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State’s Strand of Budget Worry Beads Capped by Expanded Medicaid

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Call them the Secretary of Finance’s worry beads.  It is easy to imagine Aubrey Layne putting his fingers on one bead on the strand after another as he asks the economic powers outside his control to smile on Virginia and avert any recession (or even a hiccough) that would slice into the state’s revenue.

Layne, a CPA by trade who has served governors in both parties, puts his worry beads out for Virginians to see.  They are bullet points, not plastic beads, always listed at the end of his monthly economic reports to the General Assembly’s money committees.

Layne’s September comments to both committees did not exude much confidence that Virginia would meet its revenue projections for this fiscal year, which started July 1.  He expressed even more concern for the next fiscal year as 1) General Assembly candidates are competing to offer the most expensive promises and 2) state agencies are at decision time on their own budget requests for next cycle.

He had eight worry beads listed in the presentation, with Medicaid growth at the top of the list, followed by the mandatory recalculation of the state’s contribution to local schools.  A former transportation secretary, he listed transportation funding as a potential budget problem, along with the growing concerns that the Virginia Retirement System will not meet its investment projections and will need additional state infusions.

The state lottery is now creating worry, with reports that an explosion of unlicensed and untaxed gaming machines is deeply cutting into its monopoly on exploiting the wishful.  State legislators likely will shut that competition down or shake down that industry for a cut, but not before next year.

What is not a worry bead on his strand?  Further efforts to reform Virginia’s taxes in the wake of all the federal changes in 2018.   One-time state refund checks will hit mailboxes before the election, the minor policy changes made are now in effect for this tax year, and the prospect of additional action is fading.  The highly touted Taxpayer Relief Fund will hold about $25 million, a revenue rounding error.

The state’s real challenge, which Layne did not ignore, is that Virginia is not exceeding (and not always meeting) national economic growth trends.  In 2019, Virginia missed its projections for employment, personal income, and wage growth. To meet this year’s budget, state revenue needs to grow more than 4 percent, with “a lot of uncertainty in our models going forward.”  So many 2021 spending elements are growing by 5 percent or more “we’re going to need an extraordinary event to make that difference up.”

The outside consulting firm the state uses for forecasting does not see a national gross domestic product growth above 2 percent in 2020.  Growth of less than 2 percent is not a recession, but it will not remove any of the beads on Layne’s strand.

The possibility that Virginia’s own tax policy might be impeding economic growth and thus state tax collections is not a conversation underway anywhere.  The string of worry beads gets all the attention.

The biggest worry bead is Medicaid.  Layne was followed at the House Appropriations Committee by Karen Kimsey, the state’s new director of the Department of Medical Assistance Services. She outlined the many services used by the 314,000 recipients added by expansion. She reported the state spent just under $4.8 billion in state tax funds on Medicaid services in FY 2019, supplemented by another $204 million in spending from the new state taxes on hospital revenues.   (Federal funds brought the total to more than $11 billion.)

Of $204 million from the hospital assessments, $60 million paid for the state’s share of expanding coverage to another 314,000 recipients by the end of the fiscal year.  About $144 million went to increasing the payment rate to many of the medical providers.  Neither amount covered an entire 12-month period, however, and the projected full-year annual cost of those initiatives going forward was not mentioned in the presentations.

With the legislative election a few weeks off, nobody seems to want to fully explore the cost of those two 2018 legislative decisions – coverage expansion and higher reimbursement payments.  There was also a meeting last week of a joint House and Senate subcommittee on health care matters, which the General Assembly had directed to set a formal target for Medicaid spending in the 2020-22 period.  It did not do so.  The meeting lacked a quorum.  The September 15 deadline for action passed.

In the staff presentation to that subcommittee, it was stated at the outset that neither the expanded pool of recipients nor the higher reimbursement rates would be part of the growth target.  The staff looked at the previous forecast, before those changes, and projected future growth in the base program of 5.8 percent next year and 6.4 percent in 2022.

The addition of more than 300,000 recipients by expansion grew the Medicaid population by 30 percent (to 1.4 million Virginians). How can you ignore that in making these projections? But it was disregarded, it was said, because those two expensive policy decisions are having their state share covered by the new hospital assessments.  Within the walls of the Pocahontas Building and other state offices, those hospital assessments seem magically invisible money, not really counted as and certainly not looked upon as taxes ultimately paid by Virginians.  While Director Kimsey provided end of year figures for 2019, no projections were reported for those assessments in the budget year now underway.  Back in March the 2020 projections were more $700 million (but you had to ask to find that).  This week  nobody mentioned them.

The routine revenue reports provided by Secretary Layne do not have a line item marked “Medicaid Hospital Assessments” mixed in with the other taxes and fees tracked. What Medicaid really needs is an entire page tracking Medicaid income and outgo, both the state and federal share, with expansion included.  Such break outs are provided for transportation funds and for the Lottery.  Medicaid is now the most important and aggressive budget driver, and the budget draft released in December will demonstrate that.   Between now and December keep working those beads.

Stephen D. Haner is Senior Fellow for State and Local Tax Policy for the Thomas Jefferson Institute for Public Policy.

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