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At Governors' Meeting, Budget Problems Are Inescapable

By Dan Balz
Sunday, July 19, 2009

BILOXI, Miss. These are grim days for governors. Here's one example: Offered an invitation to spend a weekend on the waters of the Gulf of Mexico at the annual meeting of the National Governors Association, more than half the nation's governors politely declined.

Budget issues have kept some governors at home, including the chairman of the NGA, Pennsylvania's Edward G. Rendell (D). He decided it wasn't wise to leave his state on the first "payless payday" for state workers. "Not a very good move for me to go down to Biloxi," he said by telephone.

The governor of the hardest-hit state, California's Arnold Schwarzenegger (R), is also a no-show because he is struggling with his legislature to close a $26 billion budget deficit. Legislative leaders reported Saturday that after two weeks of hard negotiations, they were moving toward a solution. Meanwhile, the state has been issuing IOUs in lieu of payment.

Others governors who have resolved budget problems for this fiscal year may simply be skittish about leaving home to stay at a resort hotel and casino, even if the purpose is to spend time talking about issues of mutual interest and concern. They may rightly believe constituents would not look kindly on the use of taxpayer funds for a summer getaway.

Others are generally keeping a low profile; for example, South Carolina's Mark Sanford (R) isn't here after recently admitting to an extramarital affair. Neither is Alaska Gov. Sarah Palin, who is contemplating her next moves in the final days of her self-shortened term. Florida Gov. Charlie Crist has already decided he'll try to become a senator and is spending the weekend in New York raising money for his campaign.

But the real reason things are grim is that governors, like their constituents, are grappling with a terrible economy, one that has thrown their budgets into the red. The Nelson A. Rockefeller Institute of Government reported Friday that state tax revenue dropped 12 percent in the first quarter of 2009, the biggest decline since at least 1963. Preliminary data for April and May from 45 states suggest an even sharper plunge is underway in the second quarter, approaching 20 percent over the same period a year ago, according to the institute.

The federal stimulus package has helped cushion the blow, and there's hardly a governor here who doesn't have good things to say about the money (though as always, some would prefer greater flexibility in how to spend it). "We have been able to dodge a bullet, but we will not go unscathed," West Virginia Gov. Joe Manchin III (D) said Saturday.

But even with the stimulus money, states face collective deficits of more than $200 billion in the next few years. Governors are already talking about the moves they may have to make once the stimulus money disappears after 2011, especially if the economy is not growing at a substantial pace.

"We have to restructure our state governments . . . so we are ready to get along without these resources in a couple of years," said Vermont Gov. Jim Douglas (R), who will take over the NGA chairmanship on Monday.

As they do that, governors may have another looming fiscal burden. The health-care bills moving through Congress include a significant expansion in Medicaid, which is funded by the federal government and the states. An NGA official estimated that the cost of that expansion could be around $60 billion a year.

How might states pay for their share? Maybe not at all, at least for the first few years. One proposal has called for the federal government to pick up permanently the cost for those newly eligible for the program. Another proposal floated earlier was for the federal government to pay the entire bill for five years.

But as congressional committees wrestle with projections that show health care turning into a budget buster, they are looking for ways to strip away costs. Governors have already been warned that 100 percent federal financing is now very unlikely. More troubling proposals have been under discussion.

Last week, governors revolted against a plan under consideration in the Senate Finance Committee. That proposal, according to an analysis prepared by the Center on Budget and Policy Priorities and shared by Rendell's office, would have called on the states to issue 30-year bonds and pay the cost of the Medicaid expansion from the proceeds. This would have been augmented by some share of promised Medicaid drug rebates.

The proposal smelled of an effort to offload some costs of the health-care package during the years that would be included under the Congressional Budget Office's period for "scoring" the budgetary implications of the plan. States were promised relief after 2019. Asking the states to issue bonds for the Medicaid expansion would have taken $180 billion off the budget, according to an estimate by an NGA official.

One congressional source described the measure as "subject to gimmick charge." A state official called it "creative financing." Rendell said it was "absolutely" an attempt by the Finance Committee to make the package look less costly during the years included in the CBO scoring window.

The proposal drew a swift rebuke from the governors. For one, they argued, most states cannot use borrowing to pay for operating expenses. Some states are already at or near their borrowing capacity. "Wait a minute," Montana Gov. Brian Schweitzer (D) exclaimed Saturday. "The outfit that prints the money is turning to us to say you can borrow. . . . They need to figure out a way to pay for what they're offering."

A group of governors spoke with Senate Finance Committee Chairman Max Baucus (D-Mont.) on Wednesday and also raised the issue with Health and Human Services Secretary Kathleen Sebelius, a former governor of Kansas. They came away believing that it was off the table -- for now. "Senator Baucus was terrific when we told him the problem," Rendell said.

Erin Shields, a Finance Committee spokeswoman, said Saturday in an e-mail: "Chairman Baucus is aware of the states' concerns related to financing changes to the Medicaid program and will continue to work closely with them to address their concerns."

With the CBO warning that the House health-care bill would enlarge the deficit and doesn't adequately contain costs, lawmakers are under increasing pressure. Who's to say more creative financing might not be proposed as part of a final package? Governors believe they've made their case, but they wonder whether they've heard the last of this.

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