November 1, 2011

The Honorable Patty Murray
Joint Select Committee on Deficit Reduction
U.S. Senate
Washington, D.C. 20510

The Honorable Jeb Hensarling
Joint Select Committee on Deficit Reduction
U.S. House of Representatives
Washington, D.C. 20515

Dear Senator Murray and Representative Hensarling:

The nation’s governors support federal efforts to restore the fiscal health of the country and speed economic recovery.  We applaud the efforts of Congress to set a prudent and sustainable fiscal course that is both responsive to needs and fiscally responsible.

States face many of the same challenges and have made dramatic changes in their budgets.  Several states are still wrestling with continued revenue shortfalls and some have called special sessions to make further spending reductions.

In this context, governors caution the Joint Select Committee on Deficit Reduction (Select Committee) against proposals that would reduce the federal deficit simply by passing the federal government’s costs to states.

Principles for Deficit Reduction

In January, governors sent a letter to Congress and the President emphasizing our commitment to working with you to reduce deficits, reform programs, and restore long-term stability.  We also reiterated the importance of the federal-state relationship and offered the following principles for deficit reduction:

  • Federal reforms should be designed to produce savings for both the federal government and states;
  • Deficit reduction should not be accomplished by shifting costs to states or imposing unfunded mandates;
  • States should be given increased flexibility to create efficiencies and achieve results; and
  • Congress should not impose maintenance of effort provisions on states as a condition of funding.

These principles are even more relevant today as the Select Committee conducts its work.  The federal budget cannot be viewed in a vacuum.


Medicaid is an important program which provides health care for nearly 60 million people.  For many states, it represents the single largest and fastest growing expenditure in their budgets.  On average, Medicaid consumes more than 22 percent of all state revenues, more than education or public safety.  If the Select Committee and Congress decide to reduce spending for Medicaid, we request that it be done in a manner that produces savings for both states and the federal government.

Specifically, improving the coordination of Medicare and Medicaid for beneficiaries of both would produce substantial benefits in care delivery and costs.  As savings accrue from the joint program, they could be shared with both federal and state taxpayers.

Starting in 2014, a fee will be imposed on Medicaid managed care companies, (along with selected other risk-based insurance), resulting in increased costs for both the state and federal governments.  The federal government is essentially charging itself and the fee will be passed on to the states and the federal government.  Exempting Medicaid would save the federal government as much as $10 billion over 10 years, and the states a commensurate amount depending on the matching rate.

In addition, increasing flexibility for states, giving them the ability to manage programs more efficiently without waivers or plan amendments, will produce savings for both states and the federal government.  For example encouraging states to require prior authorization on non-emergency imaging could save the states and the federal government a combined $10 billion, 60% of which would accrue to federal expenditures.  Or, allowing states to limit provider charges for “out-of-area “ services to, say, 110% of Medicare rates would produce additional savings for the program.

There are many common-sense program changes that would save seemingly small amounts, but add up to significant savings over the long haul.  For example, allowing co-pays from beneficiaries when they repeatedly use emergency rooms for non-emergency purposes is one of several initiatives that with state flexibility could reduce the use of this expensive venue for care.  Whenever states save money on Medicaid, so do federal taxpayers.

Other modifications that have been proposed, such as blending federal matching rates, appear to be little more than pure cost shifts to the states.  While there may be modest administrative efficiencies from blending, it is only by significantly reducing the match from current law that anything like the claimed savings can be achieved.  Similarly, imposing limits on the amount of state funds that can be matched to federal funds will further interfere with states’ authority and merely shift more costs back to the states – it will not reduce the spending on Medicaid and federal savings will be eroded as states are forced to add other revenues to the program.  We communicated these concerns to the President and Congressional leaders back in the summer.


We understand that the Select Committee is looking at spectrum auctions as a way to produce much needed revenues and reduce the deficit.  Governors are supportive of incentive auctions as a means to raise revenue and provide opportunities to create the next generation of wireless service.  We insist, however, that as part of any spectrum auction the Select Committee allocate the spectrum in the 700MHz band known as the D-block to public safety.

The D-block is vital if states are to develop and deploy an interoperable broadband wireless network for public safety to save lives and protect property.  S. 911, the “Public Safety Spectrum and Wireless Innovation Act” has passed the Senate Commerce Committee and provides the best framework for achieving the goals of both building the network and reducing the deficit.

Spectrum is a finite resource that once auctioned is nearly impossible to get back.  The opportunity to assign this much needed, contiguous spectrum for public safety is one that must be seized if we are to meet the expectations of our citizens now and in the future.

Governors are committed to working with Congress to speed recovery and establish a long-term fiscal plan that will ensure growth and prosperity.  We will continue to review proposals and other suggestions for reducing the deficit that are fiscally responsible for both states and the federal government.  Difficult decisions must be made; we encourage the Select Committee, Congress and the Administration to work with us throughout this process.


Governor Dave Heineman

Governor Jack Markell
Vice Chair

Cc: Members of the Joint Select Committee on Deficit Reduction