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Financial Meltdown Taking California Budget From Bad to Worse

California isn’t the only state floundering in rough economic waters, but because of its size, keeping this ship afloat may be more difficult — and painful — than most.

Ten months ago, one of the world’s largest economies (various ranking systems place California’s economy anywhere from sixth to 10th largest in the world), was pursuing ambitious comprehensive health care reform with a plan to provide health insurance for virtually everyone in the state.

Now the state’s health care system, already reeling from Medi-Cal cuts in a brutal budget battle, is at risk of becoming even weaker if the receding economy pushes health insurance out of reach for more people, as many predict it will.

“This situation is as bad as I’ve ever seen it,” said William Pound, executive director of the National Conference of State Legislatures. “States have been confronted with bad economic circumstances in the past, but not so many and not all at once. State budgets have a very rough road ahead.”

Gov. Arnold Schwarzenegger (R) is planning to call a special legislative session to address the growing gap in the budget for fiscal year 2008-2009 and discuss an economic stimulus package.

Assembly Speaker Karen Bass (D-Los Angeles) said lawmakers should be careful not to do further damage to the state’s safety nets.

“I will be working with my Assembly colleagues, our counterparts in the Senate and hopefully the governor on an economic stimulus and reform package in California that complements what Speaker Pelosi is putting forward in Washington,” Bass said in a written statement.

“We don’t have all the same tools available as the federal government, but I want our stimulus program in California to focus on actions like accelerating the infrastructure projects voters approved in 2006 (and) protecting the public health safety net including Healthy Families,” Bass wrote.

Credit Crunch Not as Crucial as Revenue

California managed to borrow $5 billion in the credit markets earlier this month, avoiding a severe cash shortage that could have led to service cuts and layoffs.

Tight credit still threatens to stall construction efforts, including hospitals in California working on seismic improvements to comply with new regulations.

“The credit crunch is definitely a problem, but it’s a relatively new one and nobody knows how long it’s going to last,” said Richard Cauchi, health program director for NCSL.

“The more pressing, immediate problem for states right now is revenues.  When state revenues start falling off with declining income and sales tax — because people aren’t working as much and they’re not buying as much — programs that depend on that revenue are going to feel it,” Cauchi said.

The national economy is the single most important influence on state finances, according to the NCSL. Turmoil in national financial markets translates swiftly into problems for state budgets.  California, where lawmakers struggled with a $15.2 billion deficit in the summer before the national financial meltdown became apparent, is facing another $3 billion deficit in the fall. Projections for winter and spring are bleak.

“I work on health finance as it relates to state legislatures and I can tell you it doesn’t look particularly good anywhere in the country right now,” Cauchi said. “I can’t say if California is in any worse shape than other states. I think that will become more clear as legislatures get back into session at the start of the year.”

Small Bit of Good Fiscal News

Buried in this year’s budget was a small bit of good financial news concerning retiree health benefits.

The increase in the state’s bill for retiree health benefits is lower than previous years.

“I guess it’s good news relative to the very bad news in most other parts of the budget,” said Jason Dickerson, budget analyst specializing in public employment and retirement for the state Legislative Analyst’s Office.

While it’s higher than the rate of inflation in the overall California economy, the rise in cost of health benefits for retired state workers this year is one of the lowest in recent years.

Dickerson credits negotiators for CalPERS.

“It is surprising — in the current climate — the way CalPERS has been able to hold down premium increases each of the last two negotiation cycles,” Dickerson said. “The effect of that will be favorable in determining the state’s unfunded liabilities in the future.”

Health premiums are included in a designation that includes all non-pension expenses, known as Other Post-Employment Benefits, or OPEB.

The budget includes $1.2 billion for pay-as-you-go OPEB expenses for state retirees and their dependents in 2008-2009. The total is a 7.6% increase over last year’s OPEB expenses, but it is still considerably less than previous years’ increases.

Rural Retirees Take a Hit

Dickerson said part of the good news — from the state’s perspective — is the elimination of a program that provided supplemental subsidies for state retirees living in certain parts of rural California.

One of the “trailer bills” (AB 1389) passed by the Legislature to implement parts of the budget eliminates the state’s Rural Health Care Equity Program for state retirees.

It’s clearly not good news for rural retirees who lose that benefit. It will increase out-of-pocket health care expenses for several thousand rural retirees and their families.

“For those rural members of CalPERS, it will mean a small increase in what they pay, but for the state it’s a small but significant step to get that program eliminated. It’s quite rare to get anything eliminated,” Dickerson said.

Related Topics

Health Care Costs Health Industry Insight Medi-Cal