By Rose Hoban

This year’s N.C. Health and Human Services budget includes pages and pages of notations reading “no direct change.” But digging into the numbers often reveals complicated budget two-steppin’ that sometimes can involve tens of millions of dollars.

Take federal Child Care and Development Block Grant dollars, for example, where lawmakers did the child care shuffle.

In January, Congress passed a bill that greatly expanded funding for a multitude of programs to benefit families.

One of the big boosters of that bill was North Carolina U.S. Senator Richard Burr, who has long been a champion of child care and increasing support for child care subsidies. In 2014, Burr helped co-author increases in the Child Care Credit and Development Block Grant reauthorization that provides child care help to low-income families so that they can work.

The funding enables “Low-income working parents to have jobs and to start building their careers while also having the peace of mind that comes with knowing that their children are in safe child care,” he wrote in an op-ed in the D.C. publication The Hill in October 2016. “To achieve the American Dream, families must have good-paying jobs, but with a career comes the need for safe and affordable child care during the work day.”

“Passing my [2014] child care law was a great start, but Congress still needs to take action to address the challenges that middle-class families are currently facing,” Burr concluded.

And Congress did just that, bolstering the Child Care and Development Block Grant as part of a stop-gap budget deal passed in early February. That deal increased child care subsidies to low-income families by $5.8 billion over two years.

North Carolina’s share of that money is about $74 million per year more than its previous allocation under the block grant, and the state was instructed to use the money to bulk up the state’s child care subsidy program.

“What’s really important is that this was bipartisan legislation passed by Congress and signed by Trump,” said Michelle Hughes, head of NC Child, an advocacy organization. “It was supposed to provide states with the largest increase to expand access to high quality child care for North Carolina families.”

Grant laundering

But instead of using all of those new $74 million in federal money to enhance child care services, budget writers engaged in a form of grant laundering, where they abided by the letter of federal rules about how to use the money while violating the spirit.

It started when lawmakers took $50 million in state money out of NC Pre-K and returned it to the state’s General Fund, reducing the state funds allocated for NC Pre-K from $72 million to $22 million.

In a competitive election year, it’s important to keep Pre-K bulked up. To keep Pre-K on budget and fill its new $50 million hole, the money had to come from somewhere. So, budget writers then moved $50 million from the pot of money for child care subsidy into NC Pre-K.

Child care subsidy funding in North Carolina comes from many funding streams, but there are three big sources: the Child Care and Development Block Grant, another block grant known as TANF, and state dollars. Some of these funds have more strings attached than others.

drawing illustrating how money moves from congress to one program to another and finally, into the state's General Fund
Illustration credit: Rose Hoban

Federal rules prohibit using any of those new CCDBG federal dollars to backfill a state’s budget. But there are fewer restrictions on where to move TANF money, so budget writers were able to shift $50 million of TANF dollars out of the child care subsidy budget and into NC Pre-K to fill that big hole.

The upshot? Instead of the child care subsidy program growing by the $74 million Congress sent to North Carolina, it grew by only $24 million.

“When part of that new funding is used to replace recurring state dollars instead of expanding access, working families lose out,” Hughes said.

The loss of state dollars troubled Tracey Zimmerman from the North Carolina Early Childhood Foundation for a different reason.

“There’s a trend of increasing federal funds and decreasing state funds, and once you take state funds out of a program, the federal dollars are not guaranteed,” Zimmerman said. “And it’s much harder to get state funds back into a program once they’re gone.”

One step forward, one step back

As of April, North Carolina Medicaid, which provides care for some 2.1 million low-income and disabled North Carolinians, was coming in about $206 million under budget. North Carolina’s share of that surplus is about $70 million, and the rest will go back into federal coffers.

Every year, budget writers need to plan for the multi-billion dollar Medicaid budget, where a half percent variance can mean tens of millions of dollars over or under budget. Lawmakers assume a level of enrollment, take an educated guess as to how much health care individuals use, the cost per person, and create the budget.

Last year, North Carolina spent about $3.8 billion on the program.

During the “rebase” process, one key factor lawmakers take into account is the rate at which the federal government reimburses North Carolina for money spent on care. The federal match rate, known as the FMAP (Federal Medical Assistance Percentage), is calculated based on per capita income in North Carolina, compared to other states.

Since 2011, North Carolina’s FMAP has trended upward, because the economy’s not been as robust as in other states, so the feds have picked up more of the state’s Medicaid tab.

But not this year.

And that could become a wee bit of a problem. That -0.45 percentage point difference in the federal match rate means about $41 million fewer federal funds will flow toward North Carolina in the coming year.

But an allowance for that lower FMAP isn’t in this year’s budget.

“It’s all good,” said the House’s lead budget writer Rep. Nelson Dollar (R-Cary). “It’s already in there.”

Dollar expressed confidence that the two-year Medicaid budget he crafted last year would remain solvent through the 2018-19 fiscal year, even though he calculated federal dollars based on the old – higher – FMAP.  And Dollar has some wiggle room this year because of that budget surplus reported in April.

The governor was not as confident, and there’s some history behind his concern. In years past, Medicaid’s budget has been known to fluctuate wildly, leaving the state with deficits at year’s end.

So, Gov. Roy Cooper included an extra $28 million in his Medicaid budget to cover any extra share of Medicaid costs. A spokesperson at DHHS expressed disappointment the General Assembly’s assumptions didn’t match their forecasting model.

“Medicaid has been within budget for the last four years while being funded at the proposed rebase due to a cooperative approach with the General Assembly,” he wrote.

But Dollar is betting that with $70 million (or so) in leftover North Carolina Medicaid dollars, it’s likely there’s plenty of wiggle room to get the program through the coming fiscal year without an overrun.

Last year’s reduction was driven by slightly cheaper drugs, limits on medical billing and fewer people needing services than expected at the beginning of the year. These are all factors that could change, perhaps because of a bad flu season or an expensive new medication.

The questions are: Will those trends hold? And will savings be sustained during the coming year?

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Rose Hoban

Rose Hoban is the founder and editor of NC Health News, as well as being the state government reporter. Hoban has been a registered nurse since 1992, but transitioned to journalism after earning degrees...