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Good overview on budget problems for US states, especially Medicaid [ClearOnMoney]
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Good overview on budget problems for US states, especially Medicaid

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Commentary

Good overview on budget problems for US states, especially Medicaid

11 May 2013 by Jim Fickett.

Last July a “State Budget Crisis Task Force”, co-chaired by Paul Volcker and Richard Ravitch, put together a 112-page overview of long-term problems for state budgets. There have been many overviews of issues in retirement benefit funding, including mine (State retirement funds), but this is the first time I've seen a clear, concise, and insightful overview of all the important issues, in one place.

Medicaid is probably the single biggest budget issue on the minds of state governors – unlike retirement funding problems, Medicaid cannot be put off and constitutes a near-term crisis. This report contains (in 7 pages) the clearest overview I've seen of Medicaid issues.

Most coverage of the states' Medicaid problems concentrates on the aftereffects of the recent financial crisis. The crisis did exacerbate the problem but, in fact, the Medicaid problem has been growing in the background for a very long time. The most fundamental issue is that Medicaid costs have been growing, for decades, significantly faster than state revenue growth, and so have taken a continually increasing share of the budget. While that share was small, few people worried about the growth. Medicaid is now in the foreground primarily because total expenditures have reached a critical threshold – Medicaid takes 24% of all state funds, and more money is spent on Medicaid than on pre-college education. Further, there is a strange administrative issue in that the states need desperately to contain costs, but most reforms need to be approved at the federal level. This makes any changes slow and difficult.

Here is the report's summary of the overall budget problems facing the states:

What we found will not be surprising to many knowledgeable observers, but the facts have never been assembled in a way that reflects the totality of the problems.

Certain large expenditures are growing at rates that exceed reasonable expectations for revenues:

  • Medicaid programs are growing rapidly because of increasing enrollments, escalating health care costs and difficulty in implementing cost reduction proposals. At recent rates of growth, state Medicaid costs will outstrip revenue growth by a wide margin, and the gap will continue to expand.
  • Pension funds for state and local government workers are underfunded by approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used.
  • Unfunded liabilities for health care benefits for state and local government retirees amount to more than $1 trillion. …

The federal budget crisis will have serious spillover effects on state and local governments, and state actions will have spillover effects on local governments:

  • Cuts in federal grant dollars, lower spending on federal installations, procurement, and infrastructure, and potential changes to the federal tax code all threaten states’ fiscal stability.
  • Pressures on local governments, caused by the weak economy and cuts in state aid, are constraining education spending, law enforcement, aid to the needy, and the institutions that make up the culture of our cities. Local government cuts pose a significant risk to the overall economic and social fabric of states. …

The threats and risks vary considerably from state to state, but the storm warnings are very serious. Only an informed public can demand that the political systems, federal, state and local, recognize these problems and take effective action. The costs, whether in service reductions or higher revenues, will be large. Deferring action can only make the ultimate costs even greater.

The conclusion of the Task Force is unambiguous. The existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical. It is structural.

The time to act is now.