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The Fiscal Gulch, The Rainy Day Cap and Again the Affordable Care Act Rears Its Head

By: Allison Small

Just in time to welcome the Texas Legislature back for its 83rd session, the Texas Comptroller had some good news for the state. For the coming 2014-2015 biennium, the state’s general revenue collections from taxes, fees and other income is estimated to be $96.2 billion, of which about $3.6 billion would be set aside for future transfers to the Rainy Day Fund. This leaves approximately $92.6 billion in net general revenue. The Comptroller also stated that added to the estimate is a projected $8.8 billion ending balance from the current biennium, giving the Legislature an estimated $101.4 billion for general purpose spending for the next biennium. The total revenue situation is significantly better than the starting revenue for the previous 82nd legislative session of $72.2 billion (2.9% lower than the previous biennium) which triggered significant cuts in state spending. Additionally, the $8.8 billion good news projection appears just in time to save the state from falling head long into the “Fiscal Gulch”.

Not quite a fiscal cliff, but last session the Legislature significantly under- funded state Medicaid to the tune of $4.7 billion and rolled education payments one month into the next fiscal year to the tune of approximately $2 billion. The $4.7 billion under-funding created a “Fiscal Gulch” that had to be addressed upon the Legislature’s return, or the Medicaid program would run out of money. The Medicaid $4.7 billion short fall will leave the Health and Human Services Commission penniless by the end of March unless the Legislature intervenes and the $8.8 billion ending balance will likely be welcomed to avert the “Gulch” calamity. It is reasonable to assume that many different factions will also have designs on the $8.8 billion. Last session saw considerable reductions in rates (approximately 2% across the board) paid to Medicaid services providers and there will be pressure to restore those cuts, especially since a surplus would indicate that perhaps the cuts were not indeed necessary to balance the budget in the first place. All rhetoric aside, the news from the Comptroller is welcome news indeed as appropriators begin their work on the 2014-15 budget and provide hope that the Medicaid bills, for this year, will continue to be paid.

Being awash with money creates another interesting dilemma. At the end of the current biennium, the state’s Rainy Day Fund, formally called the Economic Stabilization Fund, will have a balance of about $8.1 billion, absent any appropriation that might be made by the Legislature. At the end of the 2014-15 biennium the balance is projected to be approximately $11.8 billion. The Rainy Day Fund total is capped however. The fund cannot exceed 10 percent of the amount of general revenue raised by the state during the prior biennium. After the cap is reached then no additional revenue may be transferred into the fund. What this means in practical terms is that given the revenue picture for Texas, the Rainy Day Fund stands a good chance of hitting the cap this coming biennium. The state leadership has a long history of conserving the fund for special circumstances, and rarely has the fund been tapped. The state leadership has already floated out ideas like water infrastructure and highway construction and maintenance as potential uses for the fund. There will also be pressure on the Legislature to address some other critical issues through the use of the fund while saving the more favorable revenue estimate totals from the Comptroller for appropriators to address the customary needs such as caseload growth in health and human services and student growth in public education.

One does not have to look far to see where demand for funding in the health and human services arena can be found. The baseline budget request for HHSC for the 2014-15 biennium is $19.1 billion General Revenue, or $48.8 billion all funds representing a $0.9 billion increase over the 2013-2014 biennium. Medicaid related programs makes up 89.5 percent of total HHSC funding request. Because of the LBB instructions to agencies for making appropriations requests, the request for HHSC is $1.2 billion short of addressing the total anticipated case load growth. If caseload growth is not addressed by the Legislature, then they begin, again, to underfund the system, postponing the payment until the Legislature convenes in 2015. Since Medicaid is an entitlement program, the state has no choice but to fund total caseload. It is a “pay me now or pay me later” scenario.

There is also a revenue source not readily discussed among the leadership but potentially available as well. The leadership has stated their opposition to expansion of Medicaid under the Affordable Care Act, even though the expansion is 100% federally funded for the first three years. When services are provided through insured arrangements, like managed care organizations, they are paid a premium for providing the medical services to eligible Medicaid individuals. In an interesting fiscal creation, the state then taxes the premium it has paid to the managed care entities at a 1.75% rate, creating a revenue stream from the dollars actually paid to entities to provide the services. This revenue source is known as the premium tax. When Medicaid managed care is expanded to other populations then the state experiences additional revenue in the form of premium tax. The Medicaid expansions legislated last session generated $385.7 million in premium tax revenue. There are other expansions being considered for this session as well: expansion of managed care to rural areas; rolling in nursing home care into managed care; rolling in behavioral health into managed care and some other smaller initiatives. While there are no official estimates, these expansions will most likely save the state money through the generation of the associated premium tax revenue. If the state were to expand Medicaid managed care available through the Affordable Care Act, then the totally federally paid premium can be taxed by the state at the 1.75% rate. This would be a considerable amount and will likely be pushed by supporters of the Affordable Care Act expansion. Requests to the Health and Human Services Commission and the State Comptroller for an estimate of potential revenue have not proven fruitful, but at some point the potential windfall that could be made available through taxing the Affordable Care Act expansion (if implemented) will not be able to be ignored.

The 83rd Legislature has an incredible job ahead of them and the debate on funding priorities will be significant. But it is nice to know that at least for this session, the revenue picture is strong – almost as strong as the demands placed upon that revenue.

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