There’s light at the end of the states’ fiscal tunnel

The most recent analyses by the National Conference of State Legislatures (NCSL) and the National Governors Association (NGA)/National Association of State Budget Officers (NASBO) indicate improvement in states’ fiscal situations and cautious optimism that the economic downturn is ending.

In its April report, NCSL said more than half the states are projecting surpluses by the end of the current fiscal year, a sharp contrast to the situation they faced a year ago when they were struggling to close a cumulative $21.5 billion budget gap. Currently, they are working to close a total gap of $720 million, and 32 states were forecasting surpluses for the fiscal year that ended June 30. The projected surpluses were a result of improved collections in major revenue categories and program cutbacks.

Nine states expected surpluses below 1% of their general fund budgets. In Florida, Nevada, Oklahoma, South Dakota, and Wyoming, surpluses were expected to be more than 5%. But officials said this breathing room came after three consecutive years of fiscal crisis, when states had to cut funding in such core areas as education, health care, and corrections. Some states dipped into rainy day funds, increased fees, or raised taxes on items including cigarettes, health insurance, and phone bills to help make ends meet.

Turning red ink into black

"States are turning red ink black," NCSL executive director Bill Pound said. "They should be praised for their diligence and willingness to make tough and often unpopular decisions that were necessary to get through the fiscal crisis. States are also grateful for help from the federal government this past year." (Federal aid in 2002 provided $10 billion in Medicaid relief and $10 billion in discretionary funds.)

Mr. Pound says state budgets still don’t look healthy in FY 2005, but are moving in the right direction. Some 33 states were resolving budget gaps as they negotiated their FY 2005 budgets for a July 1, 2004, start of the fiscal year. The aggregate gap reported by NCSL was $36.3 billion, half as high as the $78.4 billion facing states as they opened FY 2004.

"The national economy seems to be improving," Mr. Pound said, "but not all states have felt the full strength of the recovery."

Meanwhile, the NGA/NASBO report says that in FY 2004, state-sourced Medicaid spending was up by 4.6%. Because of the temporary Federal Medical Assistance Percentage increase that was part of the federal fiscal relief package, federal-sourced state Medicaid spending increased by 11.7% in FY 2004. For FY 2005, governors project average state growth rates of 12.1%, while the federal share would grow by 3.9% as the temporary federal aid ends.

Elementary and secondary education has dominated state spending since FY 1993, while Medicaid has been the second largest and fastest growing component of state spending, both from state general funds and from all spending sources.

NGA says Medicaid "continues to exert pressure on state budgets, although for the remainder of FY 2004, the temporarily increased federal share of the program contained in the state fiscal relief provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 has alleviated some of the fiscal stress."

Medicaid expenditures account for some 21% of all state spending, with spending on all health care functions taking up approximately 30% of overall spending. Proposed budgets for FY 2005 are looking at Medicaid growth rates of 12.1% in state funds and 3.9% in federal funds, with the significant shifts between state and federal funding attributable to the temporary increase in the federal match from April 2003 through June 2004.

"Even with extensive cost containment and fiscal relief," NGA says, "Medicaid expenditures continue to strain states and to exceed the amount that had been originally budgeted for the program. Twenty-three states experienced Medicaid shortfalls in FY 2003, and 18 states anticipated shortfalls in FY 2004."

The states have maintained a growth rate below private insurance levels due to extensive cost-containment efforts, NGA says. Among steps taken, 50 states reduced or froze provider payments, 50 states implemented policies to control prescription drug costs, 34 states reduced or restricted eligibility, 35 states reduced benefits, and 32 states increased copayments.

In addition to taking cost-containment steps, approximately half the states said they planned to generate additional Medicaid revenue. Most measures that rely on additional resources involve fees or taxes levied on health care providers. Other measures include reallocating tobacco settlement funds and increasing cigarette taxes.

According to the Fiscal Survey of States issued by NGA and NASBO, governors expect FY 2005 expenditures to increase 2.8% from 2004, well below the 26-year average of 6.2%, but still a considerable improvement over the 0.6% increase in FY 2003, which was the smallest increase in the previous 20 years.

"After three years during which state revenues were exceedingly dismal, the picture is notably — but cautiously — brighter at the end of fiscal 2004," the report says. "As most economic indicators continue to improve, the cyclical instability that plagued state revenues has eased, and revenue collections compared to budgeted estimates contrast markedly with the past several years. Still, the state revenue situation might be characterized both as beginning to recover and ceasing to decline."

NASBO executive director Scott Pattison says the analysis indicates that "despite some improvements in the states’ fiscal situations, the picture is far from rosy given the unprecedented strain of the last three years. Spending growth remains weak, and the recovery continues to be uneven. To balance their budgets in fiscal 2004, states also used a combination of layoffs, furloughs, early retirement, reductions to local aid, reorganization of programs, and a variety of other methods."

The worst of years for states

At a media briefing to release the NGA/NASBO report, Mr. Pattison said the last three years have been the worst ever for states. "If states were a patient, we’d say they’re out of intensive care but still in the hospital," he said. He said state revenues have been coming in recently as projected, but spending is subdued and rainy day funds are not being replenished.

In visits to 10 state capitols, Mr. Pattison said, budget officers uniformly told him that "Medicaid is eating us alive."

NGA executive director Ray Scheppach told the briefing the basic problem for states is structural, including an obsolete tax system. He also pointed out that states gave to come to grips with the fact that one-third of their budgets (health care expenditures) is growing in double digits. He said enrollment in Medicaid has been increasing, even with cuts in the program.

An independent analysis by the Center on Budget and Policy Priorities finds states continuing to look to spending cuts to close gaps in their FY 2005 budgets. "The decline in expenditures continues to put important government services at risk in many states," the Center’s Elizabeth McNichol and Makeda Harris said in an April report. "Publicly funded health insurance for low-income families and children continues to face cutbacks in a number of states this year. Georgia, Florida, California, Missouri, and New York are among the states that have adopted or are considering limiting eligibility for health insurance programs for low-income families in their FY 2005 budgets. For example, the Georgia state legislature has just approved a budget that reduces Medicaid eligibility levels for almost 20,000 pregnant women and infants. The Missouri legislature is considering a budget that would sharply trim Medicaid — ending coverage for about 65,000 low-income people, including 41,000 low-income parents and 21,000 children."

Number of uninsured growing

According to the center, a large number of people are becoming uninsured as a result of the nation’s fiscal crisis. Budget cuts enacted since the fiscal crisis began have eliminated Medicaid or SCHIP coverage for more than 1 million people nationwide, and health care services for low-income families continue to face cutbacks this year. In addition to the Georgia and Missouri budgets mentioned above, the Center cites these examples:

• Florida recently enacted legislation to restrict eligibility for low-income children in its SCHIP program. The state stopped enrolling new applicants last year and built up a waiting list of more than 100,000 children. State officials yielded to citizen pressure to cover some 70,000 children from the waiting list but took other actions to restrict future eligibility. Making it harder to keep track of future actions, the state will no longer keep a waiting list.

• In California, Gov. Arnold Schwarzenegger has proposed a number of deep cuts in health programs including freezing enrollment in SCHIP so 114,000 children would not get coverage and reducing provider payment rates by 10%.

• New York is considering scaling back eligibility for low-income children and their parents in Medicaid and Family Health Plus. Also under consideration is restricting eligibility for seniors in Medicaid, reducing the ability of some seniors to obtain long-term care services.

• Several states have initiated plans to redesign Medicaid using waivers. These plans are looking to longer-term savings rather than immediate changes. Details are expected to include reducing the scope of benefits, increasing cost-sharing for low-income beneficiaries, or scaling back eligibility.

(For information from NCSL, go to www.ncsl.org; from NGA/NASBO go to www.nga.org; and from the Center on Budget and Policy Priorities, go to www.cbpp.org.)