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State Governments Face Budget Crisis

46 states have cut services to reduce their deficit

Similar refrains echo in statehouses coast to coast. How did we get here?

To understand that, here's a quick course in state budgeting: Almost every state requires the governor to submit, and the legislature to pass, a balanced budget. Because most states can't run a deficit the way the federal government does, they must reduce spending, raise taxes or use reserves, often called rainy-day funds.

The largest share of state revenue — 43 percent — comes from general funds, such as state income and sales taxes. Another 30 percent comes from the federal government. Other state funds, such as a gas tax dedicated to a highway trust fund, make up about 26 percent, and bonds about 2 percent of revenues, according to the National Association of State Budget Officers (NASBO).

After the recession hit in December 2007, income and sales tax revenues tanked, while the demand for services — from the Children's Health Insurance Program to unemployment benefits — soared. State budgets actually grew, thanks to $151 billion from the American Recovery and Reinvestment Act of 2009, commonly known as the stimulus act, which provided enhanced funding for Medicaid and other programs.

Medicaid covers almost one in 20 Americans. Best known as the health insurance program for the poor, Medicaid is also the nation's biggest payer of long-term care, covering 40 percent of the nearly $180 billion-a-year cost.

AARP has offices in every state monitoring budget deliberations. JoAnn Lamphere, AARP's director of state government relations for health and long-term care, says most of the deepest cuts proposed for Medicaid last year were avoided by infusions of federal stimulus money, most of which runs out July 1.

"AARP members should pay attention to the very serious budget decisions taking place in their states and be careful to avoid a knee-jerk judgment of what's good and bad," Lamphere says. "They would be wise to think of the value of public programs in their lives — for example, Social Security, Medicare and Medicaid."

Whatley, of the Council of State Governments, says, "Medicaid is eating public education. States are gutting pre-K. Secondary education has taken the deepest cuts of all. In some ways we're borrowing from one generation to pay for another."

Medicaid accounted for 22 percent, and public education 21 percent, of state spending last year. Next were higher education, 10 percent; transportation, 8 percent; corrections, 3 percent; and public assistance, 2 percent. States spent the remaining 34 percent on everything else.

Next: How is Medicaid driving the states' budget problems? >>

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