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US states braced for cuts to federal contributions
By Christopher Swann in Washington Published: February 1 2005 20:37 | Last updated: February 1 2005 20:37
George W. Bush's address tonight comes ahead of what will be the toughest budget of his presidency so far, with cuts expected in a wide range of domestic programmes.
America's state governors, who are still dusting themselves off after the sharpest downturn in their finances since the second world war, are worried that the axe will fall particularly hard on federal contributions to the states.
The bursting of the internet bubble in 2000 led to a slump in revenues at a time when the cost of health benefits were rising sharply.
Although the immediate crisis is over, many states were forced to dip into trusts and pension funds to make ends meet and would now like to replenish these.
Chief among their worries, however, is the rising cost of Medicaid, which provides healthcare to more than 50m low-income people, and the expectation that the federal government will provide less help in funding the scheme.
Medicaid already represents about a fifth of state budgets and the cost is growing about 10 per cent a year. The financial burden of Medicaid is split, with the federal government matching between 50 and 77 per cent of the costs, depending on the wealth of each state. Governors are concerned that Mr Bush may decide to put a cap on the growth rate of federal contributions to Medicaid, leaving the states to meet the extra cost. The concern of the states is partly due to the Bush administration's pledge to halve the $412bn (?316bn, ?219bn) deficit within four years with domestic discretionary spending likely to bear the brunt of cuts.
The Medicare drug benefit, which was passed at the end of 2003 and comes into force next January, has also created a headache for the states. The healthcare scheme for the elderly is funded by the federal government but because many are both poor and old there is an overlap between the two schemes, and the states are affected too.
Mr Bush's Medicare Modernisation Act, which introduced prescription drug benefits, put in place measures to contain the extra costs to the states. However, many governors believe these are insufficient.
?Essentially the states are being asked to pay for a portion of a federal scheme and they do not have any way of controlling the costs,? said Donna Folkemer, a programme director at the National Conference of State Legislatures.
In a recent interview with the Financial Times, Kathleen Blanco, governor of Louisiana, put the problem even more starkly. ?They are creating a dependency but . . . if you put a new programme together it should be with new money,? she said. ?The Republican governors are just as angry about this as the Democrats. It is like cutting our hands off.?
In addition, states are concerned that the federal government may force all state employees to contribute to Social Security removing the option of just paying into state pensions. This would add to financial pressures on state pension schemes, says Ray Scheppach, executive director of the National Governors Association, since the states still have to meet their pension obligations with smaller inflows.
The federal government also provides the states with a large range of discretionary grants worth about $150bn a year and contributes to state programmes on everything from highways and economic development to education and health.
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