Missing Funds Hurt Budgets

WASHINGTON — About 30 states must revisit their fiscal 2011 budgets to compensate for the loss of expected enhanced federal matching Medicaid funds that were in a jobs bill Congress failed to approve last week.

The loss of those funds will add to the $140 billion cumulative budget shortfall that states are likely to face for the year, according to a report released yesterday by the Center on Budget and Policy Priorities.

States’ fiscal conditions could be severe enough to “push the economy into a double-dip recession,” said Nicholas Johnson, the director of the State Fiscal Project at the CBPP and one of the authors of the report.

The spending cuts that would be needed for states to meet their balanced-budget requirements could cost the economy up to 900,000 public and private sector jobs, according to the report.

But the downward spiral of state fiscal conditions may not impede debt issuance in fiscal 2011, according to Johnson, who suggested the fiscal bad news may be offset by good news that interest rates are at historic lows.

“Right now, borrowing is a great deal because interest rates are so low,” he said, adding the low costs of borrowing may “cancel out” some of the fiscal concerns.

Some strong opposition by Senate Republicans to federal spending in the American Jobs and Closing Tax Loopholes Act forced Senate Majority Leader Harry Reid, D-Nev., last week to table the bill, which included a six-month, $15 billion extension of enhanced federal matching funds for states under the Federal Medicaid Assistance Program.

The funds were provided under the American Recovery and Reinvestment Act, but will expire at the end of this year. 

The Senate failed to extend the FMAP funds after the House in May passed a six-month, $24 billion extension as part of a bill that also included an extension for the Build America Bond program.

Several governors have intensively lobbied for the FMAP extension, claiming the funds are necessary to save or create 162,000 jobs and add an extra $12.8 billion to states’ revenue, according to figures from the Economic Policy Institute.

Pennsylvania Gov. Edward Rendell and other governors are meeting in Washington today to urge Congress to find a way to extend the FMAP funds for six months.

States that had included the expected funds in their budgets will face budget gaps at the very beginning of their fiscal years, according to Nicole Johnson, an analyst with Moody’s Investors Service. Most states’ fiscal years begin in July.

“It is certainly a concern to us given that revenues are still weak and the economy is certainly not in a strong recovery mode at this point,” Johnson said.

Moody’s analysts will look at states’ plans for plugging their FMAP holes along with other factors to determine any credit implications, she said.

New York, California and Texas were slated to receive the most funding from the FMAP extension.

The funding allocations were based on a state’s Medicaid spending and its unemployment rate, said the CBPP’s Nicholas Johnson.

On a per capita basis, New York, ­Massachusetts and Vermont would have received the most funding, according to Anika Khan, an economist for Wells Fargo. State budgets traditionally lag the national economic recovery, she said.

The fiscal stimulus to states “is winding down at a time when states are going to need increased funding the most,” she said.

States are dealing with the FMAP budget cuts differently, according to the CBPP report.

Some states included the money as contingency funds, and would have used it for supplementary spending. But other states were expecting the funds to reduce their expenditures, said Laura Porter, an analyst with Fitch Ratings.

The FMAP expiration in 2010 “compounds fiscal pressures” for states that are already under budget stress, she said. Without the extension the drop in stimulus money “now comes earlier,” she said.

The CBPP report said some state legislatures will be called back into session to address their fiscal gaps. For other states, the governors may unilaterally impose additional cuts.

Colorado could cut its a free school-lunch program to compensate for its FMAP losses. More layoffs may be needed in Washington State. Most states plan to offset the Medicaid funding gap by reducing health care benefits, the report said.

State legislators in North Carolina scrambled over the weekend to eliminate the FMAP gap before settling on a $19 billion budget for fiscal 2011. State House and Senate lawmakers could approve the budget today.

Cuts in state spending and employment already are hurting the national economic recovery.

 In the first quarter of 2010, state and local spending contracted 3.8% and subtracted 0.48% percentage point from real gross domestic product growth while state employment has declined for three straight months, according to federal agencies.

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