The financial crisis of 2008 and the recession it fueled have profoundly affected state government finances in New York and elsewhere. Yet a deep understanding of the fiscal challenges states face has been lacking.
Until now. A report from the State Budget Crisis Task Force describes the problems states are dealing with now and will be saddled with for years to come.
Headed by Richard Ravitch, a former New York lieutenant governor, and Paul Volcker, a former chairman of the Federal Reserve, the task force says that "states have been grappling with their most serious fiscal crises since the Great Depression. Even before the 2008 financial collapse, many states faced long-term structural problems, and now they face additional threats."
The report outlines six major fiscal threats:
- the rapid rise in Medicaid spending;
- the threat federal deficit reduction poses for state economies and budgets;
- the problem of underfunded pensions;
- narrow, eroding tax bases and volatile tax revenues;
- the challenge for states posed by local government fiscal stress; and
- state budget laws and practices that hinder fiscal stability and mask imbalances.
Among these threats, Medicaid spending stands out.Even before the recession, the report notes, "Medicaid spending was growing more rapidly than tax revenue; that trend is now exacerbated by the weak economic recovery, which means higher caseloads."
But a stronger economic rebound would not solve the problem. "Aging populations and increasing medical costs (still) will put upward pressure on state Medicaid and retiree health care costs, potentially crowding out other spending."
The report gives Gov. Andrew Cuomo credit for making Medicaid cost control a major priority, achieving savings of $973 million for fiscal year 2012 and aiming for $1.1 billion in fiscal year 2013. But the need for federal government approval of changes is an impediment.
What if Washington took Medicaid off the states’ hands? The idea of federalizing it, in exchange for reduced federal aid to states, is not new; Sen. Lamar Alexander, R-Tenn., has advocated it for years. This idea might seem improbable, but not more so than the notion that we can afford to stay on Medicaid’s current path.
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