Medicaid Expansion Will Break New Mexico Budget

Feb 25, 2016


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One of the best ways for a family to get into deep financial trouble is to take on payment obligations they cannot sustainably afford. The responsible thing to do, of course, is to make sure there is enough money left in the family finances before a new spending item is added.


Our state governments are effectively forced to operate under the same principles. Just like a family they cannot print their own money (only the federal government can do that) and they have to balance their budgets every year.




However, that has not prevented our states from putting new spending programs in place without having a dedicated revenue source in place. The latest example, Medicaid Expansion, is threatening to bring many state budgets deep into the red in as little as a year.


So far 31 states and the District of Columbia have accepted Medicaid Expansion.  It is very likely that this number would have been far lower if the federal government had not promised to pay the full cost of the program for the first three years.


The problem is what happens beyond those three years. To get an idea of just how big that problem can be, one need not go any farther than New Mexico. Already today there is big fiscal cloud looming over Santa Fe, ominously foreshadowing a big hole in the state budget. The main reason is Medicaid Expansion enrollment:


  • When New Mexico adopted Medicaid Expansion the enrollment forecast was at 147,000;

 

  • In 2015 that number was 46 percent higher, with 215,000 people having signed up for Medicaid Expansion.

 

Under Affordable Care Act stipulations, New Mexico is going to pick up ten percent of the tab for the program starting in 2017. The federal government may pledge to continue paying 100 percent for a couple of more years, but in the end that does not change the fact that once the state's responsibility kicks in, it is going to have to send a hefty bill to taxpayers. An optimistic estimate points to $100-150 million annually in higher taxes just to cover Medicaid Expansion.


Or, to be exact, one tenth of Medicaid Expansion.


It is a safe bet that legislators in Santa Fe have not even contemplated a scenario where they would have to cover more than ten percent of the cost. They are busy trying to accommodate for the new costs they know are coming their way. After two years with state spending growing at 7.6 percent (Fiscal Year 2015) and 6.2 percent (FY16) the budget for FY17 is actually set to shrink, albeit marginally. The Albuquerque Journal reports:


"While the budget plan for the fiscal year starting in July would cut state spending by roughly $96 million, most of that would be offset by taking money from various government accounts."


They have a steep hill to climb just to stop the budget from growing. In the past two years alone, health care costs have gone up by double digits:  


New Mexico state budget; Total spending; $ millions

Annual growth

 

FY14

FY15

FY16

14 to 15

15 to 16

Health

$6,526

$7,207

$8,005

10.4%

11.1%

Public schools

$2,914

$3,025

$3,072

3.8%

1.6%

General control

$1,547

$1,664

$1,667

7.6%

0.2%

Transportation

$839

$862

$838

2.7%

-2.8%

Public safety

$481

$517

$543

7.5%

5.0%

Judicial

$245

$259

$256

5.7%

-1.2%

AENR*

$218

$232

$233

6.4%

0.4%

Commerce

$154

$143

$153

-7.1%

7.0%

Legislative

$17

$20

$20

17.6%

0.0%

Total

$12,941

$13,929

$14,787

7.6%

6.2%

*) Agriculture, Energy and Natural Resources

     

Source: New Mexico Department of Treasury

 

As if the cost of Medicaid Expansion was not enough, New Mexico has a deep problem with its dependency on federal funds. In FY15 38.5 percent of the state’s total revenue came directly from Uncle Sam. The question is: what happens to those federal dollars when Congress is again faced with trillion-dollar deficits, as the Congressional Budget Office predicts will happen no later than 2022?




To top off the problems for the Enchantment state, severance tax revenue have dropped dramatically. The Albuquerque Journal again:


"Plummeting oil and natural gas prices are largely to blame for the spending cuts, having forced the state’s revenue projection for next year to be pared back by $326 million over the last three weeks."


While New Mexico is in a particularly tight spot due to losses in severance tax revenue, the state’s situation is not that different from many other states. For example, stagnant personal incomes have created a perennial revenue problem for states like Oregon, where personal income taxes pay for 68.3 percent of the state’s revenue, or New York (54.6 percent), Massachusetts (53.9) and California (50.2).


With long-term weakness in revenue growth, the last thing a state should do is take on responsibility for new spending programs. New Mexico has already rolled the dice with Medicaid Expansion; what matters there is to rein in the costs as best possible. Other states, still not having accepted the program, should cautiously watch - and learn from their mistake. 



Sven R. Larson

Sven R. Larson is an economist and Member of the Council of Scholars with Compact for America. He has a blog called America’s Fiscal Future and he recently published "Robbing the Millennials: How We Looted Our Kids' Future and the New Handshake We Owe Them"


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