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State Responses to 2004 Budget Crises

A Look at Ten States

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Document date: February 01, 2004
Released online: February 01, 2004

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).


Introduction

In 2000, the United States economy began to slow and the nation entered a recession early in 2001. The terrorist attacks of September 11, 2001 exacerbated the economic problems facing the nation. State revenues experienced a dramatic decline in the middle of 2001, and while beginning to increase again, have generally remained at depressed levels. At the same time, states were faced with strong public support for increasing spending on elementary and secondary education, rising enrollment in higher educational institutions because of the baby boom echo, and sharply growing Medicaid expenditures.

Because of all these factors, states were dealing with their most serious fiscal crises since World War II.1 The pressures facing states were particularly acute as they enacted their fiscal 2003 budgets. Conditions were, in most states, just as severe if not worse as they prepared their fiscal 2004 budgets, in part because prior budget actions foreclosed some options for this year. In this report we examine the decisions states made to solve their budget problems in fiscal 2004. Among other things, we look at the extent to which states attempted to increase revenues through taxes or fees, cut spending, or used reserves or rainy day funds, trust fund surpluses, or tobacco settlement revenues.

This report updates one that was completed a year ago that examined state decisions from fiscal 2003 made by seven states (California, Colorado, Florida, Michigan, Mississippi, New Jersey and Washington).2 In that report, we concluded that states solved their budget problems in fiscal 2003 largely by the use of one time budgetary mechanisms, such as drawing down rainy day funds or reserves, using trust fund surpluses, or securitizing tobacco settlement revenues, and various Medicaid special financing mechanisms. Of particular note, several states relied on upper payment limit programs and intergovernmental transfers as a way to leverage additional federal Medicaid funds. With the exception of the cigarette taxes, most states generally avoided tax increases. Beyond revenue measures, states cut a broad array of programs. Within Medicaid, states mostly avoided cutting eligibility or benefits and instead relied heavily on provider reimbursement rate freezes or reductions to achieve savings.

The ten states in this study varied greatly in the degree of budget pressure they faced in fiscal 2004.

In fiscal 2004 we found more reliance on increases in taxes, primarily tobacco or alcohol taxes, or fees and user charges. With a few exceptions, the lack of support for increases in income or sales taxes persisted. Surprisingly, states continued use of so-called "one time" budgetary mechanisms, such as reserves or trust fund surpluses, that had seemed nearly fully exhausted after fiscal 2003 actions.

Spending cuts were much more severe in fiscal 2004 than in the previous year. While states generally avoided cuts in K-12 education, higher education was slashed in many of our states, requiring state university systems to adopt significant tuition increases. States also cut both the level and compensation of the state workforce. In addition to layoffs or reductions through attrition, many states froze salaries and state employees were required to contribute more to health benefits. Many states reduced aid to localities that could eventually affect at least lower income cities' and counties' ability to provide basic services, including education.

Particularly striking was the increased willingness of states to more aggressively cut health care programs. In addition to continuing to cut or freeze provider reimbursement, states eliminated some optional benefits, particularly for adults, and began to limit enrollment through reducing eligibility standards, imposing enrollment caps, reducing outreach, and making the enrollment process somewhat more cumbersome. Enrollment reductions took place in both progressive states that had recently enacted broad eligibility expansions as well as states with historically more narrow levels of coverage where cutbacks focused on curtailing outreach, requiring more frequent eligibility redetermination, and capping SCHIP enrollment.

This report is based on a review of policy changes in ten states: Alabama, California, Colorado, Florida, Massachusetts, Michigan, New Jersey, New York, Texas, and Washington. These ten states are part of the focus of the Urban Institute's Assessing the New Federalism project, a large multi-state research effort that has followed state health, income support and social services policies in thirteen states since 1997. We collected information on state budgetary activity from state websites, newspapers, and public documents. We then conducted telephone interviews and site visits between October and December 2003 with key state government officials and representatives of provider and consumer organizations using an open ended structured protocol.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Click on each state to view the individual state report in the PDF format: Alabama, California, Colorado, Florida, Massachusetts, Michigan, New Jersey, New York, Texas, Washington.


1 Governor Von Behrer and N. Samuels, The Fiscal Survey of States, Washington, D.C.: National Association of State Budget Offices, 2002).

2 John Holahan et al., The State Fiscal Crisis and Medicaid: Will Health Programs Be Major Budget Targets? Overview and Case Studies, Washington, D.C.: Kaiser Commission on Medicaid and the Uninsured, January 2003.


Topics/Tags: | Economy/Taxes | Health/Healthcare


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