Health Care Cost Growth Will Hurt State Budgets Too
Yesterday GAO released its annual report on the fiscal outlook for state and local governments and the news is not good. GAO found that that the short-term outlook is better in March 2010 than it was just a short year ago, primarily due to the Recovery Act federal grants to states. But the continuing effects of the recession on state revenues and expenditures will continue the pressure on their near-term budgets. GAO estimates that these governments face operating deficits of nearly $164 billion for 2010 and 2011. The National Council of State Legislatures and the National Governors’ Association/National Association of State Budget Officers reports issued late last year project that those deficits will continue well into 2012.
In addition, the states also face severe long-term fiscal imbalances that have little to do with the current economic downturn. In the past, according to GAO, states have mainly been able, except during periods of recession, to maintain a fiscal balance where their costs and their revenue matched. However, GAO projects “that the fiscal position of the sector will steadily decline through 2060 absent any policy changes.” And the cause? The growth in health care costs, the same driver of many fiscal problems at the federal level over the coming years. Approximately 21 percent of state spending is on Medicaid -- the joint state/federal health program for low income individuals -- and although the federal government increased its share of the joint costs as a part of the Recovery Act, the long-term implications of increases in Medicaid costs on state spending are enormous.
The choices that the states face to meet their long-term fiscal gap will be difficult. GAO estimates that in order to maintain a fiscal balance, states will need to decrease their expenditures this year and every future year by a 12.3 percent reduction in expenditures (or an equivalent increase in revenues). The fights we saw in