Lose some, win some: the new federal spending plan contains bad news for states. But there's good news, too, especially in the Medicaid law.

It took Congress until Feb. 1 to finally pass a spending bill. And it is--in some ways-bad news for the states. Now they must figure out how to absorb some $10 billion over the next five years in child support enforcement, child welfare, child care and reductions and cost shifts in Temporary Assistance for Needy Families.

The news could have been worse. State legislators effectively stifled other cost shift targets. These efforts erased a $1 billion proposed change in the Food Stamps program, overcame $3.7 billion of a House-approved $5.2 billion child support enforcement reduction package and curbed potentially draconian reductions to the Medicaid program.

The spending plan passed by the narrowest of votes just before the House and Senate adjourned in December and then was re-passed at the beginning of the new session because of a technicality.

"If you care about the integrity of state budgets," says Illinois Senator Steve Rauschenberger, "then you have to view last December as the 'bleak mid-winter' of fiscal federalism."

North Dakota Representative Ken Svedjan puts it this way. "Like most state legislators, I personally feel strongly that the federal budget deficit has to be eliminated. It's achieving that goal so disproportionately at the expense of the states that I find so disturbing."

Heading the list of disturbing decisions is renewal of the landmark 1996 welfare reform law. The Temporary Assistance for Needy Families law was due to expire in October 2002, but has been kept alive for three years through a series of short-term extensions. "We knew we would be in deep trouble if TANF reauthorization got included in reconciliation," says Kansas Representative Melvin Neufeld, a member of NCSL's task force on welfare reform.

When they negotiated the 1996 law, state legislators and governors agreed to a fundamental trade. They gave up the certainty and restrictions of an entitlement program--the old AFDC law--for the policy flexibility of a block grant.

"The new law abrogates the spirit and letter of the historic 1996 agreement, " says Representative Neufeld. "I would argue that the underlying philosophy of the original law has been altered. Gone is deference to state innovation and creativity. Back are the federal decision-making handcuffs that characterized the old AFDC law."

A LOSS WITH TANF

Although the funding levels for the core TANF block grant remain unchanged, money for some related programs, such as high performance and out-of-wedlock birth reductions, is gone. The new law is likely to leave most states facing financial penalties because of changes to the rules regarding work participation rates. It gives the secretary of Health and Human Services much greater discretion in defining key requirements states must meet. Although the new law increases spending for child care by $1 billion, the Congressional Budget Office estimates that states need as much as $7.3 billion more to meet the changes in the TANF program.

The budget reconciliation measure shifts $1.8 billion to states in child support enforcement and child welfare programs. Ironically, the non-partisan Congressional Budget Office estimates that the $1.5 billion child support cost shifts, which largely come from changes in what states can count as matching funds, will have the effect of reducing child support collections by $3 billion. The $300 million in child welfare cost shifts stem from new restrictions on foster care administrative payments and from a proposed statutory change regarding foster care eligibility.

A WIN WITH MEDICAID

States fared much better with Medicaid provisions in the spending bill. Original calls Carl Tubbesing is NCSL's deputy director. for cuts to this largest of state-federal entitlement programs totaled $15 billion. In the end, Medicaid nets the federal government $4.8 billion in savings over five years. Substantive changes will give state lawmakers more flexibility in structuring benefit packages and determining cost-sharing amounts for beneficiaries, potentially tempering Medicaid's strains on state budgets. The measure also includes $2 billion to reimburse states for Katrina-related emergency assistance, a variety of new demonstration grants and additional SCHIP funding.

A provision in the new budget that helps households switch from analog to digital television services will also help states. The spending bill allocates $2.8 billion to emergency management programs and improving public safety communications. There's money to improve how emergency agencies communicate with each other and funds to upgrade 911. Small rural airports will benefit with money to ensure commercial air service.

OTHER COST SHIFTS

Although the reconciliation legislation will strain state budgets over the next five years, Congress' year-end wrap-up also included passage of two important FY 2006 appropriations bills, which have an even more immediate negative effect on federal funds that states can expect. An across-the-board spending cut reduces funding for state programs by nearly $2 billion for the current fiscal year. States will absorb inflation's effect on spending, further reducing available money by $5.8 billion.

So why some cost shifts to states? The answers fall into two categories, one related to the current political environment, the other specific to the reconciliation process. President Bush and many members of Congress are committed to cut the federal deficit in half by 2009. The president is banking on economic growth--stimulated in part by tax cuts--and spending reductions. Increased funding for defense, homeland security and hurricane relief in 2005 meant cuts in domestic programs, most of which have direct or indirect repercussions on state budgets.

"Even if we had wanted to change the federal focus--and many state legislators don't, by the way--we couldn't have," says Illinois Senator Rauschenberger. "So, we were plunged into a shark tank, with state-federal programs pitted against state-federal programs. If we managed somehow to spare Medicaid, then TANF or child care or child support enforcement were going to get whacked."

The budget reconciliation process, an arcane and unfathomable device used only by the U.S. Congress, has its own set of rules--rules that limit the influence of rank-and-file members and of outside groups. Over the past several years state legislators have had most of their success in the U.S. Senate, primarily because its 60-vote cloture rule provides leverage to members sympathetic to state positions. Reconciliation bills are not subject to filibusters, so only 51 votes were needed to pass the legislation, significantly weakening the leverage state supporters have to influence various elements of the final product.

Texas Senator Leticia Van de Putte has an optimistic take on these results. "Successful sports teams learn from their losses, especially when they are close," she says. "State legislators intend to look at the lessons we've learned in these recent disappointments and figure out how to make the state-federal partnership truly a constructive and collaborative partnership."

FEDS BEND A BIT WITH MEDICAID CHANGES

Medicaid has been eating up an ever-increasing portion of state budgets. States have struggled to slow Medicaid growth by independently seeking permission to make changes in their programs through an unwieldy and time-consuming waiver process.

Now, through the federal budget reconciliation package recently approved, Congress bends a bit and offers opportunities for states to reform their programs. It addresses many of the issues identified by NCSL's Medicaid Task Force.

The spending bill increases flexibility in cost-sharing requirements and benefit design. It offers long-term care partnerships and opportunities for states to expand home- and community-based services to disabled people and seniors. It begins to reform the Medicaid prescription drug program.

The 774-page reconciliation bill also includes extra money for states that adopt innovative methods to improve effectiveness and efficiency. A new demonstration pilot will permit 10 states to set up self-directed, pre-funded medical care accounts for certain beneficiaries. Money is also available to cover costs for states operating qualified high-risk pools and to provide additional help to states that have exhausted their State Children's Health Insurance Program (SCHIP) allotments. There is a major new state option to provide assistance to families with disabled children, and incentives for states to aggressively go after Medicaid fraud.

In addition, the spending bill gives states handling health care needs of Katrina victims and evacuees $2 billion to cover expenses.

Some things in the act will cost states money. A number of states will confront new limitations on provider taxes applied to Medicaid managed care organizations. Changes in targeted case management programs will shift costs to other state agencies. A new requirement to document citizenship for all Medicaid applicants is expected to be administratively burdensome and difficult for certain applicants.

Congress is giving states many opportunities to start real reform, but it also leaves much to be done. For more information on the health provisions of the budget reconciliation law see a more detailed summary on the NCSL Web site.

--Joy Johnson Wilson, NCSL