Fiscal Reality Hits Home for State Budgets

There's a telling line in a new report on state budgets: "With the expiration of federal funding support provided by the American Recovery and Reinvestment Act of 2009 (ARRA)" — a.k.a. the stimulus —  "states continue to realign spending plans with fiscal reality." And the fiscal reality is that states are weighed down by unaffordable obligations that are wrecking their budgets.

Chief among those obligations is Medicaid. The National Association of State Budget Officers recently released a survey of state budgets, and, as with previous reports, Medicaid spending remains one of the biggest ticket items: Accounting for 23.6 percent of total state budgets, the jointly run health program for the poor and disabled represents the largest portion of total state spending. It's the second largest general fund expenditure, chewing up about 17 percent of general fund spending. Thanks in part to last year's expiration of temporarily increased federal Medicaid funding provided by the stimulus, state spending on the program increased by 20.4 percent in the 2012 fiscal year. States are working to reduce spending on the program, and a much slower growth rate rate of about 3.9 percent is expected in 2013, but as the report notes, even the reduced growth rate is still expected to outpace general fund expenditure growth.

This explains a lot about why states are cutting back. As Dan Crippen, director of the National Governor's Association, told The Washington Post, "With the growth of Medicaid expenditures, spending priorities will again face competition for state budget dollars this fiscal year." It's the out of control growth of health spending obligations, primarily Medicaid, that's weighing down these budgets and forcing states to make spending reductions elsewhere.

The report notes that total state tax revenues are on track to be above pre-recession levels next year, with general fund revenues close behind, which makes it hard to say that states budgets are somehow suffering from too little tax income. Instead, they're stuck carrying the spiraling cost of pensions, education costs, and health care obligations born out of less frugal eras. The fiscal padding provided by the stimulus just put off these decisions a little while longer, and let states avoid making tough choices, and more stimulus would have done the same while adding even more to the total federal debt burden. But eventually, fiscal reality was bound to catch up.