State Budget Actions in Response to COVID-19 and the Impact on State Health Programs

Sally Mabon, Marissa Korn and Heather Howard, State Health and Value Strategies

The COVID-19 public health crisis has triggered an economic crisis: roughly one out of every five workers claimed unemployment insurance for the week ending July 4. As a result of the twin crises, states are experiencing severe declines in tax revenue, with projections indicating between 5 and 15 percent reductions in revenue for fiscal year (FY) 2020 and reductions of 10 to 25 percent for FY 2021. These dramatic declines in revenue come at the same time that states are facing significant expenditures related to the public health crisis.

To date, the federal government has provided fiscal relief through several stimulus bills, including a temporary 6.2 percentage point increase in the regular Federal Medical Assistance Percentage (FMAP) in the Families First Coronavirus Response Act (FFCRA). The House of Representatives passed additional relief, the Health and Economic Recovery Omnibus Emergency Solutions (Heroes) Act, on May 15, which included an additional increase to the FMAP, but the Senate has not acted on relief legislation. With federal unemployment benefits expiring at the end of July, Congress is currently negotiating a new stimulus package, and it is not yet clear what form of financial relief for states will be included in this next round of stimulus legislation.

Given that health care programs make up a significant portion of state budgets, those programs are likely to be in the crosshairs as states meet their constitutional and statutory obligations to balance their budgets. This is particularly true for Medicaid, which accounts for 19.7 percent of state general fund spending, second only to elementary and secondary education. Moreover, the Medicaid program is countercyclical: in economic downturns, spending on the program increases as incomes fall and more people become eligible for the safety net program.

This expert perspective provides a snapshot of how states are navigating the fiscal challenges of the COVID-19 pandemic in the context of balanced budget requirements, given declining revenues and rising spending demands, with a specific focus on the implications for health programs. The strategies that states employ to address the fiscal fallout of COVID-19, outlined below, will have significant and long-lasting implications for critical health care and safety net programs.

States Address the Immediate Crisis: Closing the Gap in Fiscal Year 2020 

Faced with forecasts of significant deficits for FY 2020, which for most states ended June 30, 2020, several states took steps to cut expenditures before the end of the fiscal year. Approaches varied among states, depending on the size of the projected deficit, with some imposing hiring freezes while others reduced spending on programs. Implications for health care programs varied, with some states implementing across the board cuts, while other states opted to hold health care harmless.

Addressing Shortfalls By Cutting Spending 

Indiana imposed cost saving measures in April, including hiring freezes (with the exception of COVID-19 related hires), while in Missouri, Governor Mike Parson made four rounds of reductions to spending beginning the first of April, totaling $431 million.

Several states took actions to close FY 2020 budget deficits that had implications for health care programs. In Ohio, Governor DeWine announced at the beginning of May that the state was forecasting fiscal year 2020 revenues to be down by $775 million or more and as a result would be making an equivalent reduction in General Fund expenses, including a reduction of $210 million to the state’s Medicaid program.

Governor Jared Polis of Colorado issued an Executive Order specifying spending reductions totaling $228.7 million. Because Colorado is a fee-for-service state, included in the Executive Order was $183 million allocated to the state’s Medicaid program that went unspent as a result of low utilization of health care during the pandemic. Michigan lawmakers closed a $2.2 billion budget gap by supplanting state general funds with federal coronavirus aid, freeing up $195 million in general funds that the state had appropriated for its share of Medicaid expenses.

Passing Supplemental or Temporary Budgets

Washington, which experienced the first major outbreak of COVID-19 in the U.S., passed a supplemental budget at the onset of the outbreak. To reduce spending, Governor Jay Inslee used his line item veto to cut a total of $235 million in funding from the supplemental budget for “less-urgent” increases to programs and services

New Jersey was the only state that elected to extend its fiscal year. Governor Murphy, Senate President Sweeney, and Assembly Speaker Coughlin announced on April 1 that the state was postponing the end of fiscal year 2020 from June 30 to September 30, and the state enacted a three month budget through September 30.

States Prepare for a Recession 

States are confronting significant uncertainty about the state of the economy and the pandemic as they begin FY 2021, which for almost all states began July 1, 2020. Faced with projections of state budget shortfalls exceeding 20 percent for FY 2021, states are employing a range of strategies to prepare for the uncertainty they face this fiscal year and the likelihood of double-digit deficits. States are by necessity looking to cut spending on health care given that it comprises a significant share of state spending.

Building in Flexibilities

New York, which began the 2021 fiscal year on April 1, passed a budget in late March that enacted a new budget modification process to adjust for revenue shortfalls or potential federal assistance. Prior to COVID-19, the state was projecting a budget deficit of $7 billion, which was later revised to $15 billion. The new budget modification requires the Division of the Budget (DOB) to notify the legislature of a one percent revenue shortfall or overspending and provides authority to DOB to make cuts if the legislature does not adopt its own plan for addressing the shortfall within 10 days.

Several states passed short-term spending for FY 2021 to allow for updates to their revenue forecasts, with an eye to incorporating additional federal relief to offset cuts. Vermont passed a budget for the first quarter of the 2021 fiscal year, with the intention to develop the full fiscal year budget in August when the state will have refined its revenue projections. Massachusetts, Pennsylvania, Rhode Island and South Carolina passed continuing resolutions or temporary budgets for the first several months of FY 2021.

Planning for Significant Reductions 

Governor Kate Brown of Oregon announced on May 11 that she had asked agencies to develop plans for a 17 percent reduction in FY 2021. Anticipating severe reductions in revenue collections, the state of Washington’s Office of Financial Management directed agencies to identify options to reduce fiscal year 2021 spending by 15 percent.

In some states, the pandemic has only accelerated budget shortfalls. Before the pandemic, Wyoming was grappling with a projected deficit as its key revenue source of mineral development had declined. As one of the states projecting a very significant decline in revenues (a nearly one billion dollar shortfall for the general fund), the Governor announced deep budget cuts for the current two-year budget cycle, including a nine percent cut to total spending for the state’s Department of Health. The budget cuts also require state employee layoffs and human resources personnel consolidation across agencies.

Drawing from Rainy Day Funds

Pulling from discretionary funds or drawing dollars from rainy day funds are additional strategies states are employing to address significant budget shortfalls. For instance, Colorado shored up their budget by redirecting funds from marijuana taxes and tobacco settlement funds.

Furloughing Staff

Several states have also instituted employee furloughs. The governor of Washington directed agencies to implement furloughs, while the governor of New Jersey signed legislation that will facilitate the furloughing of public workers in lieu of layoffs.  Additionally, Nevada has implementedfurloughs and hiring freezes to help address the state’s revenue shortfall. The Governor of Wyoming also implemented mandatory furlough days for executive branch employees on the higher end of the pay scale.

States Grapple with Cuts to Health Care 

As states look to reduce expenditures, and in the absence of additional federal support, they may find they have little choice but to make cuts to the Medicaid program, given that it comprises a significant portion of state budgets.

Looking to Health Care for Savings

Because of the maintenance of effort (MOE) requirement in FFCRA, states cannot make changes to eligibility and premiums for Medicaid beneficiaries and instead may turn to cutting provider rates as a cost-saving mechanism. The Governor of Florida, for example, vetoed provider rate increases for those who care for people with disabilities, while Colorado enacted a reduction in rates paid to providers who care for a subset of the state’s elderly. While reducing  reimbursement rates for Medicaid providers could result in state savings, it may also exacerbate health inequities by shrinking the pool of providers who accept Medicaid and curtailing access to the critical safety net program.

Another opportunity for savings is increasing co-pays for Medicaid beneficiaries: Colorado approved an increase in member co-pays to the federal maximum permitted, which yields savings of $2.14 million to the General Fund in FY 2021 and FY 2022.

States may also look to include changes to managed care capitation rates or finding other savings within their managed care contracts, such as recouping funds under Medical Loss Ratio (MLR) standards. Hawaii, which faces an estimated 24 percent decline in revenues for FY 2021, announced that it was rescinding newly-awarded contracts to managed care organizations in light of the public health crisis and an increase in enrollment. As more states are required to impose reductions, other states may defer re-procurements.

Reversing Proposed Coverage Expansions  

Aligning with the budget recommendation of Tennessee Governor Bill Lee, state lawmakers passed a revised spending plan for FY 2021 in late June eliminating the full $6.6 million in funding for a pilot program that would have expanded postpartum Medicaid coverage for low-income mothers from two months to a full year after giving birth.

Citing budget concerns, the Governor of Oklahoma pulled plans to expand Medicaid to hundreds of thousands of low-income residents, vetoing a bill that would have funded the state’s share of the expansion. Despite these developments, Oklahomans later voted through a ballot measure on June 30 to expand Medicaid without block grants or work requirements.

Cuts to Behavioral Health 

A number of states have also been forced to slash funding for behavioral health services. Colorado has cut $26 million in funds allocated for behavioral health for FY 2021, while Florida, Georgia, and Utah have cut funding for substance use disorder programs.

Behavioral and mental health advocates have expressed concern that these cuts may have long-term repercussions, particularly as the pandemic has only increased the need for behavioral health services.

Working to Shield Health Care Programs From Cuts

Following the conclusion of a special session of the legislature, Governor Steve Sisolak of Nevada signed the FY 2021 budget which restored funding to the Department of Health and Human Services which was facing a cut of $233 million. Among the funding restored was $49 million for the Medicaid program and $7.4 million for mental health services. Nonetheless, the DHHS budget was subject to the largest cut, a reduction of nearly $173 million.

Texas Governor Gregg Abbott directed state agencies and higher education institutions to reduce spending by five percent. While the directive excluded CHIP and Medicaid eligibility and benefits from such spending reductions, proposed cuts from the Texas Health and Human Services Commission do include spending reductions for women’s health, child abuse protection, and services for adults and children with disabilities.

In May, Governor Gavin Newsom of California introduced a revised budget with proposed cuts to education and health care to address the economic downturn resulting from COVID-19; however, in late June, the Governor and California legislative leaders agreed to a budget that avoided the most severe cuts to health coverage and benefits. The budget did, however, eliminate funding for an expansion of Medicaid to undocumented Californians aged 65 and older.

Even in light of budget challenges, some states are working to preserve funding for health care services. Virginia identified emergency support for providers, redirecting dollars in the FY2020 budget to fund a 29 percent rate increase to primary care doctors, pediatricians, and other providers of general health services to Medicaid members through June 30, 2020.

States Look to the Future: Urging Federal Support and Convening Special Sessions

Faced with potential budget shortfalls totaling $290 billion in FY 2021, states are calling for additional aid from the federal government and taking action to address looming deficits by convening special legislative sessions.

Urging Federal Action 

While the federal government intervened to provide fiscal relief in the form of a temporary 6.2 percentage point increase in the FMAP in FFCRA, states have requested an additional increase to support the surge in enrollment in the Medicaid program. As mentioned above, while the Heroes Act includes an additional increase in the FMAP, it is not yet clear from the debate in Congress whether an increase will be included in the next stimulus bill.

Governor J.B. Pritzker of Illinois, in the press release announcing he had signed the FY 2021 budget passed by the legislature,underscored that he and other governors were urging Congress to pass additional fiscal relief for state and local governments. Illinois is projecting a deficit in FY 2021 of $4.23 billion. While the FY 2021 budget passed on June 10 includes reductions totaling $340 million, it also authorizes the state to borrow from the Federal Reserve’s new Municipal Liquidity Facility with possibly a plan to repay the borrowed funds with future federal aid.

Governor Kate Brown of Oregon in her press release announcing the state’s FY 2021 budget stated that whether the state would need to follow through on a 17 percent reduction would depend on whether the federal government provides additional aid to states. She emphasized in the press release that she will continue to work with Oregon’s congressional delegation to advocate for additional federal funds.

Calling Special Legislative Sessions 

States have convened special legislative sessions to appropriate funding for COVID-19 relief and address revenue shortfalls. In 2019, 16 states with biennial budget cycles passed budgets for FY 2021, and those states, if they have not already announced plans to re-examine their budgets, will likely face the need to reconvene their legislature to address projected deficits.

For example, Oregon, which operates on a biennial budget, passed a two-year budget in 2019. After highlighting in early May that the state was facing far lower than projected revenues and would likely need to implement budget cuts, Governor Kate Brown announced on June 16 that she would call a special session of the legislature to reconvene within the first two weeks of August. Governor Ralph Northam of Virginia also called for the state legislature to reconvene for a special session on August 18 to address the state budget.

The New Mexico Legislature convened a special session to revise the state’s budget in light of an estimated $2 billion budget gap resulting from a decline in state revenues. New Mexico Governor Michelle Lujan Grisham authorized an amended state budget on June 30, restoring funding for certain priorities by vetoing more than $30 million in cuts. On June 18, the Governor of Utah called the state legislature into a fifth special session, later signing legislation that balanced the state budget and spared education and social services from the most severe cuts.

Looking Ahead

States are only beginning to grapple with the budgetary impacts of COVID-19 and the ensuing recession, which could continue even after the public health crisis abates. Absent additional federal relief, states will have difficult choices to make as they seek to balance their budgets in the face of rising spending demands and falling tax revenues. This will mean unprecedented pressures on health programs, especially Medicaid, at the very time these programs are needed more than ever.