Deficit City: State Agencies Awash in Red Ink

September 21, 2010

Investigative Reports

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The NerveThree state agencies are facing operating deficits this fiscal year that could add up to a quarter of a billion dollars combined.

The agencies are accumulating deficits on the heels of the state paying off a nearly $100 million deficit that was on its books for a year.

The departments of Health and Human Services, Social Services and Corrections all say they are heading toward red ink. The Health and Human Services budget chasm could be the largest in state history.

Indeed, this is the year of deficits in South Carolina state government.

Picture a dam springing a leak, and as soon as the hole gets plugged, a second breach opens. It gets sealed but then a third puncture appears, and then yet another – and the process continues until the flood wall just can’t hold up any longer.

The first part of that scenario already has happened with the state’s general fund budget and the agencies that rely on it as their main source of operating money.

Does a tsunami lurk behind the dam break?

It’s not a foregone conclusion. Nevertheless, the smart money says have your life raft at the ready.

And – oh yeah – watch out for red ink-laden political recriminations flying like so many drone-fired missiles.

Will the charges aim at the General Assembly’s half-billion-dollar giveaway to the Boeing Co. right in the midst of the state’s budget meltdown? The Legislature’s $5 million funding increase for the Senate this year? Millions in state subsidies for TV and movie productions?

Questions to be asked, perhaps, as state funding for core government functions such as education and law enforcement has been reduced an unprecedented amount – some $2 billion – amid the Great Recession.

Although the S.C. Constitution requires a balanced budget, the state carried a $98.2 million deficit from the end of the 2008-09 fiscal year until the end of 2009-10. The deficit was paid off as of the close of last fiscal year, June 30, according to the state Comptroller General’s Office.

In more good news, even after the deficit was repaid, the stated ended 2009-10 with a $71 million surplus, and state economists say revenue collections so far this year are exceeding their projections.

Now the bad news:

South Carolina’s federal funding from the American Recovery and Reinvestment Act of 2009 is running out this year. Largely because of that, state officials are projecting a $1 billion gap in the 2011-12 spending plan before legislators even start drafting it.

HEALTH AND HUMAN SERVICES

Springing the largest of the agency leaks, meanwhile, the Department of Health and Human Services is preparing to announce possibly the largest deficit in state government history.

“It would be at least $200 million unless we make some substantial changes,” HHS spokesman Jeff Stensland says.

The deficit, he says, traces almost entirely to insufficient state funding to meet the demands of explosive growth in Medicaid, a federal- and state-funded health care program for the poor.

Since the beginning of the recession in December 2007, Medicaid enrollment in South Carolina has climbed by more than 91,600, or 12.5 percent, according to Stensland.

Conversely, state lawmakers have eviscerated once-hearty reserves at Health and Human Services, transferring about $552.5 million from the department to other agencies since 2008-09, agency figures show.

On top of that, HHS has absorbed about $228.3 million in state revenue reductions in that time period.

That makes for a total funding decline at the agency, over the past two fiscal years and so far this year, of $780.8 million.

Federal and state mandates are not helping the HHS budget picture.

Under national health care reform – the Patient Protection and Affordable Care Act of 2010 – the state agency is prohibited from tightening Medicaid eligibility standards. Historically, states have been able to tweak eligibility to help offset funding and enrollment fluctuations.

Similarly, a host of state restrictions – on everything from optional services to program funding transfers to reimbursement rates for service providers and prescription drugs – further tie the department’s hands.

Taking actions it can, Health and Human Services laid off 44 people in August, and presently is seeking input from Medicaid stakeholders via meetings and a survey on the agency’s website about ways to potentially cut costs in the program.

Not surprisingly, the HHS deficit is taking on a political dimension.

State Rep. Tracy Edge, R-Horry, chairs the Health, Human Services and Medicaid Subcommittee of the House Ways and Means Committee, which writes the House version of the budget.

In a recent interview with The Nerve, Edge criticized the HHS agency, saying it has blown through its reserves and understated the costs of the Medicaid enrollment growth. “There’s a lot of problems over there that have made it pretty difficult to keep a handle on,” he said.

Edge also asserted that HHS director Emma Forkner doesn’t really understand the health care industry.

Says agency spokesman Stensland, “I would disagree with that.”

Asked about Forkner’s background, Stensland provided The Nerve with a copy of her bio. It says she earned a nursing degree from the Medical University of South Carolina and served as a nurse in the Air Force for more than 24 years.

Forkner also holds a master’s degree in public administration and, before taking the helm of HHS, was a senior policy analyst with the Altarum Institute, a nonprofit health care research and consulting organization with offices across the country.

Asked to respond to Edge’s other comments, Stensland noted that the HHS reserves were eliminated as a result of money transferred from the department “to other agencies at the direction of the General Assembly.”

With regard to Medicaid growth, Stensland says it has exceeded the agency’s projections. But he says HHS was still underfunded compared to what the department expected to see in the program.

SOCIAL SERVICES

The deficit situation at the Department of Social Services isn’t so grave. Still, DSS director Kathleen Hayes says the agency could rack up a $52 million shortfall this year, absent congressional relief.

“So, it’s a really serious situation,” Hayes told The Nerve on Friday. “It (DSS) has never been in this situation.”

Demands on the department’s services have increased consistently during the recession, in some cases significantly, Hayes says.

The number of people receiving food stamps, for example, has jumped 50 percent since 2007, she says. “Half of the recipients are children.”

Against such demands, Social Services has incurred $48.5 million in state funding cuts since July 2008, magnified by $72.6 million in lost federal matching money, according to Hayes.

“And right now we are running on empty,” she says.

To help ease the strain on the agency, Hayes says DSS has eliminated 500 positions, implemented a hiring freeze, furloughed employees and cut services.

South Carolina had been receiving about $19.5 million annually from a contingency fund as part of the federal Temporary Assistance for Needy Families program, but the state is not expected to get any of that money this year, Hayes says.

Temporary Assistance for Needy Families (TANF) is a block-grant program. It was created when entitlement assistance ended under welfare reform in the 1990s.

But the program’s contingency fund is tapped out. Unless Congress restores it, DSS is facing a worst-case deficit of $52 million this year, according to Hayes and Virginia Williamson, general counsel for the agency.

“It would not completely solve our shortfall, but it would go a long way toward it,” Williamson says of Congress replenishing the TANF reserve.

CORRECTIONS

As for the Department of Corrections, it expects to run a deficit again this year after doing so for the past three budget cycles: $28.9 million last year; $45.5 million in 2008-09; and $3.9 million in 2007-08, according to Corrections spokesman Josh Gelinas.

That adds up to $78.3 million in red ink.

Gelinas says the deficits did not result from overspending. Rather, he says the $78.3 million equals the amount that the department’s state funding was cut over those three years, during which South Carolina’s prison inmate population grew by nearly 600, from 24,138 to 24,734.

What about this year?

“We have not projected a deficit figure,” Gelinas says in an e-mail.

However, Corrections director Jon Ozmint in an e-mail to The Nerve said the figure “will be much smaller, even with inmate population growth and inflation.”

What about belt tightening at the agency?

Describing Corrections as chronically underfunded, Gelinas says South Carolina spends less per inmate than any other state.

“At the same time, we took furlough days, limited travel and training, and took other steps to save as much as possible,” he says. “We also cut back on medicines provided to inmates upon release, postage provided to indigent inmates and other measures.”

Reach Ward at (803) 254-4411 or eric@thenerve.org.