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State Officials Say Revenue Picture Sunnier but Medicaid Revisions Remain 'Critical'

JULY 7, 2005 -- A survey released Thursday by state officials says state revenues "improved dramatically" in fiscal 2005, with a "remarkable" 42 states collecting more revenues during the year than they expected to take in. Nevertheless, states will be forced to trim outlays for higher education in coming years because Medicaid spending will keep growing at a yearly rate of 9 percent to 10 percent per year, said Raymond Sheppach, one of the officials of the National Governors Association (NGA).

Scott Pattison, executive director of the National Association of State Budget Officers (NASBO), told reporters at a midday briefing to announce the survey results that "revenue is coming in strong." State spending growth bounced to 6.6 percent in fiscal 2005, slightly above the 6.5 percent average figure for the past 27 years, and notable after several fairly flat years. Sales, income, and corporate tax collections were up, reflecting economic growth.

The spending increase—up from an average yearly increase of 3.9 percent during the past five years—reflects not only rising revenues but also "pent-up demand," Pattison said. Costs of Medicaid, other state-funded health care programs, and kindergarten-through-12th grade education have been rising fast, he said.

"The economy is strong," said Sheppach, NGA's executive director. The joint NGA-NASBO "Fiscal Survey of States" projects that fiscal 2006 revenues will come in at a figure 5.2 percent higher than that for fiscal 2005. But there are trouble signs, too, the officials cautioned.

"Rainy day funds," reserves of revenue maintained by states to draw on during economic downturns, have become depleted. In fiscal 2005 they totaled 4.5 percent of expenditures, down from 10.4 percent in fiscal 2000. The survey said the funds will drop to 3.8 percent of expenditures in fiscal 2006.

Also, 10 states expect to have budgets in fiscal 2006 that are smaller than those in fiscal 2005, Pattison added. "That's quite a concern."

Sheppach stressed that states are struggling to keep up with growing Medicaid costs even as revenues rise. According to the survey, 24 states reported Medicaid shortfalls in fiscal 2005, up from 20 states in fiscal 2004. Enrollment increases averaged 8 percent over the past five years, playing a major role in increased Medicaid spending. While families and children accounted for the greater part of the enrollment increases, the elderly and disabled accounted for the greater share of rising costs.

Although the state spending picture is improving, Sheppach predicted Medicaid will keep gobbling up a growing share of state budgets, saying states are limited in their ability to increase spending by a system that keeps them from taxing services and Internet sales.

Another issue is the politics of tax increases. The survey noted that 17 states have proposed tax and fee increases for fiscal 2006 that would raise a total of $2.4 billion, $983 million from increased tobacco taxes.

Sheppach called it "critical" for Congress to adopt revisions in Medicaid urged by the NGA, including added co-payments, asset transfer restrictions, pharmaceutical reimbursement changes, and added flexibility for states to alter benefits. He said he is hopeful Congress will make those changes in September as part of the budget reconciliation process. "If it doesn't happen then, then I think it's going to be unlikely for the next couple of years," he said.

Medicaid's "tipping point . . . is at the next economic downturn," he said. "We've got a strong economy now, but at some point it is going to slow." Without changes to Medicaid, cuts in coverage and benefits will go much deeper than they do now, because states won't be able to fill revenue gaps, he said.

Sheppach acknowledged that while it is important to chart a new course in Medicaid, flexibility won't cure states' budget blues. Medicaid's spending growth rate would only be "marginally lower" than 9 percent yearly if states could adopt benefit packages such as those in the State Children's Health Insurance Program, he said.

Sheppach further predicted that governors will pursue health care changes beyond those in Medicaid, aiming to restrain costs and improve quality. He noted that Maine's Dirigo program, for example, is made up of three parts—increasing quality, widening access, and improving quality. Other states will focus on providing consumers with more data on the cost and quality of health care so they can get better value for their health care dollar, he predicted.

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