Failing to Extend Federal Recovery Funding will Cost Jobs

Federal fiscal relief to states is set to expire at the end of 2010, but state fiscal shortfalls (including Washington State's) are expected to last into 2012 or longer. A new round of fiscal relief could help offset the damaging cuts proposed in the Governor's recent budget and provide a boost to the recovery. In order to be of use to Washington State, Congress must act soon so these funds can be included in the budget process.

In Washington State, there has been record drops in state revenue at the same time as dramatic increases in the need for public structures that provide health care, economic security, and job retraining. We are not alone. At least 38 other states have mid-year deficits that have opened up after balancing their budgets earlier this year (more detail). The actions that states must take to close these deficits could cost the economy as many as 900,000 jobs.

In the last round of deficit-closing, most states including Washington State relied heavily on federal fiscal relief. These funds helped stave off even deeper cuts in health care and education and provided a boost to the economy. The graph below shows how much of the total state fiscal gap was closed through federal recovery funds. It also shows how deficits continue into fiscal year 2012, after the federal relief has ended.

Federal legislation will give a $250 billion tax cut to wealthy estates

Last week during floor debate of the budget resolution, the U.S. Senate narrowly approved a $250 billion reduction in the federal estate tax. While not binding, the vote could set a precedent for the direction that estate tax legislation will take in Congress later this year.

The tax cut came in the form of an amendment to the budget resolution. It was proposed by Senators Lincoln (D, AR) and Kyl (R, AZ) and passed by a 51-48 margin. Washington Senators Patty Murray and Maria Cantwell joined ten other Democrats and Senate Republicans in approving the measure.

Current federal estate tax law allows a $3.5 million exemption for individuals and $7million for couples with a flat tax rate of 45 percent (although the average effective rate is much lower at 16.5 percent*). At this level, only three in every one thousand estates owe federal taxes. President Obama and the House of Representatives both called for freezing the estate tax at 2009 levels in their budget proposals.

The Lincoln-Kyl amendment increases the estate tax exemption to $10 million per couple and $5 million per individual with a lower rate of 35 percent. Over ten years, it would result in $250 billion in lost revenue for the federal government.

*Source: Tax Policy Center

Senate Budget Does Not Take Full Advantage of Federal Funds

The Senate budget contains $2.7 billion in cuts for the Department of Social and Health Services, the primary agency responsible for health care and economic security programs in the state. These cuts are partially replaced by new federal funding. However, the Senate proposal cuts too deeply, resulting in a budget that does not fully take advantage of federal funds.

In order to keep from losing available federal recovery funds, the state must avoid deep cuts such as these by raising new revenue.


Federal increases
Of the $2.7 billion in cuts, only 63 percent is offset by increases in federal funding. This includes an increase in the federal government's share of Medicaid spending, a boost in food assistance funding, and money available to pay for caseload increases in TANF.

Lost federal money
Federal recovery funds are contingent on continued state investments in these areas. Fully 25 percent of the cuts in DSHS are associated with loss of federal money. Many of these cuts are in the Medicaid program. Some examples:

• A $33 million cut in reimbursements for providers of Medicaid and SCHIP managed care services will result in a loss of $44 million in federal money, more than doubling the total size of the cut.
• A $46 million cut in reimbursements for inpatient hospital stays results in a loss of $61 million in federal money.
• A $38 million cut in nursing home rates results in a loss of $56 million in federal funds.
  
• A $18 million cut in reimbursements for pediatric services results in a $25 million loss in federal funds.
  

Other cuts not replaced by federal funding
Aside from those mentioned above, there are $311 million cuts in funding for health care and economic security programs that will not be replaced by federal dollars and are therefore real cuts that affect the health and economic security of Washingtonians. The largest include severe restrictions on GA-U eligibility and reductions in mental health services.*

* A $69 million cut in TANF is listed in the LEAP documents as not having a direct federal impact. However, this may not fully account for limitations on federal TANF money. We'll update this as we find out more.

Source: fiscal.wa.gov

Accounting for Medicaid Spending Growth

Medical assistance has been one of the fastest growing segments of the budget in the last decade, which prompts some in the state to argue for spending cuts in this area. But it is important to understand the reasons for this growth, particularly that our Medicaid investment has grown significantly to meet our commitment to care for Washington’s seniors and people with disabilities.

To understand Medicaid spending, I divided Medicaid beneficiaries into two groups: a) people over age 65 and/or with disabilities, and b) all other low income children and adults. The cost of serving these two groups is quite different. In 2005, seniors and people with disabilities made up 21 percent of Medicaid enrollees, but accounted for 61 percent of categorized spending (Figure 1). Other adults and children make up 79 percent of enrollees, but only 39 percent of spending.


The growth in spending on medical assistance can be understood along these same lines: people over age 65 and/or with disabilities compared to all other low income children and adults. In addition, growth can be evaluated based on changes in enrollment and per-person spending. Using expenditure and enrollment data from the federal Department of Health and Human Services, I broke down nationwide Medicaid spending growth between 1995 and 2005 into the following four categories (also see Figure 2, below):

• Enrollment of seniors and people with disabilities: Eligibility guidelines have not changed significantly for this group of people, but the population is aging, medical advancements are extending life expectancy, and economic factors have played a role. This factor explains nearly one-third of the total growth in spending.


• Per-person spending on seniors and people with disabilities: The cost of health care and changing benefits have risen significantly for this population, contributing nearly one-third of the national growth in spending. (In Washington State, a shift from institutional care to home and community based care has controlled spending growth.)


• Enrollment of other low income children and adults: A growing state and national commitment to expanding access to health care as well as an economic downturn led to enrollment growth, which accounted for 27 percent of total spending growth.


• Per-person spending on other low income children and adults: The significant growth in enrollment was offset by the relatively low per-person cost. Growth in per-person spending on this group was lower than health care spending growth in the economy as a whole and only contributed 9 percent of the total spending growth.

Altogether, nearly two-thirds of spending growth is attributable to the 21 percent of Medicaid recipients who are over age 65 and/or have disabilities. A key factor is the high cost of long-term care (including nursing homes and home health services), which accounted for one-third of total medical assistance spending in 2006.

For many people needing long-term care, options are limited. Private long-term care insurance is often prohibitively expensive. Medicare, a social insurance program that all workers pay into in order to receive health benefits upon retirement, does not provide long-term care benefits. Medicaid becomes the only option for many, although because it is only available to the poor, people have to “spend down” their resources in order to become eligible.

This problem is not limited to the current deficit. The overall population is aging, medical advancements are extending life expectancy, and the cost of health care continues to grow. In addition, the state will bear much of the responsibility for long-term care because the federal government has shifted the costs from Medicare (a federally-funded program) to Medicaid (a program in which the state must pay approximately half the cost). This affects Medicaid’s ability to meet its core mission of providing health care to the poorest Americans.

Long-term care must be comprehensively addressed. A federal modernization of Medicare is required as is a long-term financing model to ensure the affordability of long-term care for middle-income families. In the meantime, Washington policymakers must be cautious about reducing the benefits provided to these vulnerable populations.

$3 Billion for Washington State Fiscal Relief

The federal stimulus package, which may finally be a done deal, includes a number of provisions that will affect Washington State. The two that will have a significant direct effect on the state deficit are an FMAP boost (see my update on that) and the state fiscal stabilization fund. Together, the total is just over $3 billion.

The state fiscal stabilization fund is split into two portions. One is dedicated to education; the other is more flexible. The block grant for education (about $820 million for Washington State) can be used to stabilize state education funding, with any remaining money going to school districts.

The more flexible portion can be used to shore up state funding in other basic services and can also be used for school modernization, renovation, or repair.

More detail on the state fiscal stablization fund can be found here.

UPDATE: Federal Stimulus Requires State Investment in Health Care

NEW NUMBERS AND GRAPH BELOW
Public access to affordable health insurance is especially important during a recession. For many people, the loss of a job means the loss of health care. For those whose jobs didn’t provide health insurance, the loss of income makes health care even less affordable. Now is not the time to cut state investments in the health and well-being of people in Washington.

The federal economic recovery package that is being debated in Congress will likely include an increase in the Federal Medicaid Assistance Percentage (FMAP). This provision will ease some of the pressure on the state budget and allow us to protect other key health programs. But if we’re not careful, budgeting decisions could result in deep cuts in essential services and the forfeiture of some federal funding.

FMAP is the share of Medicaid spending that is covered by the federal government. (Medicaid is the primary source of public health insurance for lower income families across the country. It is funded jointly by states and the federal government.) Washington State’s FMAP is about 50%. So out of the roughly $4 billion spent annually on Medicaid in Washington, the state covers about $2 billion and the federal government covers about $2 billion.

If the recovery bill passes in its current form, federal dollars for Medicaid would rise. We will be able to reduce our state spending on Medicaid without reducing total spending. This would happen through an immediate increase in the state’s FMAP to 60% or perhaps higher. That would mean that the federal government would pay for 60% (instead of 50%) of our $4 billion Medicaid program. The state would only be required to pay 40% (see graph below).


In that scenario, we could reduce our state Medicaid spending from roughly $2 billion to roughly $1.6 billion without cutting people off the program or reducing benefits. This will free up money we would otherwise spend on Medicaid to protect other important health care programs. (Medicaid is only one piece of the health care system in danger due to the deficit.)

A word of caution, however: If we cut Medicaid spending any more than the FMAP increase will cover, we’ll kill the golden goose. Suppose we cut our Medicaid spending by an additional $100 million per year over the amount covered by the recovery package. Because the federal government will only fund 60% of the total funding, the federal share would also fall—by $150 million. We would lose $1.50 in federal funding for every additional $1.00 we cut. It would be a bad move for people suffering from the recession and it would be a bad move for the state economy.

UPDATE
Based on the latest estimates from the Government Accountability Office (GAO), the federal recovery package will increase federal Medicaid spending by $2.06 billion between now and the first quarter of 2011. The state will be able to reduce Medicaid spending by $2.06 billion over the three fiscal years while keeping total spending on the program constant. The money will be divided among fiscal years as shown in the graph below, according to the GAO.

We Need a Strong Recovery, Quick

For workers with lower and moderate hourly wages, the current recession comes at a precarious time. The losses in income that workers are expected to incur now come on the heels of an insufficient recovery from the last recession in 2001.

The graph below shows the growth in average hourly wages for the lower-earning half of the Washington State workforce. Wages are adjusted for inflation.


There are three very different time periods:

BOOM: Low unemployment and robust job growth translated to strong wage growth in the last half of the 1990s.

BUST: After adjusting for inflation, there was no wage growth among lower and moderate wage workers.

BUSTED BOOM: When job growth started to rebound after the 2001 recession, wage growth improved, but stayed very anemic.

We only have comparable wage data through 2008 at this point, but it’s a safe bet that wages are taking another hit. Looking ahead, not only can workers not afford this recession, they can’t afford another recovery like the last one.

* Data is based on analysis of CPS-ORG microdata, following the methodology used in State of Working America. Want more detail? Let me know.

Five Facts About the Economy and Deficit Fact 4: The Economy Needs a Big Push

As everyone knows by now, our state economy is in a recession. People are feeling the pinch at home and so are retailers and manufacturers. The question we all want answered is, how do we get the economy moving again?

It helps to understand what exactly is meant by the term “recession.” The economist Jared Bernstein, who is my former boss and is now Vice President Biden’s Chief Economist, sums it up well:

Economies depend on robust demand. When folks stop buying, when investors leave the room, when governments stop building and improving public goods, growth grinds to a halt. And when that happens, the job machine stalls, unemployment rises, those with jobs work fewer hours, wages rise more slowly, and incomes decline, especially for the lowest earners and many minorities.

Lately there has been much talk of a federal stimulus plan to quickly get more money flowing in the economy. There are lots of ways to do that, but some of them are better than others. Mark Zandi from economy.com suggests the best route is to target dollars at lower and middle income households who need the cash and will quickly spend it.

In fact, he estimates the biggest “fiscal economic bank for the buck” (his phrase) comes from increasing unemployment benefits and food stamps. Spending on infrastructure would come next, followed closely by aid to state governments. By comparison, tax cuts seem like a waste of money in terms of stimulus.

When it comes to state government, economic recovery can be more difficult because most states need to balance their budgets. Basic economics says that both tax increases and spending cuts are harmful to the economy during a recession. Using our nascent Rainy Day Fund helps a little. Washington also expects federal aid for health care, economic security, and education, but there’s still a large gap.

So what do we do? Do we choose tax increases or spending cuts?

The Governor’s budget proposal comes down on one side of this question. During the election campaign last fall, she promised not to raise taxes and her budget plan for 2009-11 calls for deep spending cuts to the tune of $3.6 billion.

This is not a position backed up by economic research. Nobel Prize winner Joseph Stiglitz who is the new head of the federal Office of Management and Budget says, “Tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run.”

The Governor has also made some smart decisions to help get the economy moving. She has proposed using money from the Unemployment Insurance Trust Fund to temporarily increase benefits for unemployed workers. That plan does not require tax increases and puts money quickly into the economy. It also helps struggling workers. The Governor and legislative leaders have also proposed moving quickly on ready-to-go capital infrastructure improvements.

Legislative Session Starts, Lawmakers Look to D.C. for Help

The legislative session started today. As we’ve discussed, this session carries with it the challenge of overcoming the largest deficit in decades.

But as Brad Shannon pointed out yesterday in The Olympian, lawmakers also face another enormous challenge: how to "leverage spending to increase jobs, avoid layoffs and spur economic growth."

One strategy of the economy-boosting agenda is to coordinate state plans with programs for economic stimulus that will come from the federal government under President-elect Barack Obama. Shannon's article contains detail on the plans of legislative leaders.

The word from D.C. is that aid to the states is likely to come in the form of block grants and possibly through expanding existing programs that funnel money to transportation or wastewater projects, Shannon says. Gregoire’s list to Congress included $132.9 million for transportation projects and $352.7 million in water and sewer projects.

Federal aid may still be a few months away.