Billion-Dollar Deficits Greet Several Statehouses

Spent too much over the holidays, and the flood of credit card bills getting you down? A bigger financial hangover is awaiting legislators in nearly a dozen states who will return to work in 2005 to face billion-dollar deficits as they write their upcoming budgets.

California sports the most red ink, with an estimated $9 billion budget shortfall, followed by New York and New Jersey with a looming deficit of $4 billion each.

States confronting projected budget deficits in the $1 billion range for fiscal 2006 include: Connecticut, Indiana, Ohio, Oregon, Washington and Wisconsin, all of which have two-year budgets, and Illinois and Massachusetts, which have a one-year budget cycle.

Most state legislatures reconvene in early 2005 and begin drawing up budgets for fiscal 2006, which begins July 1 for all but four states (Alabama, Michigan, New York and Texas).

Certainly times are better for states than the past four years, when tax collections plummeted during a national recession and states collectively had to close a $235 billion budget gap. Nearly every state cut spending, raised taxes or drew down reserve funds to bring budgets into balance in the past four years. Budget holes, however, are still the story in many statehouses. State revenues are up but still haven’t climbed to the level of four years ago when states were flush with money.

Skyrocketing health care costs are the biggest headache, gobbling up a growing share of state budgets. “Medicaid is the bear that is scaring states out of their wits,” said Sujit CanagaRetna, a tax and budget expert at the Council of State Governments.

State policy-makers in Louisiana, for example, are trying to figure out how to plug an estimated $1.9 billion hole in their Medicaid budget for fiscal 2006. Medicaid is the state-federal program that serves 52 million poor and disabled people and is growing at a double-digit clip. Louisiana’s shortfall represents both the state and federal share.

Other states under a major Medicaid crunch for fiscal 2006 include Mississippi, with a projected $266 million Medicaid shortfall, and Alabama, expected to run $127 million short.

In Tennessee, ballooning medical costs forced Gov. Phil Bredesen (D) to scale back TennCare, the state’s 10-year-old health care program for the poor and uninsured that went beyond Medicaid’s requirements and covered working families who couldn’t afford private insurance. Bredesen will drop 323,000 adults from TennCare’s rolls to save the program. Without the cuts, the state would have had to find an extra $650 million dollars to cover TennCare’s bills in fiscal 2006. Even with cutbacks, the program’s price tag is going up an additional $75 million.

The upcoming budget year is likely to continue the recent trend of states failing to set aside enough money when they write their budgets to cover unexpected cost increases in Medicaid, which entitles qualifying patients to free or reduced-cost hospital and medical care. States had to come up with an additional $7 billion to cover end-of-year gaps in their Medicaid budgets for fiscal 2003 and 2004, according to the National Association of State Budget Officers.

The current fiscal year is no different. Wisconsin, for example, faces a deficit of $225 million in Medicaid funding in fiscal 2005. Fifteen other states also projected budget overruns in Medicaid, according to a survey by the National Conference of State Legislatures (NCSL). On the list are Arizona, Idaho, Iowa, Kansas, Maine, Maryland, Michigan, Mississippi, Missouri, New Hampshire, North Dakota, Ohio, Texas, Vermont and Virginia.

Bureaucrats in Washington, D.C., are contributing to the problem. The federal government periodically tinkers with its formula for calculating how much money it gives each state. The richer the state, the less Medicaid money it gets from the federal government. The changes for fiscal 2006 will require that states pony up an additional $527 million, according to Vic Miller, senior fellow at the Federal Funds Information for States, a joint subscription service for NCSL and the National Governors Association that tracks budget issues affecting states.

States hardest hit include New Mexico, which could lose some $82 million, followed by Alaska (potentially losing $76 million) and Louisiana (potentially losing ), according to Miller’s estimates. “Many states that will lose [federal funding] in 2006 also lost in 2005,” he said.

Nicholas Johnson, a state fiscal expert for the Center on Budget and Policy Priorities, a group that focuses on policies that affect the poor, said this year’s state deficits threaten public services. He predicted additional cuts in education, health care and other programs.

The problem for many states is that they’ve already dipped into reserve funds and tapped tobacco settlement money to fill previous budget gaps. Unlike the federal government, all states except Vermont require balanced budgets. “A lot of states didn’t make structural changes, but relied on one-time fixes,” said Jason Mercier, budget analyst for the Evergreen Freedom Foundation in Olympia, Wash., a group that advocates for limited government. Mercier said states should conduct independent performance audits of all state programs to know whether the programs can be scaled back or are needed at all.

States projecting some of the largest project budget deficits for fiscal 2006 include:

• California $9 billion  
• Connecticut $1.2 billion (two-year budget) 
• Illinois $1.4 billion 
• Indiana $800 million (two-year budget) 
• Massachusetts $600 million 
• Michigan $400 million 
• Minnesota $700 million (two-year budget)
• New Jersey $4 billion 
• New York $4 billion 
• Ohio $1.4 billion to $2 billion (two-year budget) 
• Oregon $1 billion (two-year budget) 
• Washington $1.8 billion (two-year budget) 
• Wisconsin $1.6 billion (two-year budget)