Congress blasts Medicaid hole in states' budgets

NEW YORK (CNNMoney.com) -- Young children in Massachusetts will lose state-funded mental health services. Welfare recipients will see their employment and training programs slashed. And homeless families will lose nearly all their state assistance to move into more permanent housing.

Massachusetts lawmakers had to make these and other difficult cuts last week after discovering they had to slash another nearly $700 million out of the state budget. The Bay State had assumed Congress would pass $24 billion in additional Medicaid funding for states before their fiscal years start on July 1.

But that money hasn't materialized. In fact, Senate Majority Leader Harry Reid, D-Nev., effectively killed the bill last week after deficit-wary Republicans blocked it for a third time.

So officials in Massachusetts and 29 other states that counted on the funds to balance their budgets are left with the task of slashing services and payrolls once again.

"It's going to be another round of difficult decisions," said Corina Eckl, head of the fiscal program at the National Conference of State Legislatures. "Most states are looking at more spending cuts."

Until recently, the additional Medicaid funding seemed like a sure thing. Both the Senate and the House had passed a measure extending the stimulus-fueled payment through June 30, 2011. It was even included in President Obama's federal budget.

But it then fell victim to mounting concerns about the nation's massive deficit. So states will see the funding run out at the end of December, unless Congress acts.

State officials, who have already contended with $89 billion in budget gaps this year, don't have to scramble to plug the holes in the next few days. There are several paths they can pursue, experts said.

Most of the state legislatures that assumed the Medicaid funding would come through have already finished their work for the year and are not due back until early 2011. But this is too long to wait since it will be harder to make deep cuts in such a short period of time.

So those legislatures may have to be called back into special session over the summer or fall, a costly proposition for these cash-strapped states. Or, the governors may be forced to unilaterally slash funding for all state departments.

Some state officials are still hopeful that Congress will approve the additional funding. They are lobbying their representatives, trying to impress on them the consequences of not getting the funds.

But they can't hold off forever.

"The longer they wait, the deeper the cuts have to be," said Nicholas Johnson, director of the state fiscal project at the Center on Budget & Policy Priorities. "So they are not going to wait too long."

Washington Gov. Christine Gregoire has warned that if the Medicaid money doesn't come through, she'll have to cut 6,000 jobs to plug a $480 million budget gap. But if state officials wait until January, the figure would rise to 12,000.

If Congress doesn't act by the August recess, the governor will have to decide whether to make across-the-board cuts or to call the legislature back into special session, which costs $18,000 a day.

"I'm not giving up," Gregoire said last Thursday in a news conference. "But if we don't get the money, we've got problems."

About a half-dozen states, including New York, California and New Jersey, have yet to pass their budgets. So they are struggling to figure out how to cope with their new deficits.

In Pennsylvania, Gov. Edward Rendell and state lawmakers were close to a budget agreement before the Senate killed the bill. Now they have to determine how to close an $850 million budget gap that Rendell has said could cost 20,000 state and local government workers their jobs.

"The biggest impact you'd see right away is us laying off people," said Gary Tuma, Rendell's spokesman.

The governor would like to pass a budget that includes the Medicaid funds, but puts it into reserve accounts for specific programs that are frozen unless Congress acts, Tuma said.

Massachusetts lawmakers took a similar step last week when they slashed $687 million from the budget, roughly half in spending cuts, said Rep. Charles Murphy, House chair of the Ways & Means Committee.

The new fiscal plan outlines the amount of funding state agencies and programs would receive only if the Medicaid money if it comes through. For instance, lawmakers set aside $23 million for employment services for welfare recipients, but some 35% of that funding, or $8 million, is dependent on Congress approving the Medicaid match. So the program can only count on getting $15 million at this time.

"Thousands of state employees will be laid off," said Sen. Steven Panagiotakos, Senate chair of the Ways & Means Committee. "Tens of thousands of citizens who depend on state services will either lose those services or see them diminished. And any non-profit that depends on state subsidies will bear a large part of the burden, cutting into their core mission."