Governor’s Veto Means Budget Depends on Managed Care Savings and Anticipated Revenue

Governor Steve Beshear’s selective veto of legislation addressing the hole in the Medicaid budget means no additional budget cuts at this time. Instead, the budget will depend on possible Medicaid savings through expanded use of managed care next year and additional revenue the state is hoping will come in for 2011.

The administration’s original estimate of needed Medicaid savings (not taking into account this revenue) is $425 million, including $139 million in state funds, through the use of managed care and other efficiencies in 2012.

The governor’s veto removes the following provisions of House Bill 1:

• Additional budget cuts in 2011 or 2012 to education and other programs in state government.
• Face-to-face interview requirements for new and renewal applicants to Medicaid and the Kentucky Children’s Health Insurance Program. Face-to-face interviews could be a barrier to enrollment in these programs.
• A mandate for $168.9 million in spending reductions through efficiencies including reduced personal service contracts and reduction in non-merit employees.
• A restriction of no more than $203 million in General Fund debt restructuring over the biennium to help close the budget gap. The governor has restructured more debt in 2011 than the budget originally laid out, and House Bill 1 would have limited debt restructuring in 2012 to cap the total at no more than $203 million. That would reduce the amount of restructuring the governor could do in 2012 by $67 million. Debt restructuring refers to pushing forward interest and principal payments on debt to future years, and costs the state more in the long run. The veto also removes specific requirements associated with Road Fund debt restructuring.
• A requirement that the Legislative Research Commission hire an accounting firm to certify savings that the administration achieves through expanded use of managed care. Instead, the governor will certify the savings.
• Elimination of the governor’s authority to put in place additional furlough days.

The changes that the governor allowed to stand in House Bill 1 relate to additional revenue to help close the budget gap. Specifically the bill includes:

• An assumption of $22.4 million in additional revenue for 2011 that is not part of the official state forecast. An interim forecast from the Office of the State Budget Director issued in January projected that the state will have $53 million above projections at the end of the year, but is an unofficial estimate.¹ State law requires that official estimates come from the Consensus Forecasting Group, but revisions can only be requested by the Legislative Research Commission as a whole or the state budget director.²
• Fund transfers of $4.6 million to the General Fund for 2011 from the Controller’s office and from Vehicle Regulation to help fill the budget gap.

In the short term, passage of the legislation allows Kentucky to access additional federal Medicaid dollars for 2011; avoid deep and painful cuts to Medicaid reimbursement rates for providers that would have begun April 1; and meet federal requirements to maintain certain levels of education spending in order to keep extra federal education money awarded in the fall. It also means avoiding more budget cuts on top of the eight previous rounds of cuts over the last couple of years.

Important questions lie ahead as Kentucky limps through the remainder of the current two year budget and begins work on a budget for 2013-2014. Those questions include:

• Will the governor be able to achieve the promised savings in managed care? What are the implications of greater use of managed care in terms of access to health care for Medicaid-eligible Kentuckians? How will managed care contractors be held accountable to the public interest, especially given the major, well-publicized accountability problems associated with the state’s contract with Passport?
• How will revenues fare given the tepid and uncertain recovery and the long way Kentucky has to go until employment reaches pre-recession levels? How can the legislature craft a budget for 2013-2014 that moves the state forward given these revenue challenges and the costs that the legislature has passed forward in order to balance the current budget?
• What are the implications of federal budget choices on Kentucky, including likely additional federal budget cuts (which will take dollars from the state budget) as well as the likelihood of continued inaction on needed stimulus measures?
• When will state leaders begin to discuss necessary reforms to Kentucky’s tax system?

Special Session Veto.pdf

The Kentucky Center for Economic Policy (KCEP) conducts research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. Launched in 2011, the center receives support from foundation grants and individual donors and is an initiative of the Mountain Association for Community Economic Development (MACED).