Bailout requests by numerous states have recently been a top news item, as everyone lines up behind the financial sector with their hands out. Rather than debate the wisdom of these bailouts, it is time to look at the states’ fiscal policies and see whom they hurt.
The recession of the early 2000s saw states scrambling to balance their budgets. Texas’ watershed year was 2003, with a $10 billion budget shortfall for the biennium, but we were not alone. California faced a whopping $38 billion shortfall that same year. The way the two states responded then, set the stage for what is happening today.
Texas reduced spending to cover the deficit that represented about 15 percent of its general revenue. The commitment was made, and kept, that the shortfall would not be resolved by increasing taxes.
Today, Texas has become the nation’s top job producer, hosts more Fortune 500 companies than any other state, and was cited by the Financial Times as the state best able to weather the financial storm. Although the economic downturn will cause short-term problems, especially in retirement system investments, the state will enter the next budget cycle in the black, just as it did in 2005 and 2007.
California, on the other hand, not only raised taxes as part of its deficit plan, but also borrowed $10.7 billion – about 15 percent of its general revenue. The result has been that California has lost both jobs and population. The current budget year has a $26 billion budget gap, representing 25.7 percent of general revenue. Its solution again is to borrow much of the money rather than significantly reducing spending. But this time, there is a steep price to pay.
California now has the lowest bond rating of any state and will pay for that through a high interest rate. Stateline.org reports that the state may be the first to “nose-dive into junk bond territory.” Instead of facing the recession from a position of fiscal strength, the state is incredibly weak.
Next will come the budget cuts, not only in California but in up to 36 other states. Not surprisingly, the two areas of the budget most often cited for targets of cuts are Medicaid and education.
California, in the name of compassion, has expanded its Medicaid rolls to the highest in the nation, with 29 percent of the population enrolled. Provider rate cuts are always first on the chopping block when things get tight, and that is what California has tried to do. Its 10 percent cut to providers in Medi-Cal, the state’s Medicaid plan, was temporarily halted by a federal judge in August, further complicating their budget woes.
California has expanded its Medicaid rolls in the good times, creating a dependency on the program, and now that the economy has gone south, health care for the poor will be the first area to take a hit. Expansion of government-paid health care programs inevitably increases the cost of health care for everyone and contracts the private market, meaning that everyone suffers. If the federal government decides to bail out states like California, it will reward them for poor fiscal management and punish Texas for being responsible.
The Kaiser Family Foundation estimates that for every 1 percent increase in the national unemployment rate, there are one million new enrollees in Medicaid and State Children’s Health Insurance Program (SCHIP), costing $3.43 billion in additional program spending.
At the very time when families will need the safety net of Medicaid and SCHIP the most, states that have not exercised fiscal responsibility, particularly those that have expanded their health care programs beyond sustainability, will not be in a position to help. That is not compassion.
Careless spending hurts those it purports to help.
Arlene Wohlgemuth is a Visiting Research Fellow at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.