States tackle $430 billion gap, more to come

Federal law has largely protected Medicaid from budget cuts as states have struggled to erase painful deficits created by the recession and weak recovery.

First, Congress attached strings to $87 billion in federal Medicaid relief. States that took the extra cash in early 2009 pledged not to scale back Medicaid eligibility. Then, the Patient Protection and Affordable Care Act said states cannot make it harder to enroll for Medicaid until states launch the law's insurance exchanges—but Congress included one loophole. States able to demonstrate a deficit or projected deficit may ask CMS for permission to reduce Medicaid eligibility, beginning at the end of the year.

Arizona may employ that loophole, though no decision has yet been made how the state will approach an expected request to CMS to reduce Medicaid eligibility, says Paul Senseman, a spokesman for Arizona Republican Gov. Jan Brewer, who last week told the Associated Press she would seek a waiver.

The news is particularly grim in light of the most recent look at state budgets from the Center on Budget and Policy Priorities. In a newly released report, the center's Elizabeth McNichol, Phil Oliff and Nicholas Johnson culled figures from state agencies, legislative reports and press reports and found among 40 states, projected budget gaps for the year that begins July 1 total $113 billion.

That's after the $430 billion in shortfalls states have already been forced to address in budgets during 2009, 2010 and 2011. Federal recovery funds helped offset state deficits each of those years, including roughly $59 billion for 2011 (which ends June 30 for most states); $68 billion in 2010 and $31 billion the prior year. But the report says federal relief will all but disappear in 2012 ($6 billion).

The report also warns that fiscal gaps will likely continue beyond 2012. “In the early 200s, as in the early 1990s and early 1980s, state fiscal problems lasted for several years after the recession ended,” the report says. “The same will undoubtedly be the case this time, since the current recession is more severe—deeper and longer—than the last one, and state fiscal problems have proven to be worse, and are likely to remain so.”

How long did states suffer after last decade's first recession, which lasted from March 2001 to November 2001? The report says state deficits totaled $40 billion in 2002; $75 billion in 2003; in 2004, $80 billion; and $45 billion in 2005.