Fiscal cliff awaits states as stimulus money winds down, new budget survey indicates

Increased Medicaid enrollment and the end of Recovery Act funding are the leading challenges facing state governors and their budget officers as they look to 2011, a new report indicates. In their twice-annual Fiscal Survey of States, the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) say that most states expect to have slightly higher revenues compared to last year, but that most governors are looking at several more years of austerity before returning to pre-recession levels.

“Since the recession began, states have had significant revenue declines and in order to balance their budgets, have made significant cuts and in some cases enacted tax and fee increases,” NGA Executive Director Raymond Scheppach said in a statement. “The end of Recovery Act funding in 2012, along with the growing pension liability and the rise of Medicaid enrollment could further exacerbate the already tight fiscal conditions.”

General funding spending for state government in fiscal 2008 was $687.3 billion, which was $74.7 billion greater than spending in fiscal 2010 and $42.2 billion greater than general fund expenditures in fiscal 2011, the report said. These cuts came most frequently from the areas of K-12 education, higher education, Medicaid and corrections the most frequent recipients of decreased funding. So far in FY 2011, 14 states have made $4 billion in mid-year cuts, largely to those same categories

“Strained state budgets will be the norm for the next several years as mandated expenditures such as Medicaid continue to grow,” Scott Pattison, NASBO Executive Director, said. “While states will continue to fund “core functions” from their general fund, they may fund other services such as parks or arts programs from different sources, including user fees.”

Recovery Act funds have increased the federal share of total state budgets to 34.7 percent in fiscal 2010 from 26.3 percent in 2008, the report noted. The removal of these funds, when combined with an extremely slow recovery in state revenue collections, could result in severe cuts to state programs and services. In fact, the report says a cliff of about $65 billion will need to be addressed in FY 2012.

This report also adds to a chorus of other surveys, finding many states are concerned about expanded Medicaid and health care reform. Medicaid spending for fiscal 2010 is estimated at $353.8 billion, an increase of 8.2 percent over fiscal 2009, which is 21.8 percent of total spending, the report said.

Mr. Scheppach said the potential impact of health care reform in 2014 is hard to know at this time, but due to a number of changes under national health care reform – from a new option to cover childless adults in Medicaid using the regular Medicaid match, to new long-term care options for community based care and the establishment of temporary high risk pools – states do not have time to stand idle while court cases determine the future of the Affordable Care Act.

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