Health Care Costs Are Slowing States’ Continued Fiscal Recovery, NGA Says

States' financial situations continued to improve this year, but states' full recovery from the "worst fiscal crisis in six decades" has been stymied by "soaring health care costs," according to a new report from the National Governors Association, the New York Times reports. States ended fiscal year 2004 with combined balances totaling $25.3 billion -- or 4.8% of state spending -- up from balances of $16.4 billion, or 3.2% of state spending last year. According to the Times, a 5% balance "cushion" is considered "healthy," and 23 states reported balances of 5% or more, up from 12 in 2003.

In addition, spending from state general funds increased by 3% this year to $523.5 billion after two years of "hardly any growth," according to NGA, the Times reports. Nine states reported a decline in general fund spending from 2003 to 2004. NGA also said that tax collections have stabilized since 2001, when a recession reduced state revenues for two years. The higher tax revenue resulted in part from an increase in cigarette and tobacco taxes -- which brought in an additional $888 million -- and an increase in sales taxes totaling $710 million.

The governors said that tax revenues still are "not sufficient to pay for the growth of Medicaid and other health costs," the Times reports (Pear, New York Times, 12/17). Medicaid costs this year for the first time exceeded elementary and secondary education as the largest budget item for states, and programs' costs are expected to increase by 12.1% in fiscal year 2005, Reuters reports.

The Medicaid cost increase is partly because of the absence this year of "federal stimulus funds," which were given to states last year to "help them through the economic and fiscal weakness," Reuters reports (Reuters, 12/16). According to the Times, Congress provided $20 billion in fiscal relief to the states, but the aid expired in June (New York Times, 12/17).

The report said, "Even though the overall fiscal situation seems to be getting better in many states, most are still keep expenditures reined in, especially considering pent-up demand that resulted from the recent fiscal crisis" (Tanner, AP/Cincinnati Post, 12/16). Raymond Scheppach, NGA executive director, said, "We have just come through a tremendously difficult fiscal period. The light at the end of the tunnel is beginning to appear, but unfortunately it's a long tunnel."

Scott Pattison, executive director of the National Association of State Budget Officers, said that the report shows "relative improvement from the fiscal malaise of the past few years, [but] the states' fiscal situations will remain difficult for the foreseeable future" (New York Times, 12/17). He added, "There's stability on the revenue and spending front, but it's really the bills to pay that keeps ratcheting up the problem" (Reuters, 12/16). The report is available online. Note: You must have Adobe Acrobat Reader to view the report.

NPR's "Morning Edition" on Friday reported on the NGA report. The segment includes comments from Tennessee Gov. Phil Bredesen (D); Trish Riley, director of Maine's Governor's Office for Health Policy and Finance; and Scott Pattison, executive director of the National Association of State Budget Officers (Jones, "Morning Edition," NPR, 12/17). The complete segment is available online in RealPlayer.