MuniLand

Much as the Simpson-Bowles report aspired to be the foremost guide to reducing the federal deficit, the Volcker-Ravitch report on the state budget crisis that was released yesterday hopes to serve a similar purpose for state government spending. Paul Volcker, the former Fed chairman, and Richard Ravitch, who helped New York City work itself out of bankruptcy, led the State Budget Crisis Task Force, the group that produced this report. The task force also included two former U.S. Treasury Secretaries as members. The bottom line of the report is that there is less money to go around and that states should become better managers of the shrinking economic pie:

The United States Constitution leaves to states the responsibility for most domestic governmental functions: states and their localities largely finance and build public infrastructure, educate our children, maintain public safety, and implement the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers – 15 percent of the national total and 6 times as many workers as the federal government…

…States are grappling with unprecedented fiscal crises. Even before the 2008 financial collapse, many states faced long-term structural problems. Many economists believe that in the aftermath of the crisis, the economy will grow sluggishly for years as it works off the excesses of the credit and real estate bubbles and endures slow employment growth. Tax revenues are recovering slowly and remain well below their pre-crisis trends.

Basically states, once flush with revenues, have overpromised benefits to their retirees, set aside too little in reserves to cover their liabilities, mismanaged their books and sat idly by while their tax base eroded as a result of changes in consumer behavior. The two big issues for state budgets are public pensions and Medicaid, both of which are somewhat out of the states’ control. Although states assume about half the cost of Medicaid, decisions about the program are made at the federal level. States must apply to Washington for an exemption to make changes to their program. Pension benefits are enshrined in contracts and are generally governed by a state’s constitution. Making changes to pensions, outside of bankruptcy, is either impossible or would require constitutional amendments.

The report is a landmark for recognizing that the decades-long expansion of state and local governments must come to an end. Harsh economic conditions have collided with gross structural imbalances, and the report highlights the dimensions of the wreckage.

Millions of uninsured Americans will now have access to healthcare as a result of the Supreme Court’s decision last Thursday to uphold the Affordable Care Act. This is a big step forward for the nation, but it raises questions about funding. The nation is already starved for revenue and is supposed to cut $1.2 trillion from the federal budget over the next eight years through the sequestration process.

Under sequestration, one or more of the three major areas of the budget – defense spending, Medicare or Medicaid – need to be cut. Congress is now trying to have President Obama show where these cuts will be made. But the Daily Caller is reporting that the president doesn’t intend to implement sequestration for the military:

President Barack Obama’s White House has told at least one defense contractor not to worry – sequestration isn’t really going to happen.

The Supreme Court’s decision to uphold the Affordable Care Act just created an unenviable task for governors across the country.

To grant healthcare coverage to all Americans, the ACA involves an expansion of Medicaid, a program jointly funded by the federal and state governments and administered by the states for the poorest Americans. Under the expansion, an estimated 18 million people who previously lacked health insurance will be swept into the Medicaid program. Even though the federal government will bear the full cost of this expansion in the first year and 90 percent of it in subsequent years, states will shoulder some of the program’s administrative costs.

Adding 18 million people to the Medicaid rolls is a challenge in itself, but it also comes amid fears that Congress will decide to cut spending on social programs like Medicaid as a way to decrease the federal deficit. Wary of unfunded mandates like this one, some governors are hinting that they will refuse to expand healthcare coverage under the Medicaid program despite the federal government’s offer to pay for nearly all of it:

Senior citizens account for a greater share of the population of Florida than of any other state in the country: 18.1 percent of the residents of the Sunshine State are over the age of 65, compared with the national weighted average of 12.7 percent. There are some obvious reasons for the state’s popularity among the elderly: It has excellent winter weather and is one of nine states with no income tax.

There’s also some indication that in the past Florida has explicitly courted seniors and encouraged them to relocate there. A 2002 report by then-Governor Jeb Bush’s Destination Florida Commission said this (emphasis mine):

Thinking of retirement as an important industry allows Florida to recognize the economic and social value of current elders and the aging baby boomer population. Retirement is a stable growth industry. Jobs and businesses needed to sustain this industry run the gamut from hospitality to health care, from janitorial workers to neurosurgeons…

A surprising campaign called Choosing Wisely launched this week. Nine of the nation’s top medical societies joined together to put their support behind the effort to cut the number of unnecessary medical tests. The campaign marks a turning point for the practice of medicine in an economy that devotes 17 percent of its resources to curing illness, the highest level in the world. Previously, efforts to rein in medical spending have been led by health management organizations (HMOs) and other groups responsible for the payment of healthcare. It is a big shift for healthcare providers to take the lead in reining in costs.

States are increasingly burdened by their responsibility to provide healthcare through the Medicaid program, which serves over 58 million people. The new direction that Choosing Wisely advocates has the potential to lessen the strain on state budgets, as CBS News reports:

Doctors from nine of the top medical societies in the country are warning patients and fellow doctors to choose wisely when it comes to 45 common medical tests.

Planning a 21st century power system

One of the biggest issues for America’s infrastructure is improving the national grid that moves electricity around the nation. From Wikipedia:

Historically, local governments have exercised authority over the grid and have significant disincentives to take action that would benefit states other than their own. Localities with cheap electricity have a disincentive to making interstate commerce in electricity trading easier, since other regions will be able to compete for local energy and drive up rates. Some regulators in Maine for example do not wish to address congestion problems because the congestion serves to keep Maine rates low.

In the US, generation is growing 4 times faster than transmission, but big transmission upgrades require the coordination of multiple states, a multitude of interlocking permits, and cooperation between a significant portion of the 500 companies that own the grid.

Thirty-one Republican governors have petitioned the Congressional supercommittee to devolve control of Medicaid to the states and away from Washington where it is currently supervised.  Medicaid is the government health insurance program which covers low-income earners and the elderly committed to nursing homes. Unlike other federal social entitlements, states pay a portion of the costs of the Medicaid program. The Republican governors claim that the federal government constrains their ability to develop more flexible and effective coverage. In essence Republican governors are asking that the program be transformed into a block grant rather than a proscribed benefit program. From Bloomberg:

Medicaid, the U.S. health program for the poor, should be overhauled to limit spending and let states design programs without federal interference, Republican governors said.

“The United States literally cannot afford to have the status quo on Medicaid,” said Mississippi Governor Haley Barbour, a Republican who has called for overhauling the program by ending federal oversight. “We should not have to come to Washington on bended knee and kowtow for waivers to do these kinds of things.”

The new paradigm for state and local governments is austerity.

Hard economic conditions and efforts at the federal level to achieve a balanced budget mean that funding for municipal governments will continue to contract. How will the reductions at the federal level spill over? Blunt-talking former Senator Alan Simpson, who co-chaired the National Commission on Fiscal Responsibility and Reform, was quoted recently as saying:

“(State officials) need to know the great milk cow in the sky dropped dead and that it’s over,” Simpson said in an interview for the March/April Capitol Ideas. “If they’re waiting for the next injection of some kind of funding from the feds to get the states propped up, … they probably saw the last one go by with the last compromise, which added almost $1 trillion bucks to the deficit without any reduction in spending.”

I’m sure that former Senator Simpson echoes the beliefs of many conservatives in Congress. Money is tight at the federal level, and much of the funding to states is targeted at very low income areas. It’s hard to predict how broad-based the defense of programs such as tenet-based rental assistance and child-nutrition programs will be. But the word is that the big federal program to states, Medicaid, has escaped cuts. So this potentially leaves the other programs very vulnerable. Let’s take a look at where federal dollars flow through to the states:

The states rely on the federal government for 1 out of every 3 dollars they spend. States are rightly worried that the new “super committee” established by the debt ceiling deal in Congress will be looking at these monies to reduce spending. I thought it would be useful to look at the federal budget and get a sense of the size and composition of these expenditures.

I got a large table of data from the Government Printing Office (GPO) that shows the Congressionally authorized grants to the states. About half these monies are administered by states and flow through their budgets (see especially Medicaid and education funding) and the balance are distributed as federal programs. Here are the main programs administered by the states in this pie chart. Federal unemployment assistance is not included in this area of the budget.

Medicaid has always been the biggest cash transfer program to the states. It requires matching funds from state and county governments. Although it escaped mandatory reductions in the first phase of deficit reduction it’s the area that has governors and legislators most concerned. Medicaid is the poor cousin to other health insurance programs and it generally pays the lowest reimbursement rates. Some creative thinking is needed for this widely used health insurance program.

Debt deal for states

As we reach the end game in Washington, states still have no idea how a reduction in federal spending will trickle down to their budgets. Stateline.org drills down to the number one concern of governors and state legislators — Medicaid (emphasis mine):

Among the biggest concerns for states was — and remains — the fate of Medicaid, the joint state-federal health insurance program serving more than 60 million poor Americans. That’s because Medicaid is generally the biggest item in state budgets. In the short term, the debt deal appears to spare Medicaid from immediate cuts in federal support. What’s more, Medicaid was specifically exempted from a “trigger” mechanism that would reduce spending automatically if the special congressional committee does not achieve its deficit-reduction goals.

Further:

NYT: States and Cities Brace for Far Less Money From Washington

Reuters: Three reasons conservatives should oppose a balanced budget amendment

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Medicaid moguls

As a nice bookend to state officials’ concerns about Medicaid, the New York Times has an outstanding piece today on the excessive pay for executives who provide care to the developmentally disabled. Medicaid funds these programs with federal and state dollars. All is not well in the public, non-profit sector. From the NYT: