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<i>The Week in Public Finance</i>: Trump's Budget, the CBO on Health Care and Accounting for Higher Ed

A roundup of money (and other) news governments can use.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

Trump’s Budget Cuts

This week, President Trump proposed his budget and, as expected, it focused federal spending cuts on a narrow area that impacts state and local governments the most: discretionary spending. The cuts come by way of diverting more than $54 billion from various federal agencies to defense spending.

The Takeaway: Paying for all these cuts would mean many programs beneficial to states and localities would be targeted. Under the plan, grant funding -- which accounts for 31 percent of state budgets and 22 percent of state and local spending combined -- takes an enormous hit. Specifically, Trump would eliminate the $3 billion Community Development Block Grant program, which was started by President Nixon as a way to provide direct federal assistance to city projects.

In transit, the president calls for a half-billion cut from the wildly popular TIGER grant program. He would also cut $175 million in subsidies for commercial flights to rural airports, eliminate funding for many new transit projects and discontinue support for long-distance Amtrak trains.

Public education grants are also targeted. Trump has proposed $1.6 billion in new spending on school choice programs, but cuts overall education spending by more than $9 billion, or 14 percent. The largest proposed cut is $3.7 billion in grants for teacher training, after-school and summer programs, and aid programs for low-income students.

Putting Medicaid on a Diet

The Congressional Budget Office (CBO) this week released its financial projections on the cost of the GOP's proposed health-care plan and the numbers are sobering for states, particularly those that expanded Medicaid. The CBO estimates the bill, called the American Health Care Act, will reduce federal Medicaid spending by $880 billion, or 25 percent over the next decade.

House Republican authors of the bill have said their goal was to "put Medicaid on a diet" and reduce federal spending. But the bill does nothing to tackle the rising costs of health care. Instead, it imposes caps on federal spending and shifts the risks for higher costs from the federal government to the states.

The Takeaway: It’s hard to overstate the impact these numbers could have on state budgets as Medicaid spending accounts for approximately one-third of a state budget. About $370 billion of the reduced federal spending comes from changing the program to a per-capita funding structure. That 10 percent reduction over a decade, writes Fitch Ratings analyst Eric Kim, “would require states to make material, but not impossible, budget adjustments.”

The remainig $480 billion in reduced spending is attributable to cuts in the federal matching rate for new Medicaid recipients. The (slightly) good news is that Fitch considers that number to be “a somewhat overstated view of actual costs to the states.” The estimate assumes more states beyond the current 31 and the District of Columbia will expand Medicaid before the 2020 cut-off date. Still, Kim writes, “expansion states will face the most challenging fiscal and policy questions” as they will have to determine whether to allow new enrollees into the expansion population after 2020.

Meanwhile, the 19 nonexpansion states, could see short-term benefits, says Kim. That’s because the bill establishes a $2 billion annual pool of federal funding from 2018 to 2021 to these states to help offset payments to Medicaid providers for higher uncompensated care costs.

Paying for College That Works

The cost of college has increased by 70 percent since 2000. Many experts attribute that to the fact that state funding has not kept up with enrollment.

But a new paper by the Bipartisan Policy Center (BPC) points out that state funding isn’t the only source of blame. Colleges and universities have increased tuition and fees “even in years when state funding was stable or increasing. Thus,” the paper says, “expanded public support, by itself, seems unlikely to be a practical approach to keeping attendance costs down—especially given the many other growing demands on state budgets.”

Partly in response to these rising costs, more and more states have called for funding to be tied to performance metrics. Currently, 33 states have a performance funding system for their colleges and/or universities and five more states are developing their own models, according to the BPC. That means more than 6 million students are now enrolled at institutions that are subject to performance funding, which accounts for about 40 percent of enrollees at all public institutions.

The Takeaway: Put simply, performance funding directs more money to higher education campuses that are getting the best results. But performance funding has its drawbacks. In particular, there is concern that creating incentives to excel will lead institutions to restrict access to students who are less likely to graduate. “Schools could boost admissions criteria to screen out these students," the BPC report warns, "thereby improving the institution’s completion numbers and capturing higher levels of state funding."

Long-term success, therefore, will depend on states’ ability to avoid such unintended consequences with regard to equity and academic standards. That means that paying for what works also means spending money on programs that ensure low-income and minority students receive the support they need to get their degree.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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