The fiscal balances of state and local governments will rapidly deteriorate in less than a decade and Medicaid spending is the principal culprit, according to a new American Enterprise Institute report based upon a Government Accountability Office study.

Measured as a percentage of the state's fiscal year 2008 general fund, Arizona's projected FY 2009 deficit was the most serious shortfall of any state, due chiefly to the state's expansion of its Medicaid program and the perverse incentives created by Medicaid's inordinately generous transfers to the states, write Greve and Wallach.

By making program expansions look cheap and making cuts look outrageously expensive, federal matching grants ratchet up spending and taxes and tend to exacerbate the states' boom-and-bust budget cycles. With a Medicaid matching rate of 66.2 percent, for each dollar Arizona spends on Medicaid, the federal government sends the state $1.96. Medicaid spending in Arizona now exceeds the average spending level and has increased from roughly 8 percent of general fund spending to a projected 14.4 percent in FY 2009.