State Government Fiscal Stress and Federal Assistance

Robert Jay Dilger
Senior Specialist in American National Government

No two state budgets are alike. States have different budget cycles, different ways of preparing revenue estimates and forecasts, different requirements concerning their operating and capital budgets, different roles for their governors in the budget process, and different policies concerning the carrying over of operating budget deficits into the next fiscal year.

Although no two state budgets are alike, all 50 states have experienced fiscal stress in recent years, especially during FY2009 and FY2010. The national economic recession, which officially lasted from December 2007 to June 2009, led to lower levels of economic activity throughout the nation and reduced state tax revenues. State tax revenues from all sources, including sales, personal, and corporate income tax collections, fell from $680.2 billion in FY2008 to $609.8 billion in FY2010, a decline of 10.3%. The decline in state tax revenue, coupled with increased demand for social services and state-balanced operating budget requirements, created what the National Association of State Budget Officers (NASBO) characterized as “one of the worst time periods in state fiscal conditions since the Great Depression.”

States closed nearly $230 billion in state budget shortfalls in FY2009 and FY2010; and $146.3 billion in state shortfalls in FY2011 and FY2012. State fiscal conditions improved during FY2011 and FY2012, and are projected to continue to improve in FY2013. However, states continue to experience fiscal challenges. For example, although state general fund revenue is projected to surpass pre-recession levels in FY2013 by about $13 billion (from $680.2 billion in FY2008 to $692.8 billion in FY2013), total general fund spending is projected to remain below pre-recession levels in FY2013 (from $687.3 billion in FY2008 to $681.3 billion in FY2013). State budget officers predict continuing budgetary challenges in virtually all states in FY2013, in part due to slow state revenue growth, the withdrawal of temporary federal assistance provided through P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), the need to replenish reserves, and increased costs for health care and other social services.

Congressional interest in state budgetary finances has increased in recent years, primarily because state action to address budget shortfalls, such as increasing taxes, laying off or furloughing state employees, and postponing or eliminating state infrastructure projects, could have an adverse effect on the national economic recovery. For example, Federal Reserve Board Chairman Benjamin Bernanke stated on March 2, 2011, that the fiscal problems of state and local governments have “had national implications, as their spending cuts and tax increases have been a headwind on the economic recovery.” Also, if states reduce their service levels there could be additional pressure for the federal government to provide those services. As funding from ARRA expires, there could be additional pressure for the federal government to provide additional federal assistance to states.

This report examines the current status of state fiscal conditions and the role of federal assistance in state budgets. It begins with a brief overview of state budgeting procedures and then provides budgetary data comparing state fiscal conditions in FY2008 to FY2011. The data indicate that (1) states reduced their general fund budgets from FY2008 to FY2011, but, because they received increased federal funding, increased their total amount of spending; (2) the share of total state expenditures held by the states’ four operating expenditures budgets (general fund, federal funds, other state funds, and bonds) shifted from FY2008 to FY2011, with an increased reliance on federal funds; and (3) states experienced varying levels of fiscal stress from FY2008 to FY2011.


This report concludes with an assessment of the consequences current levels of state fiscal stress may have for the 113th Congress.

Date of Report: December 14, 2012
Number of Pages: 34
Order Number: R41773
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Legal Protections for Subcontractors on Federal Prime Contracts

Kate M. Manuel
Legislative Attorney

Payment and other protections for subcontractors on federal contracts are of perennial interest to Members and committees of Congress, in part, because many subcontractors are small businesses, and it is the “declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small business concerns.” Subcontractors on federal contracts are not in privity of contract with the government and would generally lack the payment and other protections that federal prime contractors enjoy. However, Congress has enacted several measures that give small business and other subcontractors certain protections. Key among these are the Miller Act, the 1988 amendments to the Prompt Payment Act, and Section 8(d) of the Small Business Act.

The Miller Act of 1935, as amended, authorizes subcontractors who furnished labor or materials used in carrying out federal construction projects valued in excess of $150,000 to bring a civil action against prime contractors’ payment bonds to obtain payments due. Congress enacted the Miller Act to compensate for the difficulties that subcontractors would otherwise have in obtaining payment from federal construction contractors, given that they cannot place a mechanic’s lien on the work because the government has sovereign immunity. The doctrine of sovereign immunity protects the government from being sued without its consent, and the Contract Disputes Act waives the government’s sovereign immunity only as to suits involving contracts to which the government is a party, not subcontracts under these contracts. Relatedly, there is no privity of contract, or direct contractual relationship, between the government and the subcontractor, which means that the subcontractor generally cannot sue to enforce the payment or other terms of the subcontract against the government.

The 1988 amendments to the Prompt Payment Act provide an additional form of payment protection for subcontractors on federal construction contracts by requiring federal agencies to include in their contracts a clause obligating the prime contractor to pay the subcontractor for “satisfactory” performance within seven days of receiving payment from the government. Absent such a clause in the prime contract, the prime contractor would generally be free to agree to whatever payment terms it wishes with the subcontractor and would not necessarily pay the subcontractor as quickly. However, the federal government cannot be interpleaded as a party to any disputes between contractors and subcontractors over late payments or interest, and contractors’ obligations to pay subcontractors cannot be passed on to the federal government in any way, including by contract modifications or cost-reimbursement claims.

Section 8(d) of the Small Business Act provides a different sort of protection for prospective subcontractors by generally requiring that prime contractors agree to plans for subcontracting some percentage of the work to be performed under federal contracts with various types of small businesses. Without such subcontracting plans, or similar contract terms, prime contractors would generally be free to subcontract with whomever they wish for the completion of work under the contract and would not be required to deal with these categories of small businesses. The 111th Congress amended Section 8(d) to require that prime contractors with subcontracting plans make a “good faith effort” to work with the subcontractors whom they “used” in preparing their bids or proposals, and provide the contracting officer with a written explanation whenever they fail to do so (P.L. 111-240, §1322). The 2010 amendments also require that prime contractors notify the contracting officer in writing whenever they pay a “reduced price” to a subcontractor for completed work, or payment is more than 90 days past due (P.L. 111-240, §1334). The Small Business Administration is in the process of implementing these provisions of the 2010 act.


Date of Report: December 10, 2012
Number of Pages: 14
Order Number: R41230
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International Parental Child Abductions

Alison M. Smith
Legislative Attorney

International child custody disputes are likely to increase in frequency as the global society becomes more integrated and mobile. A child custody dispute between two parents can become a diplomatic imbroglio between two countries. Since 1988, the Hague Convention on the Civil Aspects of International Child Abduction (“Hague Convention” or “Convention”) has been the principal mechanism for enforcing the return of abducted children to the United States. While the treaty authorizes the prompt return of the abducted child, it does not impose criminal sanctions on the abducting parent. Congress, to reinforce the Hague Convention, adopted the International Parental Kidnapping Crime Act of 1993 to impose criminal punishment on parents who wrongfully remove or retain a child outside U.S. borders.

The Convention does not act as an extradition treaty, nor does it purport to adjudicate the merits of a custody dispute. It is a civil remedy designed to preserve the status quo by returning an abducted child to the country of his or her “habitual residence” and allowing the judicial authorities in that country to adjudicate the merits of a custody dispute. As such, the proceeding is brought in the country to which the child was abducted or in which the child is retained. Although domestic relations involve issues typically governed by state law, the federal statute implementing the Hague Convention explicitly confers jurisdiction on the federal courts. Federal courts are split as to the scope of this jurisdiction. Both the Convention and its implementing legislation are silent on the issue of appellate review. In Chafin v. Chafin, the U.S. Supreme Court will weigh in on this issue when it decides whether an appeal of a district court’s decision granting a return petition becomes moot after the child at issue returns to her country of habitual residence, as determined by the district court.

The Hague Convention is not always applicable in international child custody cases. Signatory nations do not have to automatically return a child to his or her place of habitual residence, as discretionary exceptions exist that enable the child to remain with the removing parent. Also, procedures and remedies available under the Convention differ depending on the parental rights infringed. Courts must determine whether a particular order confers a right of custody or a lesser right of access. For example, federal courts disagreed on what type of right was conferred by a ne exeat, or “no exit,” order granting one parent the right to veto another parent’s decision to remove their child from his home country. In Abbott v. Abbott, the U.S. Supreme Court resolved the circuit split by finding that such an order confers a right of custody, thus triggering enforceability under the Convention. However, it is important to note that this decision was limited to ne exeat orders. As such, courts will have to address which side of the access-custody line any other arrangements may fall.

This report will discuss the applicability of the Hague Convention and current U.S. laws, both civil and criminal, which seek to address the quandary of children abducted by parents to foreign nations.


Date of Report: December 3, 2012
Number of Pages: 11
Order Number: RS21261
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Loss of Federal Pensions for Members of Congress Convicted of Certain Offenses

Jack Maskell
Legislative Attorney

Members of Congress may forfeit or lose their congressional pensions upon conviction of certain federal crimes under two different provisions of federal law:

1. Under the so-called “Hiss Act,” Members of Congress (and most other officers and employees of the federal government) will forfeit their entire federal employee retirement annuities if convicted of a federal crime that relates to espionage, treason, or several other national security offenses against the United States.

2. In addition to the Hiss Act provisions, Congress enacted, as part of the “Honest Leadership and Open Government Act of 2007” (HLOGA; P.L. 110-81, Section 401), and as amended by the “Stop Trading on Congressional Knowledge Act” in 2012 (STOCK Act ; P.L. 112-105, Section 15), further provisions that will deprive Members of all of their “creditable service” as a Member of Congress for federal pension purposes if that Member is convicted of any one of a number of federal laws concerning corruption, election crimes, or misconduct in office.

Any new or additional penalty for the commission of a crime, such as the penalty of forfeiture or loss of part or all of one’s federal pension, must, under the Constitution’s ex post facto prohibition, apply prospectively only, and cannot work retroactively to take away the pensions or annuities of Members of Congress or former Members who had already engaged in the covered criminal misconduct prior to the passage of the new law. The new statutory penalties, in a similar manner to the current Hiss Act, would allow convicted former Members to retain their own contributions to the retirement fund, as well as their own savings and earnings in the Thrift Savings Plan under the Federal Employee Retirement System (FERS). Unlike the operation of forfeitures under the Hiss Act, however, the more recent forfeiture provisions apparently would allow Members to keep the government’s contribution to their Thrift Savings Plan, while under the Hiss Act such contribution appears to be forfeited.


Date of Report: December 10, 2012
Number of Pages: 17
Order Number: 96-530
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RICO: An Abridged Sketch

Charles Doyle
Senior Specialist in American Public Law

Congress enacted the federal Racketeer Influenced and Corrupt Organization (RICO) provisions as part of the Organized Crime Control Act of 1970, 18 U.S.C. 1961-1968. In spite of its name and origin, RICO is not limited to “mobsters” or members of “organized crime” as those terms are popularly understood. Rather, it covers those activities which Congress felt characterized the conduct of organized crime, no matter who actually engages in them. RICO proscribes no conduct that is not otherwise prohibited. Instead it enlarges the civil and criminal consequences, under some circumstances, of a list of state and federal crimes.

RICO condemns: (1) any person, (2) who (a) invests in, or (b) acquires or maintains an interest in, or (c) conducts or participates in the affairs of, or (d) conspires to invest in, acquire, or conduct the affairs of (3) an enterprise (4) which (a) engages in, or (b) whose activities affect, interstate or foreign commerce (5) through (a) the collection of an unlawful debt, or (b) the patterned commission of various state and federal crimes (“racketeering activities” sometimes referred to as “predicate offenses”). Violations are punishable by fines, forfeiture, and imprisonment for not more than 20 years or life if one of the predicate offenses carries such a penalty.

Civil RICO permits anyone injured in their business or property by a RICO violation to recover treble damages, costs and attorneys’ fees. In exceptional cases, at least at the behest of the government, the courts will enjoin further RICO violations, order divestiture, dissolution or reorganization, or restrict an offender’s future professional or investment activities. RICO comes with tailored provisions for venue and service of process, expedited judicial action in civil cases brought by the United States, in camera proceedings, and for the use of civil investigative demands.

This is an abridgement of a report, which with full citations, footnotes, and various appendices, appears as CRS Report 96-950, RICO: A Brief Sketch, by Charles Doyle.


Date of Report: December 7, 2012
Number of Pages: 9
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