Federal dollars at stake in the Valley

By Burton Speakman, Jamison Cocklin | November 18, 2012 at 12:01a.m.

By BURTON SPEAKMAN and JAMISON COCKLIN | news@vindy.com

YOUNGSTOWN

Lawmakers return to Washington this week to embark on what could be a lengthy battle to avert deep spending cuts and steep tax increases set to take the country over a fiscal cliff if left unresolved by year’s end.

If they fail to act, a broad ripple effect could be felt across the Mahoning Valley and in cities and towns across the United States, with everything from health care to education to safety nets such as unemployment benefits on the line.

“If we fall off the cliff, if no deal is reached by January, the first thing that will be hit is consumer pocket books. There will be a reduction in spending in all areas, and it will be no different in Youngstown,” said Mekael Teshome, an economist at PNC Financial Services.

“Right now, we’re in this awkward position because we don’t know what a deal will look like in the end, with no definite answer. It’s just this kind of limbo.”

For the Valley, limbo puts $10 billion on the line.

According to the U.S. Bureau of Economic Analysis, in 2009, the latest year for which data is available, Mahoning, Trumbull and Columbiana counties received more than $5.2 billion in direct federal expenditures to finance grants, loans, infrastructure improvements and to help pay thousands of federal employees at government agencies or those working to fulfill defense procurement contracts in area manufacturing.

In that same year, about 30 percent of the population in the three counties depended on some level of federal assistance, whether through entitlement programs, unemployment benefits, job training assistance or other government aid worth more than $5 billion, according to figures from the U.S. Bureau of Economic Analysis.

The cliff — and the negotiations that are bound to find lawmakers wrangling over the spending programs and tax revenue that keep federal money coming here — means much is at stake for the Valley.

THE BEGINNING

In 2011, Republicans would not raise the debt ceiling without a broad agreement to cut the country’s deficit. That impasse led to the automatic spending cuts that loom on Jan. 1, the same time the Bush-era tax cuts are set to expire.

Between budget cuts and tax increases, more than $500 billion could be sucked out of the economy between January and September, with about four-fifths of that total coming from tax hikes and $65 billion more in domestic spending cuts slated to take effect at the same time, according to the nonpartisan Congressional Budget Office.

Though not immediately pressing, intertwined in the makings of any deal will be the need to raise the government’s debt ceiling, fast approaching its $16.4 trillion limit. Eventually, lawmakers will be called on to pass a comprehensive federal budget, a feat left unfulfilled since 2009.

Paul Sracic, chairman of Youngstown State University’s political science department, says both sides of the aisle will undoubtedly use the staples of next year’s Congress as a pivot in the lame-duck session’s fiscal- cliff negotiations.

Both Democrats and Republicans have shown willingness to negotiate after the Nov. 6 election, but each has stances from which they’re unwilling to budge.

POTENTIAL IMPACT

In any event, a report by the CBO made clear that if automatic spending cuts were enacted and all Bush-era tax cuts were allowed to expire, October’s unemployment rate of 7.9 percent could spike to 9.1 percent and the Gross Domestic Product could sharply contract, sending the economy back into recession.

Congress shouldn’t focus on creating a “grand compromise,” said Alison Fraser, director of economic policy for the Heritage Institute, a conservative think tank in Washington, D.C. “The focus should be on preventing all tax increases,” she said. “It’s lunacy to raise taxes when unemployment is high and growth is low.”

It is “critically important” to keep tax cuts for the middle class, which serves as an economic catalyst by accounting for 70 percent of consumer spending, said Wendy Patton, senior project director of Policy Matters Ohio.

“Any deal needs to strike a balance between new revenue and cuts,” she said. “They need to make the tough decisions.”

CURBING GROWTH

For Bert Cene, executive director of the Mahoning Columbiana Training Association, the cliff means doing more with less. At the moment it’s the best he can hope for.

MCTA receives nearly all of its funding from the Federal Workforce Investment Act, which provides operating expenses for the One-Stop career centers and job training in Mahoning and Columbiana counties.

Based on early estimates, Cene believes if lawmakers fail to act, funding for the unemployed, displaced workers, and lower income job seekers that MCTA serves will be slashed by 8 to 10 percent nationally.

“The government sends displaced and unemployed workers to us and asks that we provide them with better skills to get the jobs that they need, but it’s an unfunded mandate,” he said. “We’ve already taken serious cuts in the last few years with this Congress, and

there really won’t be too many options left if we lose any more funding. I’m running out of magic tricks.”

Any potential spending cuts mean MCTA will be faced with a choice of either scaling back its services or turning away the unemployed altogether.

Eric Planey, vice president of international business attraction at the Youngstown/Warren Regional Chamber, shared Cene’s sentiment and said the spending cuts and tax increases would completely curb economic growth.

The local auto and aerospace industries would be impacted, Planey said. Both would see sales and business decline because supply would be curtailed.

“There’s been a lot of positive movement in those industries, but that would take a hit,” he said.

Teshome said cuts in defense spending could also hurt the Valley’s manufacturing base and sting Ohio even more. The state deals heavily in defense procurement contracts, and if defense spending is reduced, contractors stand to lose.

Oil and gas could also be affected because a shrinking GDP would lower prices, Planey said. A drop in price would slow exploration and development in the Valley.

ECONOMIC PACEMAKERS

Aside from the immediate economic impact, thornier issues remain. Long-term spending and taxation problems will make their way into the fray as well.

Treasurers at school districts all over the area are concerned about the impact of cuts associated with the fiscal cliff. Grant funding for school districts comes directly from the federal government, said Ron Iarussi, superintendent of the Mahoning County Educational Service Center. The funding is through Title 1 and Title 6 and includes funding for children with disabilities.

“Those cuts would be substantial for local districts,” he said.

All schools in the area receive title funds, Iarussi said. Some of the funding goes toward students with deficiencies in reading and math.

“Those problems tend to correspond with economics,” he said. “Schools such as Youngstown, Struthers and Campbell will lose the most.”

The U.S. Department of Education is anticipating a loss of more than $75 million for Ohio’s 2013 education funding, a decrease of

5.8 percent. Springfield Local Schools alone receive about $560,000 per year in federal money, said Edward Sobnosky, district treasurer. At the national level, the picture is no different, with school districts projected to lose $2.7 billion in the next 10 years.

“I don’t think a lot of districts understand [Title 1 and Title 6 funding] is part of the fiscal cliff,” he said. “For some districts, [that represents] 15 percent of their funding.”

CUTS IN ENTITLEMENTS

Entitlement programs will get a closer look, too. As part of the automatic spending cuts agreed to in 2011, hospitals and private practices could take a steep cut in Medicare reimbursements.

“This is already affecting patients because doctors already have to limit the number of patients they take on,” said Karyn Frederick, executive director of the Mahoning County Medical Society.

“Rates are already antiquated, and this will ultimately affect health care in the Valley. People are wary.”

Democrats are seeking to combine spending cuts with revenue generated from letting the Bush-era tax cuts expire on wealthier households earning more than $250,000 per year, while Republicans remain opposed to hiking taxes and instead want to close loopholes and limit deductions to raise revenue.

This makes a good deal look something like one that combines a compromise between adjusting tax increases and spending cuts, Sracic said.

Teshome predicts that the payroll tax cut, first enacted in 2010 to provide consumers with more spending power and emergency unemployment benefits, will likely be done away with.

The payroll tax cut hit the Social Security trust fund by reducing the 6.2 percent collection rate to 4.2 percent, effectively saving $1,000 for those earning about $50,000 per year.

“A good deal is one that gets enough votes to get something done,” Sracic said. “We can’t have payroll taxes going up or all tax brackets going up. You can’t have something like $600 billion being sucked out of the economy — it’s too weak — so you’re going to see some things adjusted and some things get kicked down the road.”

A POINT OF NO RETURN

With the political reality, experts are beginning to speculate on whether Congress will buy time by simply agreeing to disagree — pushing back spending cuts and tax hikes or allowing them to slowly phase in through 2013, as originally planned, until a “grand compromise” can be reached sometime next year.

But inaction, pundits say, is action enough. Fears over the U.S. once again seeing its credit rating downgraded, combined with skittish investors, could send financial markets into a spiral and curb capital investments — further fueling economic decline.

“We do think odds are higher now for increased volatility until the fiscal cliff and ongoing European Union issues are resolved or seriously addressed,” said Rob Gardner, a financial adviser at the Bennett/Gardner Group in Canfield. “[There’s] the fear of yet another bear market and stock prices possibly dropping between 30 and 40 percent.”

On the other hand, some like Patton, contend the cliff is more of a slope.

“It’s more important to get the right deal than to get a deal done by Jan. 1,” she said.

Fraser, of the Heritage Institute, agreed the right deal is more important than something that is rushed through but argued the damage of going over the cliff on Jan. 2 could be severe.

“They need to take steps to make sure the agreement is pro-growth,” she said of lawmakers.

For example, the Women, Infants and Children program, which provides financial support to low-income mothers, is scheduled to lose $308 million without action.

At PNC Financial Services, Teshome said the bank still believes lawmakers will reach a compromise that keeps the economy growing in 2013, a belief widely held by policy makers and experts across the country.

“It’s an unusual situation, when we’re beginning to reach that point of no return,” Sracic said. “Normally, when Congress doesn’t act, nothing happens. In this case, if Congress doesn’t act, horrible things happen and there’s some disagreement at the moment as to when we reach that point of no return. Is it now or later?”