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Medicaid Assistance Eyed as Potential Avenue to Bolster State Budgets

By David Clarke, CQ Staff

November 3, 2009 -- House Democrats hope to use the health care overhaul bill moving through Congress to address another issue on their agenda: helping states deal with their budget shortfalls.

The legislation (HR 3962) extends for six months a provision included in February's stimulus package that puts the federal government on the hook for more of Medicaid's costs, through what is known as Federal Medical Assistance Percentages (FMAP), so that states pay less.

But beyond that, there is a broader debate over whether the states should get a bigger infusion of federal aid. Some Democrats are looking for opportunities to provide other assistance, while keeping a wary eye on the deficit and a GOP opposition that has hammered the economic recovery efforts undertaken thus far.

State governments are warning that the pressure on their budgets may get worse next year, possibly leading to layoffs and cuts in services. All states, with the exception of Vermont, have some sort of balanced budget requirement, meaning that unlike the federal government, they can't borrow to fill the gap between the amount they raise and the amount they want to spend.

States are already nervous that an overhaul of the health care system will push up their Medicaid costs, and including the extension of the FMAP boost in the overhaul could ease some of those worries.

The program was originally scheduled to expire at the end of 2010, but under the House bill it would run through the end of June 2011. The estimated cost of this extension is about $23.5 billion.

The February stimulus provided states with a sizeable amount of assistance, including $86.6 billion for Medicaid and a $53.6 billion "fiscal stabilization fund" meant mostly for education programs, but advocates of state aid are warning more will be needed.

The executive director of the National Governors Association, Raymond C. Scheppach, argued that if unemployment remains high, it will take awhile for states to stop losing revenue and for Medicaid rolls to return to pre-recession levels.

"What we've found out from the last two or three downturns is that the year after and the year after that had the most impact on state budgets," he said.

The left-leaning Center on Budget and Policy Priorities, which closely follows state fiscal policies, estimates that the shortfall in state budgets could go from $178 billion in 2010 to $180 billion in fiscal 2011 and $120 billion in fiscal 2012.

Partisan Split on Aid
Some prominent Democrats, like House Appropriations Chairman David R. Obey of Wisconsin, are supportive of the states' position and believe Congress should act soon. "We are going to have a very serious problem with states facing even deeper budget holes than they did last year," he said. "Adults would respond to a problem."

The argument for state aid is that if states lay off workers or cut back services, it will counter whatever stimulus policies are put in place by the federal government. But aid for states will be expensive, and Republicans have been keeping up a steady drumbeat that Democrats are racking up too much debt.

"FMAP didn't do anything to stimulate the economy when it was included in the stimulus, and there's no reason to think that it will be of any help in HR 3962, beyond putting the federal government on the hook for hundreds of billions of dollars well into the future," said a Republican aide on the Energy and Commerce Committee, which has oversight of Medicaid.

It's not clear how much, if any, state aid will be enacted this year. Beyond such things as extending current unemployment and health insurance benefits set to expire at year's end, the White House would prefer to wait until next year before deciding on what new stimulus or job creation policies should be moved and how big they should be, according to House Democratic aides.

But waiting too long could be problematic, because states will begin working on their fiscal 2011 budgets early next year, said Jon Shure, who studies state fiscal issues at the Center on Budget and Policy Priorities. Those budgets will mostly go into effect by the middle of 2010, when most state fiscal years begin. That means decisions on what cuts to make are not far in the future.

A chief concern among Democrats as they consider how much state aid to provide is the impact on the growing federal budget deficit at a time when Republicans believe the amount of red ink on the government's books could be a winning issue for them in the 2010 midterm elections.

"It just goes back to, in the world of a big deficit, what's the most cost-effective place to do it," Christina Romer, chairwoman of President Obama's Council of Economic Advisers, said of additional state aid.

While acknowledging that most economists view state aid as among the effective things Congress can do for the economy during a recession, Romer also noted that any policy that creates jobs or improves the economy will help states by boosting their tax revenues and lessening the demand for some of their services.

"That's why it's not obvious if all you care about is jobs where you spend the money," she said. "If you spend it where it has the biggest bang for the buck, then that will feed through to state budgets, it will feed through to other things."

Congressional Democrats and the White House were buoyed by last week's announcement that the economy began to grow in the third quarter. But the unemployment rate appears headed to 10 percent, meaning jobs and the economy are still very much on the minds of voters and members of Congress.

"I think this recession is going to have a job hangover problem for several years to come," Obey said. "If the president wants to do something next year in the State of the Union message, that's fine, but I think there are other things we need to do as well if we want to have an impact next year, if we don't want to have a drop-off in the simulative effect in the economy."

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