Looming State Finance Shortfall Could Undermine Health Care Reform

Governor Schwarzenegger’s updated health care reform proposal sports a $12 billion annual price tag. To his credit, the Governor has identified revenue sources for his program. If legislation emerges from the current special session many of these funding mechanisms will be put before voters for approval through a November 2008 initiative. Of course, if that compromise includes the greater premium subsidies and the expanded eligibility for those subsidies, as Democrats are demanding, the cost of health care reform will be significantly higher.

The problem is the state is cruising toward a financial future which is looking increasingly dismal. And that spells trouble for health care reform. 

Judy Lin reports in today’s Sacramento Bee that current year revenues are already below what was projected in the state budget — yes, the budget passed just six weeks ago. During July and August state revenue from personal, corporate and sales taxes were $300 million below what was forecast. Ms. Lin reports state officials are already considering some of the revenue sources in the 2007-08 budget to be shaky. ,” she quotes Finance Director Mike Genest as acknowledging.

State finance officials were already predicting a $6.1 billion gap in next year’s budget.  Now they are recognizing this estimate is low, very low. “It’s fair to say the revenue situation is not going to be as good as we had hoped. It’s likely the $6.1 billion (projected operating deficit will be higher,” according to Finance Director Mike Genest. By higher he means a lot higher: something like $8.5 billion. Keep in mind, this summer’s budget debacle centered around a little more than $700 million in spending. Multiply the problem by 12 and you can estimate the kind of political maelstrom we’re heading for.

Into this storm marches health care reform. Every plan out there will increase state spending on heath care. Most admit this although some advocates of a single payer system believe eliminating the insurance industry will save enough to pay for the medical care they promise to all residents. However, doing away with insurance companies, agents and the like will take time and in the meantime there will be bills to pay. And ironically, eliminating the industry will cost the state substantial revenue in lost corporate, premium and individual taxes (I don’t know how much, but I bet there’s a lot of zeros involved). In addition, nuking the industry is pretty much a one time event. Once the industry is gone, those savings, if any, are gone. As the underlying cost of delivering health care increases the state will need to find new revenue sources.

So the budget battle of 2007 was just a skirmish involving sticks and stones. Next time around we’re likely to witness a nuclear conflict. More evidence: state agencies have already been told any new spending they propose for next year have to be offset by cuts to existing spending.

State budgets are all about setting priorities. Some of those priorities are set in stone. For example, certain funds are earmarked for education and can’t be diverted to health care or fixing aging infrastructure. One might think that something as critical as health care will wind up near the top of the list for lawmakers, making its funding secure. Unfortunately, it doesn’t work that way.

Consider: approximately three-quarters of the $700 million in cuts needed to close a budget deal this summer came from the Health and Human Services Department. Among the items cut : $55 million for a program to help homeless adults with serious mental illnesses; and $65 million for programs to get children already eligible for Healthy Families to enroll in the program. However, a tax deduction for new yacht sales survived — provided the new owner keeps the boat outside of California for a few months. There’s simply no way of predicting where cuts will fall, but no discretionary program is safe.

None of this means health care reform shouldn’t move forward. It should. But it does mean lawmakers have to face — and address — thee reality that making it work will be far more difficult than is currently being discussed.

One thought on “Looming State Finance Shortfall Could Undermine Health Care Reform

  1. Couldn’t agree with you more Alan.

    I was at the Claremont Event at Santana Row in San Jose ealier this week. Your presentation was very educational. Thank you for taking the time to meet with us.

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