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The conventional wisdom is that the worst is over for the U.S. economy, but New Mexico’s budget is still going through some very hard times.

Revenue estimates released recently project that New Mexico’s revenues will come in at around $5 billion for the current 2010 fiscal year. That is $422 million less than was anticipated when the budget was put together.

In 2008, the state’s revenues were about $6 billion, so in two years the state has seen a $1 billion drop in revenue, making New Mexico’s FY 2010 budget about the same size as was the FY 2007 budget.

That may seem like a crisis, and the situation does indeed demand some tough decisions from the governor and Legislature, but it still represents approximately 4 percent annual budget growth since FY 2002 when the general fund was about $3.8 billion. After FY 2010 New Mexico will be about where it should have been had the size of government grown at levels more in line with population and inflation rates. This is hardly a “crisis.”

The temptation, especially among lawmakers, is to make short-term cuts and rely on one-time money to fill this budget gap. The belief is that if difficult decisions can be put off for long enough, the economy will turn around and those decisions won’t have to be made. That is not a good mind-set. There are plenty of good cuts to be made.

For starters there is Medicaid, which Gov. Bill Richardson has justifiably placed on the chopping block. Programs relating to low-income families and children can and should be re-formed in ways that enable the poor to manage their Medicaid funds in some form resembling a Health Savings Account. These accounts, similar versions of which have been adopted in Florida, provide recipients a limited amount of money for day-to-day health care needs. They encourage responsibility and lead to less reliance on costly emergency room care.

Giving recipients some responsibility over their own health care spending is the best way to encourage them to access preventative care, thus saving taxpayers money. More than two years into Florida’s Medicaid reform implementation, beneficiaries are experiencing better, more efficient patient care that yields more predictable program costs for taxpayers.

Another state, Rhode Island, has applied for, and received permission from, the federal government to enact reforms to Medicaid. In Rhode Island’s case, it has received a “universal waiver” that allows state-level administrators greater freedom to control spending free of many onerous federal regulations. The thinking is that state and local policymakers can be more creative and in-tune with the needs of their populations than “one-size-fits all” policies designed in Washington.

Of course, the real cost savings in Medicaid can be found on the long term care side of things. Long term care accounts for 35 percent of Medicaid expenditures on average. An entire industry of Medicaid planners uses both simple and sophisticated techniques to protect additional hundreds of thousands of dollars for affluent clients and their heirs.

Most of these people are not the poor. In fact, Medicaid discourages at least two-thirds of seniors from buying their own insurance. So, rather than planning for long-term care, these people, due to perverse government incentives, are now costing New Mexico (and federal) taxpayers millions of dollars annually.

New Mexico legislators can prevent this waste of money from occurring, but they have to resolve to stop middle- and upper middle-class seniors who are gaming a system designed for the truly indigent.

Reforming Medicaid alone may not be adequate to completely close the budget gap, but it is one of the juiciest targets for savings. The reforms above, rather than harming the poor, will actually help re-focus the program on those who need it while empowering those very same people to take greater responsibility for their own health care. This should be emphasized now more than ever given the ongoing national health care reform debate.

Paul Gessing is the president of New Mexico’s Rio Grande Foundation. The RGF is an independent, non-partisan, tax-exempt research and educational organization based on principles of limited government, economic freedom and individual responsibility.

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