Fiscal Survey Of The States: Medicaid, Local Governments Strain Nationwide

A rise in Medicaid costs, combined with the end of federal stimulus funds and a continued decline in property tax receipts at the local level will combine to push state governments into the fiscal hot seat in 2012, a new report predicts.

The nation's current unemployment situation and a rising Baby Boomer retirement population are leading to a rise in Medicaid spending at a time when states are seeing small revenue growth, though not the pre-recession levels from 2008. The data is part of the latest Fiscal Survey of the States, released by the National Governors Association and the National Association of State Budget Officers on Tuesday.

"States are being asked to expend more resources than they have," said Dan Crippen, the NGA executive director.

Crippen said that all new state funds will be diverted to cover the costs of the Medicaid program going forward, leaving no new revenue streams for other areas. In addition to the rising number of people eligible, Crippen said rising medical costs are also playing a role in the need to increase spending on the health program.

With the 2012 end of federal stimulus dollars, money used from the American Recovery and Reinvestment Act of 2009 to fund Medicaid will no longer be available to state governments, shifting the burden for the full cost to the states. According to Scott Pattison, NASBO executive director, stimulus funds to states dropped from $61 billion in fiscal year 2010 to $51 billion in fiscal year 2011 and to just $3 billion in fiscal year 2012. Pattison noted that states knew the stimulus funds were a temporary source of revenue and have been planning.

Crippen said the report indicates that Medicaid remains the only area of state funding to see spending growth in the past fiscal years and heading into the 2012 budget cycle. At the same time he indicated states are seeking new waivers on Medicaid spending from the federal government, many of which are still pending with federal health officials. Local governments are also cutting reimbursements to Medicaid providers and instituting small co-pays to reduce unnecessary emergency room visits.

In areas of state spending, Pattison said that many cuts in recent years were to state spending on higher education, as well as funding cuts in areas such as transportation. At the same time, he indicated that K through 12 education has seen a slight uptick in state spending, but not to the same degree as Medicaid spending growth.

The report notes that state revenues for 2012 still hover below 2008 levels by $20.8 billion, while noting that revenues will likely recover at a slower rate than in the past given the slower economic growth nationwide. State revenues grew 1.6 percent from $649 billion to $659.4 billion from fiscal year 2011 to 2012. At the same time, state budgets enacted this year included a $584.1 million decrease in new taxes and fees.

While the report shows that most states have been hurting in terms of revenue shortfalls, energy-rich states such as North Dakota, Alaska and Texas have been flush with funds.

Looking ahead to 2012, Pattison said additional higher education cuts are likely, as well as cuts to smaller departments like administrative services and public parks. At the same time he said there are some areas that may not be cut, but simply will not see funding increases.

"All those small areas of government get disapportionately cut," he said. "Corrections and prisons are not cut but they are not increased. Unless you are going to let inmates out, there is not a lot of flexibility."

Pattison noted the higher education cuts will likely result in tuition increases at state colleges.

Crippen and Pattison said county and municipal governments are looking for additional state aid to offset a decline in property taxes, a trend they said will continue as the housing market recovers. Many of these drops are impacting school systems, which rely on property taxes to fund operating costs.

"States are not in a position to help," Crippen said.

The two also noted that state governments have been exploring such issues as property tax caps and changes to collective bargaining and pension benefits to assist local governments with future spending.

Crippen said states will not seek new funding from the federal government to help address the pending shortfalls for 2012. Much of the states' congressional agenda will be on preventing Congress from enacting laws that would negatively impact state finances, he said.

State governments are monitoring policies including bills to allow for state sales taxes to be paid on goods purchased on the Internet, a cellphone tax moratorium and taxes on travel services and car rentals.

"It is very tempting for Congress to play with state and local taxes," Crippen said.