LEGISLATIVE BULLETIN: North Carolina Desperately Needs FMAP Extension

EXECUTIVE SUMMARY:

•    Federal fiscal relief to North Carolina prevented the loss of many private- and public-sector jobs. It helped reduce the severity of cuts in health care, education, transportation and other services that are key to our future economic growth.
•    Heading into this year’s legislative session, North Carolina lawmakers faced a gap between the amount of revenue the existing tax system could generate and the funding levels required to maintain the current quality and quantity of state services reached $1.2 billion, or 6% percent of the state budget. 
•    Without the FMAP extension, North Carolina faces a loss of $500 million in revenue, which if addressed through cuts along would represent a decline in funding to state services of 17.6 percent since the start of the recession.
•    Nationally, overall efforts to close state budget gaps this year could cost the economy up to 900,000 public and private sector jobs next year without more federal help, according to standard economic measures.

North Carolina Desperately Needs FMAP Extension
State fiscal relief is key to economic recovery

By Alexandra Forter Sirota
Policy Analyst, Budget & Tax Center
June 8, 2010

INTRODUCTION
Before the Memorial Day holiday, the U.S. House of Representatives passed a jobs bill that failed to include a 6-month extension to increase federal responsibility for Medicaid costs (referred to as FMAP which stands for Federal Medical Assistance Percentage).  Without this fiscal relief to states, North Carolina in particular faces a loss of $500 million.  A loss of these federal dollars, at a key point in the early stages of economic recovery, will have a significant impact on the availability of essential public services and the preservation and creation of public- and private-sector jobs.

WHY EXTENDING FMAP IS VITAL FOR NORTH CAROLINA
The House and Senate already passed the FMAP extension in earlier bills.  Accordingly, North Carolina, along with 29 other states, built its 2011 budget with the reasonable expectation that additional federal fiscal relief was on the way.   But now Congress might pull the rug out from under states by failing to approve that help. 

If Congress does not extend the fiscal relief, North Carolina policymakers will be called upon to take further action to balance the budget.  The tentative budgets already approved by the NC House and Senate already contain an additional billion dollars in state budget cuts, on top of the more than $2 billion in reductions made last year. Reducing the budget by an additional $500 million would devastate North Carolina’s working families, the broader economic recovery of our state and its long-term fiscal stability. 

The FMAP extension provides essential state fiscal relief at a time when state budgets remain in crisis due to depleted tax revenues and increased demand for services.  Unemployment remains high and the low levels of job creation (7,500 in April 2010) mean that at this rate, it could take five years for North Carolina to make up for the jobs lost since the start of the recession and the growing workforce.

As a result of the significant level of job loss in the state, in both 2008 and 2009, the number of North Carolinians eligible for Medicaid increased by more than 100,000.  The federal requirement that states provide Medicaid to all those who are eligible is difficult for states to sustain in light of this level of growth and the requirement that states balance their budgets.  The budgetary pressures on states of this particular aspect of rising Medicaid costs merit an increase in federal responsibility for the cost. 

Opposition to extending the FMAP fiscal relief to the states because it will add to the deficit is misguided. The most important thing we can do right now to avoid making our long-term deficit problem worse is to get the economy back on its feet.  Temporary emergency spending in the short-term is not a significant driver of medium and long-term deficits.  Instead, longer-term deficits are largely a result of rapidly rising health care costs (which drives up spending for Medicare and Medicaid) and inadequate revenues – partly the result of the federal 2001-2003 tax cuts that significantly add to future deficits.

According to Congressional Budget Office, temporary FMAP assistance, similar to UI benefits, is one of the most effective measures  to create jobs and increase demand in the economy and therefore should not be paid for in the short-run.  The Commerce Department recently reported that the real Gross Domestic Product (GDP) grew by 3.0% in the first quarter of 2010.  If it hadn’t been for the contraction of state and local government spending, the economy would have grown at 3.5% in the first quarter instead of 3.0% – a $71.5 billion difference – and more jobs would have been created.  One of the most important drags on growth comes from the dire fiscal situation facing states. 

CONCLUSION
Extending the FMAP temporarily will provide states much-needed fiscal relief to allow for the continued economic growth necessary to create jobs and improve the long-term fiscal outlook for the state.  Without those funds, North Carolina policymakers will be forced to make deeper spending reductions or enact additional tax increases. The ideal solution is for the federal government to continue to pay for a greater share of Medicaid costs during the recession.
 

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