State governors and President Obama met this past weekend during the National Governors Association meeting in Washington D.C.. Two issues -- balancing state budgets and implementing the healthcare reform law -- took center stage in the discussions. Recognizing that healthcare is a major budget item in most states, the president told the governors they could opt out of the federal health care plan as long as the coverage offered by the states was equally comprehensive.

Tax revenues in many states have taken hits since the 2008 financial crisis, and poorer economic conditions have led residents to pay less in state taxes. And a handful of states, like California, went on spending sprees before the financial crisis but failed to raise enough revenue to balance their budgets then.

In fact, two of the three governors not in attendance - Democrats Jerry Brown of California and Andrew Cuomo of New York - stayed in their state capitals to address budget deficits. A third governor, Republican Scott Walker of Wisconsin, remained in Madison to deal with the ongoing dispute over public sector unions in the state.

According to Governor Chris Gregoire (D-WA), the chairman of the National Governors Association, states will take a further fiscal hit when the stimulus ends this year. The remaining $150 billion of stimulus funds that states have been using to address their fiscal issues will run dry soon. At that point, a variety of state programs may need to be cut, and more state employees will be let go, contributing to the unemployment rate. The possibility of a federal government shutdown would only exacerbate the states' budgetary problems.

Other governors, such as Tea Party favorite Paul LePage (R-ME), however, point out that any further federal aid to the states would just add to the federal budget deficit. He doesn't "believe that you can print counterfeit money to pay your bills."

Healthcare Cuts May Ease Deficits

Both Republican and Democratic governors have proposed healthcare cuts in their states. Currently, Medicaid covers approximately 53 million Americans with lower income. The federal government and the individual states work together to jointly finance Medicaid. To lower healthcare costs, some states may have to reduce the number of people they cover under Medicaid, yet the new healthcare reform law would prevent them from doing so, at least in large numbers. Some, including Governor Rick Scott (R-FL), called for allowing the states to work under more flexible rules with regard to Medicaid.

On Monday President Obama backed a significant potential change to the healthcare reform law that he has endorsed so far. The "Empowering States to Innovate Act," put forward by Senators Ron Wyden (D-OR), Scott Brown (R-MA) and Mary Landrieu (D-LA), would allow states more flexibility. Under the current law, states are required to set up and run health insurance exchanges by 2014. Individual states would have to wait until 2017 to apply for a waiver to set up alternative programs. President Obama endorsed the legislation's provision to move up the date, saying "if you have a better way of doing it, help yourself."

According to a blog post by Secretary of Health and Human Services Kathleen Sebelius, a waiver would be granted if the new plan can:

• provide coverage that is at least as comprehensive as the coverage offered through the Exchanges, a new competitive, private health insurance marketplace;
• make coverage at least as affordable as it would have been through the Exchanges;
• provide coverage to at least as many residents as the Affordable Care Act would have covered; and
• avoid increasing the federal deficit.

Most significantly, states would be allowed to set up alternatives to the individual mandate, preventing insurers from dropping individuals with pre-existing conditions while keeping costs under control. If enough states receive waivers, the individual mandate could be put to rest while the basics of the healthcare reform law will remain in place. According to Sebelius, states could implement the following frameworks:

• linking tax credits for small businesses with tax credits for low-income families;
• automatically enrolling people in health plans;
• offering alternative options to increase competition and provide consumers with additional choices;
• offering additional benefit packages to provide more choices for individuals and small businesses; and
• allowing large businesses to purchase health insurance through the Exchanges.

The coming weeks will show whether the president's endorsement will help move this legislation through Congress.

Budget Fight Nears Consensus as Deadline Looms

Throughout last week, Democrats and Republicans stared each other down over spending cuts as the threat of a government shutdown came closer to reality. If Congress does not pass legislation by the end of the day on Friday, March 4, the federal government will have run out of money to continue operating. Over the weekend, both parties started to blink.

Originally, House Republicans passed legislation with roughly $60 billion in spending cuts. Senate Majority Leader Harry Reid (D-NV) countered with an offer of a discretionary spending freeze, which Republicans rejected. A new Republican proposal would cut spending by about $4 billion while keeping the federal government running for another two weeks. This plan will have to pass both the House and the Senate before Friday, leaving Congress to craft an additional plan going beyond that two-week window. According to The Hill, these cuts include general highway spending, smaller cuts to election assistance grants, broadband direct loan subsidies through USDA and the Smithsonian Institution legacy fund.

Since 23 seats currently held by Democrats will be on the ballot in 2012, Senate Democrats had an extra incentive to avoid a government shutdown. A recent poll by The Hill shows that 29 percent of likely voters would hold Democrats responsible in the case of a government shutdown, compared to 23 percent blaming the GOP; 43 percent of likely voters would blame both parties. House Democrats, led by Minority Leader Nancy Pelosi (D-CA), plan to protest the cuts, but the Republican majority in that chamber makes it likely the plan will pass.

While speaking at a religious broadcasters convention in Nashville over the weekend, Speaker of the House John Boehner (R-OH) said, "Americans want the government to stay open, and they want it to spend less money. " He told listeners that the new House Republican majority was not elected to shut down the federal government, but Congress will have to take a look at Medicare and Social Security spending to balance the budget. These popular entitlement programs contribute the largest portion of the long-term deficit in most forecasts, and any deficit-reduction program will likely tackle entitlement spending.

Because polls show that cuts to these programs would be unpopular, it's uncertain whether other members of Congress will look to reform them anytime soon.