Lawmakers headed for bad budget news

The legislature’s main oversight committee meets in Raleigh Thursday to hear progress reports on the state budget. They may not like what they’re about to hear.

According to sources within the Perdue administration speaking on condition of anonymity, four months into the fiscal year, the Department of Health and Human Services is $200 million short of the cuts lawmakers expected it to make.

Medicaid – an entitlement program the state can’t simply decide not to fund – is reportedly short on cash to the tune of $139 million.

Senior sources in the administration blame the bad news on unrealistic expectations by GOP budget writers. They say warnings from experienced executive budget staffers fell on deaf ears among new leaders at the other end of Jones Street.

Many of the Medicaid cuts GOP leaders relied on to balance this year’s HHS budget are subject to federal approval. Overall, the budget outlined 45 program changes that would save the state money, and it factored in projected savings from those changes from early in the budget year. To date, though, only 41 have even been submitted for federal approval, and only 21 have been okayed. The difference is $28 million in savings that hasn't yet materialized, and won't until the changes are approved and implemented.

Mental health facilities are already running $38M over budget. Projected savings from a managed-care program, CCNC, are expected to meet targets by 2013, but are currently running about $40M behind expectations.

Administration sources also say lawmakers failed to account for other expenditures they were warned the department would have to make. For example, the state owes Medicaid a $40 million annual installment on a repayment plan for $300 million in overdrafts in 2008. The budget doesn’t cover that scheduled expense.

Speaking on background, senior sources say covering the net Medicaid cash gap of $139M could require draconian measures.

If the state cut out all “Medicaid-optional” services aside from pharmacy for the final quarter of the fiscal year - eye care, dental care, podiatry - it would only save about $60M up front. The other $79M, budget experts say, would have to come from double-digit cuts to provider rates for the final quarter of the fiscal year. Those cuts are also subject to federal approval, and it’s not at all clear they would get it.

There are other places lawmakers could look for money to cover the Medicaid gap. The rainy-day fund still contains $300M, and state revenues were more than $100M higher than expected.

But Medicaid isn’t the only budget line that may need to be shored up. Lawmakers are also looking for money for disaster relief after Irene, and Perdue is calling on them to find additional money for pre-kindergarten as well.

And then there’s the state’s beleaguered Unemployment Insurance fund. According to administration officials, the state had to borrow about $2.5 billion from the feds because the money state employers were paying into the fund during the recession couldn’t keep up with the benefits the state was paying out of it.

There's a November 10th deadline for the state to repay that money in full to Washington. It almost certainly won’t be met, Perdue officials say, which will trigger a point-3% increase in the rates employers pay into the fund for their workers.

Administration officials say North Carolina isn’t the only state in this predicament – Ohio and Michigan are, too. But they say only legislators can decide how to cover that debt – unless Congress decides to forgive part or all of it.

State lawmakers approved a measure directing the Commerce Secretary to use Employment Security Commission funds to study the issue. But Commerce can’t use ESC money until the department becomes part of Commerce on November 1st, so the study hasn’t been done yet.