Budget cuts and federal funding rules have put a number of states in jeopardy of being penalized millions of dollars from their all-important federal block grant allocations -- a double-whammy that state officials say could seriously impair their ability to provide addiction services.

Under the rules governing the $2-billion federal Substance Abuse Prevention and Treatment Block Grant (SAPT), states are penalized if they fail to keep addiction spending levels within three percent of what they have spent, on average, during the previous two fiscal years. For each dollar the state falls short of the block grant's Maintenance of Effort (MOE) target, they risk losing a dollar of federal funding.

The Massachusetts state budget for FY2003, for example, fell $9.1 million short of what the state spent over the previous two years, meaning the state also could lose an additional $9.1 million in SAPT block-grant funds. Texas faces a possible $10-million penalty for FY2003 because of a budget recission ordered by the state legislature. California officials, meanwhile, worry that they will face MOE problems of their own if the state legislature does not support renewal of the $120 million in treatment spending authorized by voters under Proposition 36.

Designed to Protect

The MOE requirement was put into place to prevent states from substituting federal money for state funds spent on addiction services. Since all states receive a share of block grant funds, any money withheld from those who fail to meet their MOE requirements would be redistributed to the other states.

During the past two years, at least four states -- Massachusetts, Iowa, Texas, and South Carolina -- have formally requested waivers of the block-grant penalties from the Substance Abuse and Mental Health Services Administration (SAMHSA). Waivers can only be granted if the secretary of the Department of Health and Human Services determines that the state has suffered "extraordinary economic conditions," defined as a financial crisis in which state tax revenues decline significantly and either unemployment rises or employment drops.

In response to a Freedom of Information Act (FOIA) request submitted by Join Together seeking all waiver requests submitted by states within the past five years, SAMHSA provided documentation of waiver requests submitted by South Carolina in September 2002 seeking relief for the FY2002 block grant; by Massachusetts in December 2002, also seeking a waiver for FY02; and by Iowa in November 2003, seeking a waiver for FY2003.

Subsequently, Join Together learned that the state of Texas also had submitted a waiver request to SAMHSA for FY03, and that Massachusetts is seeking a second waiver, for FY03, as well. Other federal documents obtained by Join Together indicate that as many as eight states have had their budgets cut to the point where their federal block-grant dollars are in jeopardy.

Mark Weber, a spokesperson for SAMHSA, said the number of waiver applications received by the agency "waxes and wanes" from year to year, but said there "hasn't been a huge spike" in waiver requests since 2001. Weber described "a handful" of states that have had MOE difficulties, but SAMHSA would not provide Join Together with the exact number of states that the agency has been communicating with regarding budgetary and MOE issues.

"It certainly has been an issue in a number of states," said Paul Samuels, director of the Legal Action Center, which provides legal services and other support to groups like the State Associations of Addiction Services, whose members rely on the block grant as a primary funding source. "There have been a number of states that have contemplated or implemented cuts to addiction services, and in those cases MOE becomes a big issue."

Mixed Response

SAMHSA's response to the waiver requests has been mixed: in April 2003, waivers were granted to South Carolina for an MOE shortfall of $1.76 million and to Massachusetts for a $4.63 million shortfall, and Iowa was granted a waiver for a $380,000 shortfall in January, 2004.

In its FY02 request, Massachusetts successfully argued that the shortfall was due to "reduced revenue during this mild recession as well as aftereffects following the events of Sept. 11, 2001," and said that addiction services had not been singled out during wide-ranging budget cuts. Similar arguments were made by South Carolina and Iowa, and each state was able to demonstrate the employment and tax-revenue declines required to qualify for a waiver.

However, SAMHSA denied the $10-million waiver request submitted by Texas for FY03, and also has balked at a second waiver request from Massachusetts, which is seeking a $9.1-million block-grant waiver for FY03.

"We have every intention of enforcing the law as it is written, while working with states that have raised issues [with MOE] on an individual basis," SAMHSA spokesperson Mark Weber told Join Together. "Our number-one goal is getting services to people in need, but there's a law is in place that we need to adhere to."

Concept vs. Reality

In less-lean budgetary times, the MOE has often been a useful policy tool for advocates and state agency directors, who could argue against funding cuts by telling lawmakers that deep cuts would trigger the federal penalties. Indeed, in the midst of its current budget crisis, Massachusetts advocates were able to use the MOE as leverage to win a $11.9-million special supplemental budget appropriation for addiction services. However, while this funding should prevent Massachusetts from having MOE issues in FY04, it doesn't directly impact the state's FY03 waiver request.

"My experience over the past 20 years is that states can manage to put the money into addiction programs, especially with MOE hanging over their heads," said the Legal Action Center's Samuels. "Without MOE, you really would risk losing money in a lot of states."

John Carnevale, president of Carnevale & Associates and a former staffer with the federal Office of National Drug Control Policy, said the MOE concept works as long as state budgets remain level or increase. "It says to states, 'We're going to give you this money and make sure that you keep up your end,' which makes perfect sense," he said. "But when you have a downturn, all bets are off."

Critics say the MOE rules have proven inflexible in the face of sharp and broad cuts in state spending because they only cause more pain if states legitimately cannot come up with the money to meet the MOE requirement in a given year. Also, when spending cuts occur across the board, other constituencies and programs with their own MOE requirements are affected, making it a less-powerful tool for persuading lawmakers to back addiction services over others.

The block-grant MOE's two-year averaging rule also may have had the unintended effect of punishing states that, prior to the recent budget crises, had been increasing their spending for addiction services.

"It creates a disincentive for states to spend over their MOE target levels, because they get penalized for a short-term economic downturn," said Michael Botticelli, assistant commissioner for substance-abuse services in the Massachusetts Department of Public Health.

Ann Horn, deputy director of the department of administration in the California Department of Health Services, agreed. "Legislators and administrators have been unwilling to put extra money into substance abuse because of the MOE requirement, not only in California but in other states, as well," she said.

The 'MOE Bank'

Botticelli said members of the National Association of State Alcohol and Drug Abuse Directors (NASADAD) have proposed to address the problem by allowing states to establish an "MOE bank" that would give states credit for spending above their MOE targets. "Every dollar over the target amount would go into the savings account, so that when states can't maintain their spending they can 'draw upon' their account before they incur penalties," said Botticelli.

In appealing Massachusetts' FY03 waiver denial, Botticelli is asking SAMHSA to take into account the state's' strong record of funding addiction services during the past decade. Dave Wanser, deputy commissioner for behavioral and community health in the Texas Department of State Health Services, also is asking SAMHSA to reconsider its denial of his waiver request, arguing that the budget cuts have not significantly impacted the number of people getting addiction services, and requesting that a five-percent funding match required of Texas providers be included in the MOE calculation.

"I've always hated the MOE issue," said Janet Zwick, director of the Iowa Division of Health Promotion, Prevention, and Addictive Behaviors in the state Department of Public Health. "I think we have numerous states with budget cuts, and I can't believe we won't have many with MOE issues. I would like to see SAMHSA work with the states to make sure they don't lose money."

Botticelli and other state directors describe SAMHSA officials as generally willing to work with states to resolve the MOE crisis. "They don't want to see states lose money," said Botticelli.

Weber said SAMHSA is "open to all reasonable options," adding, "We're optimistic that we'll be able to work things out with the states. That's why we have this appeals process in place."

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