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BACK IN BLACK: New Report Notes that State Revenues Are Up, but Challenges Especially Medicaid Spending Remain

"With long-range projections of Medicaid growth between 8 and 9 percent, states are concerned that health care cost increases exceed state revenue growth."

State fiscal conditions rebounded nicely in fiscal year 2005, and many states began to restore funding to programs that were cut during less prosperous times, according to a joint publication by the National Governors Association and the National Association of State Budget Officers. However, even though revenue increased in 2005, the report, The Fiscal Survey of States: December 2005, found that states, perhaps still mindful of the quick decline in revenue that occurred in 2001, remain cautious. Even with revenues strong, half of the states passed additional tax increases, while only 14 states enacted net decreases. Overall, state taxes increased by $2.5 billion.

While the federal government is expected to run up a record deficit for the 5th straight year, states do not have that luxury. (Forty-nine states all except Vermont have balanced budget requirements.) During the economic downturn, states were forced to address projected budget shortfalls through tough decision-making and necessary belt-tightening-“precisely what Washington did not do,” as a Washington Post article on the report notes. “As the Bush administration cut federal taxes and increased government spending year after year, the states slashed programs left and right while boosting taxes, tuition bills and user fees,” it reads.

Even though they are back in the black, states still face several fiscal challenges, including underfunded employee pensions, accounting changes related to retiree benefits, deteriorating infrastructure, and a growing school-age population. At the same time, the pressure to spend is still there, especially after the steep cuts to popular programs that had to be made from 2002 to 2004. Most of all, Medicaid spending will have a significant impact on state budgets.

Based on projections, Medicaid will continue to put a strain on budgets at the state level. In fact, at 22.5 percent of all state spending, Medicaid eats up the largest portion of a state’s budget, followed by elementary and secondary education (21.9 percent), higher education (10.8 percent), transportation (8.1 percent), corrections (3.4 percent), public assistance (2 percent), and all other expenditures (31.3 percent).

“With long-range projections of Medicaid growth between 8 and 9 percent, states are concerned that health care cost increases exceed state revenue growth,” the report reads. It adds that states also face uncertainty and concern about the impact of the Medicaid prescription drug benefit and potential federal changes in Medicaid on state budgets. Already, the report found, 22 states experienced Medicaid shortfalls in 2004, and 26 states anticipated shortfalls in 2005.

As the percentage of each state’s budget dedicated to Medicaid grows, other portions of the budget will likely decrease without continued revenue growth-a fact of concern for education advocates at both the federal and state levels.

Revenue Is Starting to Burn Holes in States’ Pockets” is available at

The full report is available at

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