Medicaid: States' $24 billion black hole

NEW YORK (CNNMoney.com) -- Governors and state lawmakers are anxiously waiting to see whether Congress will send them another $24 billion to help cover their ever-expanding Medicaid rolls.

Only a few months ago, the money seemed like such a sure thing that about 30 governors included it in their fiscal 2011 budgets, which start on July 1. This assumption spared them from cutting even deeper into social services, education and public payrolls.

That federal lifeline, however, has been thrown into doubt now that the House dropped the funding from a jobs and tax bill to woo Democrats concerned about the ballooning federal deficit.

Senate Democrats Tuesday added it back into the legislation, but it remains to be seen if the provision can make it past the deficit-wary chamber.

With only weeks to go before their fiscal years start, states are talking about slashing services for children, the poor and the sick. Schools would receive less state aid, parks would close and state workers would lose their jobs.

"If the money doesn't come through, then most states will do even more budget cuts," said Michael Leachman, senior policy analyst at the Center on Budget and Policy Priorities, a left-leaning think tank in Washington D.C.

Medicaid, which covers more than 60 million people nationwide, is one of the costliest services states provide. It ate up about 21% of state spending in fiscal 2009, according to a recent report by the National Governors Association and National Association of State Budget Officers.

The Great Recession sent even more Americans onto the Medicaid rolls, growing by an estimated 21% over three years. At the same time, state tax revenues plummeted, forcing governors and legislators to make deep budget cuts.

To help states cope with this double-disaster, the Obama administration increased the federal share of Medicaid payments by $87 billion as part of last year's massive stimulus program. States are prevented from tightening eligibility requirements in order to cut costs.

That funding runs out at the end of December, which is the middle of most states' fiscal years. So state officials have been lobbying Washington D.C. for months to extend the increased payment levels through June 30, 2011.

Now, their pleas include threats of devastating consequences both to their residents and to the national economy.

"If the extension of federal fiscal relief is not enacted, most states will have to lay off thousands of workers and make wrenching cuts to public and private sector services," Pennsylvania Gov. Edward Rendell wrote in a letter to his state's congressional delegation. "The impacts would be severe in terms of both job loss and the delivery of health and human services.

Without help from Congress, Pennsylvania will have to slash $850 million from its budget by July 1. That's on top of the $1.2 billion shortfall it has had to close before its new fiscal year starts.

To make up for the missing Medicaid money, Rendell says the state would have to slash by 25% its funding for child welfare services, as well as cut assistance to those with mental health issues. It would eliminate nearly $100 million in state aid to hospitals serving the poor and uninsured.

The Keystone State would also eliminate all state-funded programs for the homeless and substance abusers, as well as reduce state-supported social services for poor adults and families by 90%. And it would cut in half funding for domestic violence and rape crisis assistance.

But even all these moves wouldn't balance the budget, Rendell told CNNMoney.com. The state has already slashed $2.5 billion out of its $27 billion budget in the last two years so there aren't that many programs left to cut, he said.

The only way to do it would be to lay off thousands of state, county and local government workers, Rendell said. That would bring the economic revival the state has seen recently to a grinding halt.

"It would have a crushing, debilitating effect," said Rendell, who estimated up to 20,000 people could lose their jobs.

California, meanwhile, is also urging its federal representatives to extend Medicaid assistance, which would send an additional $1.8 billion to the Golden State. Otherwise, the state will be forced to make cuts that are "cruel and counterproductive," Gov. Arnold Schwarzenegger wrote in a letter to them on Friday.

"I understand the need to pay for and restrain federal spending," wrote Schwarzenegger, who is contending with a $19.1 billion shortfall this year. "But cutting the only funding designed to help states maintain the very safety net programs Congress mandates us to preserve will have devastating consequences."

The missing Medicaid money is one reason why Schwarzenegger had to unveil a more austere budget last month. It includes eliminating 60% of the funding for the state's community mental health programs and shedding all childcare programs except for pre-school and afterschool. It would also get rid of CalWorks, the state's welfare-to-work program.

While states have funding through the end of the calendar year, it will be more difficult for them to cut their budgets in January if the Medicaid money doesn't materialize.

Washington Gov. Christine Gregoire wrote to her state's delegation that she would have to cut 6,000 jobs to make up for the $480 million in Medicaid funding it thought it would receive. If officials wait until 2011 to deal with the shortfall, it would have to double that number.

"Removing this source of economic stimulus at this critical stage of our fragile economic recovery presents significant risk," she wrote Monday.