It’s not short-term federal budget issues and credit rating changes that should worry muniland; these issues will require adjustments and creative solutions, but they are transitory. The real issue for states is how their budgets will sustain the increasing load of Medicaid, the federal government’s healthcare program for the poor and those who require nursing home care. This is the real elephant in the room.
Today, multiple media outlets ran stories about the oncoming terror for states from a potential downgrade of the credit rating of the United States. For example, the New York Times ran an article with the headline “Debt Ceiling Uncertainty Puts States at Risk” on their homepage. The story details a litany of possible scenarios ranging from the minor, such as Maryland having to delay a scheduled bond sale for a few days, to the more substantial worries, such as the federal government stopping payments like Social Security and state and local tax revenues being reduced.
These are transitory problems, which, like the problems that happened when the state government of Minnesota shut down for three weeks, will cause inconveniences. Ultimately, the system will find work-arounds.
Regarding the larger problem, take a look at the chart above, which was compiled by the National Association of State Budget Officers (NASBO). Thankfully, the work of NASBO is free of the hyperbole we often hear from politicians. State budget officers and treasurers focus on making sure that there are enough funds to cover commitments and that they end the year with balanced books. These are tough jobs, especially in times of declining resources.
The NASBO chart shows how states have adjusted spending from fiscal year 2011 (just ended on June 30) to the current fiscal year (2012). It says it all. In addition the new federal healthcare care requires an expansion of Medicaid coverage in 2014. The elephant in the room is growing bigger.