Last week the state Budget Crisis Task Force issued its storm warning to the states.
“The existing trajectory of state spending, taxation, and administrative practices cannot be sustained,” said the gray eminences. “The basic problem is not cyclical. It is structural.”
Such warnings are sounded as often car alarms in a busy parking lot. The group, co-chaired by former New York Lt. Gov. Richard Ravitch and former Federal Reserve Chairman Paul Volcker, took a thorough look at six large states – California, Illinois, New Jersey, New York, Texas and Virginia. They concluded all “face major threats to their ability to provide basic services to the public, invest for the future and care for the needy at a cost taxpayers will support.”
With some variation in emphasis, that’s true of most states, including Washington. The identified threats include uncontrolled Medicaid costs, federal deficit-reduction strategies that will reduce aid and jeopardize state tax revenues, underfunded state pension systems, eroding state tax bases and volatile revenue streams, local government fiscal stress, and short-sighted state budget practices, including inadequate reserve funds.
In recent years, lawmakers here have made progress in strengthening the rainy day fund and requiring a long-term budget outlook. Steps taken years ago have mitigated (not eliminated) pension risks. And voters rejected a proposal to destabilize the tax structure with a highly progressive income tax. (The task force found “revenues have become more volatile ... because income taxes have become increasingly dependent of financial markets and on the states’ highest earners.”)
Of the hazards identified in the report, Medicaid funding poses the most imminent challenge to lawmakers in Olympia next session.
The U.S. Supreme Court’s recent ruling on the Affordable Care Act (ACA) allows states to choose whether to expand Medicaid coverage under the act. Currently, the federal government pays about half the average state’s Medicaid costs.
Under the ACA, the federal share for the population covered under the expanded coverage in 2014 is much higher: The feds pick up all the cost of medical expenses for 2014-16, ratcheting down to 90 percent in 2020.
For many governors, that’s an irresistible offer. Federal money covers nearly all the increased cost of insuring a newly eligible, low-income population. Even after the first couple of years, the state pays a dime for a dollar of Medicaid benefit. Still, because the new benefit requires new state spending, even with the generous match, other governors see the ACA’s offer as a temptation to resist.
As Matt Salo, director of the National Association of Medicaid Directors, told Stateline.org, “Ten percent of a very large number is a lot of money.”
Predictably, at least so far, the decision follows the nation’s partisan fault line. Most Republican governors say they’re ready to reject the expansion; most Democrats appear eager to accept the expanded coverage. Our state, which has generally sought to lead the nation in reducing the ranks of the uninsured, may be expected to move forward whichever gubernatorial candidate prevails in November.
That choice, however, will exacerbate the state’s fiscal crisis unless accompanied by significant strides in cost containment or spending reform. Before the Supreme Court decision, an Urban Institute study found that state Medicaid spending here, including the then-mandatory expansion, would grow by 43 percent from 2013-2019, increasing by more than $1 billion.
Matthew Buettgens, the study co-author, cautions that cost differences cannot be assumed to reflect savings to the state by opting out of the expansion. Other factors (the individual mandate, outreach, reductions in uncompensated care) must be considered. A follow-up report expected next month will help clarify the choices confronting policymakers.
Federal money, even when highly desired, comes with strings. A Legislature grappling with serious public school and higher education funding challenges would have to relegate increased spending on those programs to second place, after meeting its new federal obligations.
With Medicaid driving so much of state spending, there’s no better time for states to seek policy changes that give them greater flexibility, possibly block grants, to make the system more efficient and improve outcomes.
Where I come from, storm warnings meant tornados had been sighted. Folks took to the basement until the all clear. If states don’t act now, there will be no all clear. The foundations will rattle.
Bainbridge Island resident Richard S. Davis is president of the Washington Research Council. Email him at rsdavis@ simeonpartners.com.
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