biden and the Senate’s Democratic majority thus far have been adamant that they will not buckle to Republicans’ demands. “I will not let anyone use the full faith and credit of the United States as a bargaining chip,” Biden vowed during a speech last week.

But that hasn’t been enough to reassure advocates like Saadian. “We’ve seen this play out before,” she said. 

Her reference was to a scenario in 2011 that mirrors the current one. Democrats, as they do now, controlled the Senate and the White House. In response to similar demands by House Republicans around the debt ceiling, then-President Obama at that time agreed to reduce federal discretionary spending by $917 billion over the following decade.

“I'm deeply concerned we could see another 10 years of deep budget cuts,” Saadian said.

The Cato Institute analysis predicts that Republicans are unlikely to agree to cutting defense spending. It also noted that GOP lawmakers would prefer not to slash areas like border protection, veterans affairs and the State Department. As a result, other programs, including education, transportation and scientific research, would have to be cut by about a third to reduce overall spending to fiscal year 2022 levels, according to the analysis.

But even that much would not be enough to balance the nation’s budget, the analysis said, noting that because of the rising cost of programs like Social Security and Medicare, the nation’s debt is projected to grow from 95% of overall economic output–or gross domestic product–to 138% of GDP over the next decade. 

“Stopping the growth in debt as a share of the economy would require at least $7 trillion in spending reductions–that’s 53 times the amount of spending reductions currently under discussion,” the analysis said.

Republican spokespeople on the House appropriations and budget committees declined to comment when asked about concerns over the proposed cuts. 

But in an appearance on Fox News, Scalise, of Louisiana, said that in order to address the nation’s deficit, Congress would have to “control spending or increase the debt ceiling, or a combination of the two. But you can't just keep increasing the debt limit and let President Biden keep spending like he's done.”

The National League of Cities and the U.S. Conference of Mayors declined comment on the possible reductions. Democratic and Republican mayors were divided over the issue in recent interviews with Route Fifty. Democrats at a U.S. Conference of Mayors meeting earlier this month said they opposed cuts when cities are confronting difficulties with housing, crime and other issues. 

While the details remain unclear, Ritacco said potential cuts could wipe away funding in the omnibus for “promising new solutions” to challenges that counties face.

In addition to $500 million in initial grants for the new regional technology and innovation hub program, the omnibus included $200 million to help disadvantaged communities benefit from new domestic semiconductor manufacturing, including through worker training. 

The spending package also upped funding for Community Mental Health Services Block Grants by $150 million, or 17.5%. That money could be at risk, too. As could additional dollars under the 2021 infrastructure law for programs that help finance water and wastewater infrastructure.

Also potentially up for slicing, should Democrats agree to cuts, Ritacco said: $75 million in election security grants to help upgrade election technology and security; a $100 million increase for the Agriculture Department's Rural Development programs, which help fund a variety of infrastructure and housing; and a $3.4 billion increase that raised Transportation Department funding to its highest level in history.