Budget cuts pose high risk to SD

WASHINGTON – The options being debated to solve the looming federal debt crisis aren’t pretty: cuts to popular spending programs, reductions in entitlement benefits.

Any deficit-cutting pain would hit every American in some way, but South Dakota, a rural state whose citizens disproportionately depend on government services, could get hit harder than most.

Take changes to the two biggest entitlement programs: Social Security and Medicare. Proposals being considered on Capitol Hill to rein in costs would limit eligibility, raise the minimum age and reduce the overall scope of the programs. South Dakota has a greater share of its residents enrolled in those programs than the national average.

Spending cuts could be an equally painful remedy for a state that has a relatively high percentage of Native Americans, veterans, farmers and elderly – groups that depend on government assistance more than the general population.

The state received almost $9.5 billion in federal funding in 2009, or $11,693 per resident, compared with the U.S. average of $10,548, according to the latest figures from the U.S. Census Bureau. Only nine other states had a better rate of return in terms of the aid they get compared to the taxes their residents send to the federal Treasury.

Time is running out for a compromise. Congress has until Aug. 2 to reach a deal on raising the debt ceiling or the government will default on its obligations, a scenario that most economists say would lead to plunging financial markets and economic chaos.

Lawmakers are trying to negotiate a deal, but it’s gridlocked over GOP opposition to tax increases – including from Sen. John Thune and Rep. Kristi Noem – and opposition from Democrats, including Sen. Tim Johnson, to any plan that relies only on cuts to entitlements and other spending programs.

The national debt now stands at more than $14 trillion, or about $46,000 for each U.S. resident.

Federal dollars come in many forms, including Social Security checks, wages of federal workers in the state, financial aid for college students, government contracts, farm subsidies, housing assistance, veterans’ benefits and grants to build roads, water systems and other infrastructure.

“Historically, South Dakota’s done very well in terms of federal income taxes paid and federal payments back to the states,” said Bob Burns, a retired political science professor at South Dakota State University. “Just looking at that fact alone it would seem like if you’re one of the states that benefits greatly from federal spending, you’re one of the states that’s going to be hurt more than others by a significant rollback.”

Burns thinks the least painful option for the state is to raise taxes because “we don’t have that many high rollers” in South Dakota. No Fortune 500 companies are headquartered in the state and household median income ranked 34th in 2009, according to census figures.

But tax increases are taboo for Thune, who believes Washington has a spending problem, not a revenue one.

“I still believe the best way to get out of the debt crisis is to get government smaller, not larger, and to get the private economy expanding,” he said late last week. “If you get the economy growing and expanding again and you start creating jobs, then you start solving a lot of these fiscal problems too, just through economic growth.”

Thune said South Dakota will feel pain like other parts of the country, but he also said his constituents understand something must be done.

“Most South Dakotans tend to understand you can’t spend money you don’t have,” he said.

He’s got an ally in Scott VanderWal, a Volga farmer who is president of the South Dakota Farm Bureau and supports spending and entitlement reforms.

“The bottom-line issue here is that we’ve got to get the federal debt under control because that’s going to be a far worse ball and chain around the economy, not only for the country but our state,” he said.

VanderWal wants fair treatment for agriculture, although lawmakers in both parties have identified farm subsidies as one area ripe for reduction. A measure to ease the deficit by eliminating billions in tax credits for corn-based ethanol, a key South Dakota industry, drew rare bipartisan support last month.

Johnson has said the problem for South Dakota has been compounded by a recently agreed-to ban in Congress on “earmarking” pet projects. Without the ability to steer aid to important home-state priorities such as the Lewis & Clark Regional Water System, a smaller federal budget pie likely means those projects will take years longer to complete unless the Obama administration sees fit to fund them.

Entitlement programs, which accounted for more than 40 percent of the fiscal 2010 budget, already are on the congressional cutting board.

The Republican-led House approved a plan in April that would overhaul Medicare, including raising the minimum eligible age to 67 by 2033. The plan, which Noem supported, also would cut Medicaid, the federal/state health insurance program for the poor, by $750 billion over 10 years, turning it into a block grant program for the states.

The Democratic-led Senate rejected that plan in May, with Thune voting for it and Johnson against.

Thune said reducing entitlement programs has to be part of the mix.

“There’s going to have to be some changes before those programs go bankrupt,” he said. “The Democrats talk about Republicans wanting to end Medicare as we know it. But if you want to end Medicare as we know it, do nothing. Because if these programs don’t change, they are a one-way train ride over the cliff.”

Sam Wilson, associate director for advocacy for the South Dakota chapter of AARP, said cuts to entitlements would disproportionately hurt the state, and not just because the percentage of state residents enrolled in those programs is higher than the national average.

In rural states such as South Dakota, access to health care is key, he said. If consumers can’t afford the care and cut back on seeking it, some health providers may not have enough business to stay open in sparsely populated areas, he said.

“That really is a doubled-edged sword. You have beneficiaries who can’t afford to pay more and you’ve got the federal government who’s unwilling to pay its fair share of the cost of health care, and that’s unsustainable, too,” Wilson said. “It may help us meet the bottom-line numbers but if you don’t have providers to take care of people, what kind of system do you really have?”

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