NCPA - National Center for Policy Analysis


July 21, 2008

The Government Accountability Office (GAO) has issued a bleak report on the long-term financial prospects of state and local governments.  Their fiscal balances, GAO's simulations show, will rapidly deteriorate in less than a decade.  GAO identifies Medicaid as the primary culprit for these bleak trends, says the American Enterprise Institute (AEI).

In some states, the crisis has already arrived.  Arizona provides an early and stark illustration of Medicaid's ruinous effects:

  • Arizona is facing a general fund budget shortfall of more than $1.3 billion in its $10.9 billion budget.
  • To ameliorate the fiscal crisis, the Arizona legislature enacted modest cuts, a stepped-up traffic enforcement system to produce some $90 million in speeding tickets, and $2 billion in new debt.

Arizona's fiscal crisis is due chiefly to the state's expansion of its Medicaid programs, says the AEI.  Unsurprisingly, Medicaid expenditures constitute an ever-growing share of state expenditures:

  • In 1987, that share amounted to slightly more than 10 percent.
  • By 1992, the number was 17.8 percent; in 2006, it was 22.2 percent.
  • Arizona general fund spending on Medicaid was $463 million in 2000.
  • That figure is projected to grow to $1.5 billion in FY 2009, representing a threefold increase in less than a decade.

No state can avoid the choice between more debt or rip-roaring tax hikes, combined in some way, says the AEI.  The only plausible solutions to the states' Medicaid-induced fiscal troubles are to be found in Washington. 

However, genuine reform of Medicaid is an unlikely scenario, says the AEI.  Medicaid is designed to be fiscally unsustainable -- but politically self-sustaining.

Source: Michael S. Greve and Philip Wallach, "As Arizona Goes, So Goes the Nation: How Medicaid Ruined the States' Fiscal Health," American Enterprise Institute, July 17, 2008.

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