Just in case you weren’t depressed enough about the post-tax-cut fiscal situation, here’s some gloom and doom from an insider. Could someone please remind me why the Democrats are happy about taking back state houses this year?


On October 18, I attended the National Health Policy Forum (NHPF) seminar on the state fiscal crisis. This meeting updates last Fall’s meeting on the same topic. At that time, states were coming to the realization that it was no longer the mid-1990s (rising tax revenue, shrinking welfare rolls, and historically low medical price inflation permitted 49 states to cut tax rates). They met a FY 2002 shortfall of $40 billion by spending their rainy day funds, “securitizing” tobacco settlement funds (i.e., spending the 25-year revenue stream in one year), raising fees, sometimes raising taxes. For FY 2003, the states face a shortfall of $60-80 billion. This gap will get worse for the foreseeable future.

To recapitulate: states constitute 10% of the GDP. Their revenue is 1/2 from taxes, 1/3 intergovernmental (i.e., from the Feds), and 1/6 other (fees, charges, etc.). Their spending is 1/2 for education, 1/3 for Medicaid, and 1/6 other (corrections, welfare, transportation, housing, consumer, environment, etc.). Like tobacco funds, the rainy day fund was intended to be spent over a period of years. All states require balanced budgets every year.

The states spent all their (multi-year) reserves in FY 2002. The state presenters (CA, TX, MN) offered FY 2003 budgets that assume a huge and immediate increase in the Federal share of Medicaid. Congressional staff in the room, Republican & Democratic, liberal and conservative, agreed that there was no prospect of this. The states continued to press their case. It was like an oral conversation between the deaf. The DC-based representatives of the State Governors’ Association and the National Conference of State Legislatures were more realistic.

The states’ Plan B was an Internet sales tax. At the federal level, this idea too is a non-starter. Besides, at best this tax would raise only $13 billion.

The state presenters agreed that there would be no state tax increases (except possibly alcohol). It is an election year. All candidates are running on no-tax platforms. Term limits cause rapid turnover among state legislators, limiting institutional memory.

So, states face an average across-the-board spending cut of 20% with considerable variation. CA and some other states have referendum mandated protection of K-12 education, meaning a 40% cut in Medicaid and other. State legislatures have been losing their reality testing (assume a tooth fairy). Numerous states have had budget standoffs. Some are contemplating securitizing their federal revenue [Ed: I’m not sure the investment banks would be dumb enough to play]. Others have engaged in accounting tricks to balance the budget on paper (e.g., matching 12 months revenue with 11 months of Medicaid bills).

However, the need for services doesn’t go away. It merely transfers the problem to the counties. This level of government has the weakest revenue, most inter-year variation, and the most disparities between government units. Plus, county programs don’t get a federal match.

So, look for big cuts in Medicaid reimbursement rates, driving more providers out of the program. States have instituted administrative limits on pharmaceuticals (5 prescriptions per month limit), despite the previous studies of their ineffectiveness (increases Medicaid hospitalization costs). They can also make Medicaid harder to enroll in (administrative barriers).

Curiously, the states are also installing nonfinancial barriers to SCHIP, despite it being 100% federal funding. Apparently, SCHIP eligibles tend to come attached to families that then consumes other state services.

The presenters anticipate pressure on safety net hospitals as Medicaid funding drops. They are already losing medical specialists because of increased work load.

FY 2004 will be even worse. The 2000 Census will shift Federal revenue sharing from the cities to the inner suburbs with large concentrations of low income residents.

[Ed: Tobacco taxes are not favored for additional increases for complex and local reasons. Smokeless tobacco is apparently completely untaxed. For some reason, alcohol can be taxed with political impunity.]

[Ed: States with funded teacher-civil service retirement systems or highway funds can replace the stocks and bonds with a state IOU to be paid by a future legislature.]

[Ed: I was unable to get anyone to discuss that the Medicaid proposals only squeeze the acute care of families, whereas 5/6 of the money goes for warehousing the elderly. I would guess that expanding Medicare benefits for nursing home would be relatively politically popular.]

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

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