Legislature should get a second opinion

The version of the fiscal 2011 budget approved by the Vermont House late last month sets aside $62 million in a reserve fund, which might be used to help close part of the budget gap projected for fiscal 2012. But legislators might want to check with federal officials at the Centers for Medicare and Medicaid Services to make sure their plan complies with the law. It would be a shame if Vermont had to return federal funds because they hadn’t been handled correctly or spent on time.

One of the big boosts to states in the federal stimulus package—American Recovery and Reinvestment Act (ARRA)—was an increase in the federal matching rate for Medicaid expenditures. The match rate varies by state. Before ARRA, the split for Vermont in Medicaid spending was about 60-40, with the feds picking up the larger share. Under ARRA, the federal match rate for Vermont rose to about 70 percent.

These higher match rates are scheduled to expire at the end of this calendar year, which falls right in the middle of most states’ fiscal years. Congress is poised to extend the higher match for another six months—both the House and Senate have included the extension in separate bills—but it’s not yet a done deal. Nevertheless, many states, including Vermont, are incorporating the additional funding in their fiscal 2011 budgets. The budget approved by the Vermont House anticipates an extra $62 million from the higher match rate.

The House bill spends these additional federal funds in the fiscal 2011 budget. The House bill appropriated more federal funding and less General Fund money for Medicaid than the governor did. That allowed the House to put $62 million from the General Fund into the “human services caseload reserve.”

Technically, state dollars have been put into the reserve. But both the administration and the Joint Fiscal Office agree that without the additional federal money, the state would not have the $62 million from the General Fund to put into the caseload reserve.

Here’s the potential rub—and the reason the Legislature should get a second opinion from the federal government: ARRA specifically prohibits the states from using enhanced match rate money for reserves or rainy day funds. The primary purpose of the law was economic stimulus. Knowing that the states had Medicaid obligations and limited funds to meet them, Congress provided money so it could be spent promptly. There is a specific section of the law that addresses reserve funds and federal matching funds, which are known by the acronym FMAP (Federal Medical Assistance Percentages). Sec. 5001.(f)(3) reads:

STATE’S APPLICATION TOWARD RAINY DAY FUND.—A State is not eligible for an increase in its FMAP under subsection(b) or (c), or an increase in a cap amount under subsection(d), if any amounts attributable (directly or indirectly) to such increase are deposited or credited into any reserve or rainy day fund of the State.

The fact that Vermont wouldn’t have $62 million from the General Fund to put in the caseload reserve were it not for the additional federal matching money appears to conflict with the intent of the ARRA law, which speaks to “amounts attributable (directly or indirectly) to such increase” in its matching funds. Both the administration and the Joint Fiscal Office say they don’t see a problem. But it might be prudent to get a second opinion from federal officials.

Another potential problem is the deadline for using the federal funds. In the original bill, the funds were to be used by Dec. 31, 2010, which Congress defined as the “recession adjustment period.” The bills pending in Congress now would push that back to June 30, 2011, but the ARRA law says that the additional matching funds are not to be used for “items and services furnished after the end of the recession adjustment period.”

The administration has talked about using the reserves to replace the Vermont State Hospital, which lost its certification in 2003 and is no longer eligible for federal funding. But that won’t happen before June 2011. The Legislature knows the state is facing another budget gap in fiscal 2012, and the money in the reserve fund is one way to close part of that gap.

It may not be a bad thing, though, if federal officials disapprove of Vermont’s plan for using the extra matching funds. It could help legislative leaders out of the jam they’re in with Challenges for Change, the government reform plan that promises better state services for less.

A revolt is brewing among the rank and file against Challenges for Change. As they learn the details of the plan, it’s starting to look like an elaborate fig leaf that will really mean doing less with less. They also don’t like the fact that they’re being given so little time to evaluate a major government reorganization plan.

The extra federal money in fiscal 2011 could allow the Legislature to delay the cuts imposed by Challenges for Change and take the time it needs to thoroughly review the reform plans. Challenges for Change promises savings of about $72 million in fiscal 2012. If they’re real—and nobody would argue against true efficiency savings—that would be a good down payment to closing the anticipated budget gap.