House Budget Worsens State’s Funding Cliff

The NerveIn the wild, even the average bear plans for contingencies: Fatten up in the spring and summer in order to make it through the long, barren winter. Then migrate, hibernate and repeat.

In the General Assembly, House budget writers have planned for a contingency as well.

However, their approach to crafting a spending plan for next year arguably turns that survival instinct of bear basics – optimize fruitful days in order to prepare for leaner times – on its head.

It is true at least in regard to what’s known as Part Four of a budget for 2010-11 that the House passed in mid-March.

After a weeklong furlough, the Legislature is scheduled to return to session today and the Senate now faces the hard slog of crafting its version of the budget, currently in the chamber’s Finance Committee.

The new fiscal year begins July 1.

Think of Part Four of the House budget as South Carolina’s stimulus showdown epilogue.

The vote on the House’s proposed spending plan was fairly close: 63-51.

One of the lawmakers who sided against it was Rep. Harry Ott of Calhoun, leader of the chamber’s minority Democratic caucus.

Ott says Part Four is “where we spend money we don’t have yet.”

That’s why the budget section, totaling nearly $175 million, is a contingency plan.

Part Four hinges on reauthorization of extra federal Medicaid funding for the states. The money, dubbed enhanced Federal Medicaid Assistance Percentage, or FMAP, originated in the stimulus.

FMAP, though, will run out at the end of this year absent reauthorization.

Prevailing speculation holds that a re-upping of FMAP is likely.

“There’s a very, very high likelihood that this will occur,” says Stacey Mazer, who tracks Medicaid and other issues for the National Association of State Budget Officers, a nonprofit based in Washington, D.C.

Both houses of Congress have approved variations of a six-month, approximately $26 billion extension of FMAP, through June 30, 2011, Mazer says.

In addition, President Obama has included such a reauthorization in his proposed federal budget for 2011, she says.

After a two-week spring break, lawmakers in the nation’s capital reconvene this week also. And, the pros and cons notwithstanding, all that remains for a continuation of enhanced federal Medicaid funding for the states is for Congress and the president to agree to the details of it.

“I know from a state budget perspective we’ve been asked this a lot,” Mazer says regarding the status of the issue.

Indeed, many states are on pins and needles about the matter, she says, as they try to plan their budgets for the coming fiscal year.


Behind the Part Four Curtain

Enter Part Four in South Carolina.

Republican Reps. Dan Cooper of Anderson, chairman of the budget-writing House Ways and Means Committee, and Tracy Edge of Horry, a member of Ways and Means, sponsored Part Four.

Neither Cooper nor Edge responded to two phone messages and an e-mail to each of them from The Nerve.

What Part Four would do is allocate $174.9 million in S.C. Department of Health and Human Services funding to a raft of other state agencies and programs – most of them wholly unrelated to Medicaid – if an FMAP reauthorization passes.

That would be $175 million on top of $346 million in stimulus stabilization funding the state is set to receive next fiscal year.

In other words, under Part Four, federal stimulus money designated for Medicaid comes into the state’s coffers and a roughly equal amount of state funding goes out for purposes that in many cases have nothing to do with Medicaid.

Fiscally conservative?

It’s not even fiscally responsible, according to Rep. Anton Gunn, D-Richland.

“So effectively we have balanced the state budget by depending on the federal government to bail us out yet again (even though we haven’t received the money yet),” Gunn said in a March 21 news release, three days after the House passed its budget.

But on the spectrum of points of contention with Part Four, the contingent nature of it might be the least troubling.

Perhaps far more questionable is the fact that many of the expenditures in the budget section would not qualify for federal matching funds under Medicaid. A partial list of those includes:

  • Millions of dollars in pass-through operating funding for other state agencies, ranging from the Department of Health and Environmental Control to the Department of Motor Vehicles;
  • $10 million for the Medical University of South Carolina;
  • $7.5 million for health insurance for S.C. Budget and Control Board employees; and
  • $5 million for rural hospital grants.

If the state were to bank the $175 million in HHS funding and instead spend it in the future on Medicaid or other programs that qualify for federal matching dollars, Rep. Ott notes, “You would get a much bigger bang for your buck.”Moreover, Part Four would steepen a ginormous funding cliff South Carolina is heading toward in the 2011-12 budget year.

Here’s how that path unfolds:

The state is spending its stimulus dollars, which constitute one-time money, on recurring expenses, a process called annualization. But when the stimulus goes bye bye, which will happen before the 2011-12 fiscal year, those continuing expenses don’t.


With Acknowledgements

The House acknowledged as much in some unusual language in Part Four.

It says the Legislature “recognizes that these funds are temporary in nature and may not be sufficient to address a shortfall in recurring revenue if the current economic crisis extends beyond the period currently contemplated.

“As a result, the General Assembly strongly encourages state agencies and institutions and school districts receiving these funds to limit the reliance on these funds and make contingency plans that include savings necessary to meet future recurring obligations.”

The projected amount of the state’s deficit in 2011-12: $1 billion.

“That’s a decent estimate,” says Les Boles, director of the Office of State Budget.

Boles says the Legislature included similar language in the current year’s budget to let agencies and the public know “that we’re going to have a major problem in the future.”

Guess where about half of the projected shortfall would be.

“We think that in the next budget year (2011-12) we’ll need about $600 million in annualizations to maintain current levels of service,” says Jeff Stensland, spokesman for the state Department of Health and Human Services.

Ott says Part Four piles nearly $200 million more onto the state’s annualization tab for 2011-12. “What this does is extends the annualization problem in next year’s budget to $1.2 billion.”

Boles: “At the end of the fiscal year, that’s (Part Four) part of that funding cliff that’s gone.”

Ott says he does not oppose how Part Four would spend money. As an example, he cites $9 million for the S.C. Department of Disabilities and Special Needs that would otherwise be a bone-deep cut to services for the state’s most vulnerable residents.

Rather, Ott says, “I’m just opposed to the process. I think it’s wrong.”

On that point there is bipartisan agreement.

In a March 16 letter to state lawmakers, two days before the House passed its budget, Republican Gov. Mark Sanford cautioned them against going along with Part Four.

“We believe a more fiscally prudent step would be to set aside $175 million to help alleviate the pain caused by the loss of $1 billion in stimulus funds next year (2011-12),” Sanford wrote. “By setting aside this money the shortfall next year would be reduced by $175 million.”

Given the potential of federal matching funds, the reduction in the gap possibly could be even larger.

Sanford’s cautionary note hints at his opposition last year to $700 million in stimulus stabilization funding for South Carolina. In a high-profile showdown with the Legislature, he did not want the state to accept that money unless it paid down an equal amount of its debt.

The S.C. Supreme Court was the ultimate arbiter of the standoff, ruling that lawmakers could compel the governor to take the money. And they did.

In an e-mail, Sanford spokesman Ben Fox says Part Four “wouldn’t be a repeat of last year’s battle.”

Nevertheless the question becomes: How far can the Legislature kick the budget can down the road before falling off the funding cliff?

Reach Ward at (803) 779-5022, ext. 117, or eric@scpolicycouncil.com