GAO: State Fiscal Gap Seen Worsening as Health Care Drives Spending

Though state revenues are ticking up slightly, the Government Accountability Office’s annual report on state and local fiscal health predicts bigger budget gaps than projected this time last year. The primary driver: rising health care costs, particularly in the Medicaid program.

On the revenue side, overall state and local tax revenue reached pre-recession (2007) levels last year, but flat growth in property tax revenue over the last year accounted for the report’s larger than previously projected state and local budget gaps.

The GAO’s predictions assume the Affordable Care Act remains intact, which would require the federal government to take on a substantially larger share of Medicaid funding starting in 2014. Instead of its current 50 percent share, Washington would pay as much as 63 percent of the costs for the more than $470 billion federal-state health care program for the poor. 

Even so, states will continue to see shortfalls in the revenues needed to cover basic Medicaid program costs, the GAO predicts. That’s because states’ remaining share of Medicaid will grow faster than any other state and local expense and faster than the nation’s gross domestic product (GDP), according to the report.

“There’s going to have to be some changes in Medicaid policy,” says Thomas McCool, one of the report’s authors. “Without that, current policy gets states into trouble,” he says.

Current Medicaid spending represents nearly a quarter of state budgets, surpassing K-12 education expenditures when federal funds are included. In fiscal year 2011, Medicaid outlays increased on average by 7 percent across all states, according to the Kaiser Family Foundation. In this year’s state budgets, lawmakers approved average spending growth of only 2 percent, one of the lowest growth rates on record, according to Kaiser’s most recent 50-state Medicaid budget survey.

GAO’s remedy for states’ short- and long-term fiscal gaps is to cut current spending by an average 13 percent and maintain that lower spending level for the foreseeable future. The alternative, the report suggests, is to raise taxes by the same percentage or some combination of the two.

When state employees’ health benefits and other health-related costs are added to Medicaid, the GAO projects total state and local health-related spending will total 4 percent of GDP in 2012, rising to 7 percent in 2060. In contrast, non-health spending at the state and local level—such as the wages of public workers—is expected to decline as a percentage of GDP from 10 percent in 2012 to 8 percent in 2060.