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Most state governments have a constitutional requirement to balance the budget each year, and, as we all know, the federal government does not. But here’s a question few state-level politicians want to answer: Is a state budget really “balanced” if its own deficits are being masked by federal-deficit spending?

My own state of Colorado is a good example. State lawmakers of both political parties have gotten used to looking at annual state revenues in three categories: the general fund, cash funds and federal funds. Guess which one of the three is growing even in a recession.

Federal funds have become a routine, standard part of state budgeting. Unfortunately, too many state lawmakers have come to think of federal funds as a new “fill behind” to make up for declines in state revenue. This practice reduces the pressure to economize or to keep state expenditures in line with state revenues. Indeed, the Obama administration for the first time has offered federal funds explicitly targeted to offset reductions in state funding in education and other fields.

We are not talking here about federal funding for what are called “categorical programs” in education, programs with a specific purpose or targeted to a specific group. There are more than 50 such federal categoricals in K-12 education, and each has its own congressional appropriation or “funding stream.” Here we are talking instead about the very new idea of federal funds that augment state spending for essential, core functions, like teacher salaries.

Putting aside for the moment the important question of whether or not it is a good idea to involve Congress and the U.S. Department of Education in state-level decisions on basic educational services, there is a very practical question on the immediate horizon. What happens when the federal Santa Claus takes a holiday – or files for bankruptcy?

In Colorado, during the decade 2001 to 2010, state population grew 16.9 percent while enrollment in K-12 classrooms grew 14.9 percent and higher-education enrollment grew 17.3 percent. So, in one traditional area of government operation, education, the number of beneficiaries of government activity paralleled population growth. Yet, over the same period, 2001-2010, the number of Medicaid recipients in Colorado grew from 263,107 to 512,398. That is a whopping 94.7-percent increase.

That recent growth in Medicaid enrollment and expenditures was driven by eligibility rules, not annual appropriations, which makes it an entitlement program. But while the basic rules governing the Medicaid program are set by the federal government, Colorado’s lawmakers have expanded the eligibility and coverage and thereby spurred even greater growth in the program.

Why have Colorado lawmakers voted to expand eligibility of an entitlement program in full knowledge that it increases the tax burden of Colorado citizens? They do so because of the seductive “matching funds” formula whereby Colorado gets more federal dollars the more generous the state eligibility rules become. That federal matching-funds formula creates a devilish incentive to continually expand the program.

Would that same 94.7-percent rate of growth have occurred if Medicaid benefits were funded entirely by state tax dollars instead of a mixture of state and federal (deficit) funding?

Similar questions can be asked about federal funding in K-12 education and about state universities’ growing dependence on the continued expansion of student financial-aid programs. Across the nation, state lawmakers of both parties have been swept up in the federal game of federal dollars driving expansion of supposedly state-run programs, always on the promise of continued federal funding. But these federal “matching dollars” can only be provided by continued deficit funding and trillions of dollars in new debt.

How will states fund these programs when federal dollars disappear?

This is not a hypothetical question. Last month Colorado Gov. Ritter was forced to find an additional $67 million in the state’s general fund to offset an “unexpected shortfall” in federal Medicaid funding. Congress did not appropriate the amount expected and thus programmed into state budget assumptions.

But the story does not end there. On Sept. 20, the state’s Office of State Planning and Budgeting released its quarterly assessment of the state’s economy and estimate of state revenue for the current fiscal year. The governor must now come up with $189 million of additional budget reductions. What about the budget assumptions for the 2012 fiscal year? Buried in the economic forecast is the news that federal Medicaid reimbursements are even more uncertain in the forthcoming 2012 fiscal year because federal “stimulus funding” will not be renewed.

In Colorado and elsewhere, federal tax dollars have been used to seduce state lawmakers – and citizens – into ever-expanding entitlements that cannot be sustained.

States have been willing participants in this dishonest shell game, and that must end. If I am elected governor of Colorado, it will.

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