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How New Federal Revenue Affects State Spending Trends

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Author: massbudget

As part of our ongoing analysis of the state budget, we at MassBudget recently released a factsheet on how implementation of the Affordable Care Act affects the state’s fiscal condition (available HERE). Most significantly, the law provides substantial new federal revenue to the state. It actually provides more in federal revenue than the net state costs of implementing provisions of that law. This is good for the state’s overall fiscal health, but complicates any analysis of state budget trends.

As has frequently been noted, the overall state budget was growing by more than 6% between 2014 and 2015, before budget cuts in February. That appears to be – and in most circumstances would be – an unsustainable rate of growth. New Federal Revenue Affects State Spending Trends finds, however, that overall state own source spending grew only 4%–about the same rate as our overall economy. The difference between this 4% figure and the commonly cited figures over 6% was new federal money that flowed through our state budget to provide health care coverage for people covered by the Affordable Care Act. This was a one-time increase to a new level of federal reimbursement (which will largely be sustained), that does not affect future growth rate trends and did not reflect state own source spending this year.

While overall spending for MassHealth and health reform grew 8.6% from 2014 to 2015, net state spending for those programs grew 2.3%. Health care cost growth certainly remains a long term challenge, but the one-time increase in federal revenue that fueled this year’s spending increase should not be seen as constituting a trend. And the administration’s commitment to a thorough redetermination process should help to hold down cost growth next year.

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