Even though New Jersey receives only 57 cents back for every dollar in taxes sent to Washington, federal funds still provide important support to services in the state. Many believe the federal government determines how federal funds are used. The reality is that the state often has considerable discretion in the amount of federal funds the state gets and how those funds are used.
In addition to the $28.3 billion in state funds Gov. Christie proposes to spend in Fiscal Year 2011, another $12.5 billion in federal funds likely will be available for state programs. Approximately $7.7 billion of these funds (62 percent) would be spent in FY 2011 through the Department of Human Services, another $1.2 billion through the Transportation Trust Fund and just under $1 billion through the Department of Education. Within the Department of Human Services, the largest federal program by far is Medicaid ($4.6 billion).
It is important to understand how federal funds interact with state funds in order to maximize their effectiveness because state funds often generate federal funds. The state budget is ineffective in the way it explains federal funds, so it is not apparent what the total impact is on the budget, economy or the people receiving services. Those federal funds are often bundled in larger budget categories, but in some cases they are not accounted for at all.
For example, the state FY 2011 budget shows state “savings” of $43 million from three programs in the Department of Human Services: $14 million by reducing payments to workers providing personal assistance to people with developmental disabilities; $25 million by denying health coverage to 39,000 low-income parents in FamilyCare; and $4 million by eliminating orthodontic services to the poorest children in the state. What the budget does not show is that those cuts in state funds will result in an additional loss of $74 million in federal funds in those programs: $22 million, $48 million, and $4 million respectively. That is because each state appropriation to those programs is matched to some degree by federal dollars. To make matter worse, this results in an actual loss of $117 million in benefits to the vulnerable people served by those programs.
Because the state budget is not much help when it comes to understanding the impact of federal funds on the state, it’s important to understand how federal funds work to figure this out. There are basically two types of federal grants: categorical and entitlements. Categorical grants are the most common source of federal aid to state and local governments and can only be used for narrowly defined purposes like the Mental Health Block Grant. Categorical grants are subject to the annual federal appropriations process which takes place after New Jersey passes its own state budget by June 30th of each year. Because of this timing issue, states do not know for certain how much federal money they will receive until the federal appropriations process is complete at the end of September.
Entitlement grants are generally larger than categorical grants, are not subject to the appropriations process and sometimes require state matching funds. Unless Congress changes the law authorizing the entitlement, the federal government must make the funds available to those “entitled” to receive the assistance.
There are two types of entitlement grants: open-ended entitlements to the individual or entitlements to the state. Medicaid is an entitlement to the individual. Anyone who meets the state’s eligibility criteria is eligible for assistance. No matter what the cost, the federal government will reimburse the state 50 percent of total expenditures to eligible individuals. Similarly, the state must make the state funds available to serve all eligible residents who apply.
The Temporary Assistance to Needy Families (TANF) grant (which New Jersey calls WorkFirst New Jersey) is an entitlement to the state. The state is guaranteed to receive $404 million every year, but can close enrollment to families applying for cash assistance if funds run out.
States have discretion in entitlement program benefits and eligibility levels. This has consequences for the state budget when significant amounts of new federal funds become available. For example, the additional federal funds provided in the American Recovery and Reinvestment Act helped states avoid cutbacks in essential services. Big increases in federal matching funds can free up state matching funds that can then be used for any purpose.
Often a state must adhere to a “maintenance of effort” requirement as a condition for receiving additional federal funds. Generally this means a state must maintain its state funding for the program and use the additional federal funds to avoid cutbacks in services. Funding for Medicaid, for example, was increased by about $2 billion in the last two years. Most of these freed-up funds were used to reduce New Jersey’s budget shortfall because the state maintained its state funding from the previous year, but a small portion of them was also used to eliminate premiums for low-income children in FamilyCare.
New Jersey expects to receive another major increase in federal funds in FY 2011 as a result of the new health reform law and a partial extension of economic stimulus funds. Gov. Christie plans to use the $1 billion the state expects to receive in Medicaid stimulus money to balance the state budget. At the same time he plans to reduce coverage in Medicaid and deny health coverage to about 50,000 parents in FamilyCare.
Similarly, the FY 2011 budget estimates the receipt of about $90 million in new federal funds to reduce the state cost for medical assistance to individuals receiving General Assistance. Although these new federal funds are available, the governor proposes to save a net of $27 million by eliminating the monthly cash assistance of $140 to about 35,000 unemployed individuals. Rather than support the state’s most needy, the governor will use the funds to balance the budget.
New Jersey also expects to receive a windfall in federal funds next year for the Pharmaceutical Assistance for the Aged and Disabled (PAAD) program as a result of national health reform. These funds were not obligated in the governor’s budget because they were not anticipated when it was prepared. The Legislature therefore could use those funds to eliminate the $310 annual deductible to PAAD recipients and the co-pay increases proposed in the Governor’s budget.
Just as with state funds, how federal funds are used is a matter of choices and priorities.