Fiscal Truth and the Blame Game

Posted on February 26, 2013 by billmanzi

So we are arriving at the sequester moment of truth, and the “spinning” from all involved has reached feverish pitch. Who is to blame, is there a “scare game” being run by the White House, whose idea was it to actually have a sequester, did the President move the goalposts, and on and on we go.

So what is actually going on? The President has said that he wants a deal to avoid the sequester that has both revenue and cuts, a balanced approach. The Republicans say that the President “got his tax increase” after the fiscal cliff deal, and revenues are off the table. The sides are at loggerheads, and with all of the finger pointing it can be difficult to figure out how we got here and how we get out of here. Are both Parties responsible equally?

If you listen to folks like Joe Scarborough in the morning you might actually believe that President Obama was mostly responsible. Others who have made a living from appearing to be “centrist” or “bi-partisan” have weighed in by saying that both parties are equally responsible for the mess. Chris Matthews of “Hardball” was on Morning Joe talking about the Democrats “refusal to cut spending” and how Democrats should just go right to entitlement reform without any concessions from Republicans on revenues because revenues were just too difficult for Republicans to compromise on. We have someone that I respect, unlike many of my Democratic friends, David Brooks, writing a column on the sequester, in which he hits both sides pretty hard. His criticism of the President led him to write the following in that column:

Sequestration allows the White House to do this all over again. The president hasn’t actually come up with a proposal to avert sequestration, let alone one that is politically plausible.

He does have a vague and politically convenient concept. (Tax increases on the rich!) He does have a chance to lead the country into a budget showdown with furloughed workers and general mayhem, for which people will primarily blame Republicans. And he does have the chance to achieve the same thing he has achieved so frequently over the past two years, political success and legislative mediocrity.

I like Brooks because I think he wants to get to a solution that requires both sides to give some. But most media folks, be they local, state, or national try to give some functional equivalence to coverage because they believe “fairness” requires it. In Brooks case he feels, (in my opinion), that his objectivity will be called into question if he does not show some of that “equivalence” in his comments on the fiscal situation. Unlike Scarborough Brooks is willing to admit error, which led him to talk about the “equivalency” issue with Ezra Klein over at the Washington Post after the publication of the above mentioned column. Brooks admits to Klein that his criticism of the President was off the mark, and actually appended a “correction” to his column. That “correction”?

The above column was written in a mood of justified frustration over the fiscal idiocy that is about to envelop the nation. But in at least one respect I let my frustration get the better of me. It is true, as the director of the Congressional Budget Office has testified, that the administration has not proposed a specific anti-sequester proposal that can be scored or passed into law. It is not fair to suggest, as I did, that tax hikes for the rich is the sole content of the president’s approach. The White House has proposed various constructive changes to spending levels and entitlement programs. These changes are not nearly adequate in my view, but they do exist, and I should have acknowledged the balanced and tough-minded elements in the president’s approach.

Brooks was fair enough to admit error. And if we could look at this without rancor or pre-dispositions you would have to see that Brooks, and others, are just struggling mightily because they want to appear even handed, but when faced with real numbers they just collapse. Who is the negotiator who has put both revenues and cuts on the table? Only President Obama has. You may believe that what he has offered is insufficient, and you may be right. But how do you ever find out if one party just says that it is ENTIRELY my way, or the highway. That would be the Republicans. Scarborough and folks like him have the nerve to say they favor Simpson-Bowles, and then speak out of the other side of their mouth by saying that the President has “already gotten revenues”. Really? The President got $600 billion over ten years by compromising on the rescission of the Bush tax cuts for those earning above $400,000 in January. Simpson-Bowles had built into their BASELINE $800 billion from that increase, as well as about $1.2 trillion in additional revenues from tax reform. (Closing loopholes, etc.)Total revenues from Simpson-Bowles are over $2 trillion. Despite that fact you have Republican apologists trying to cover the Republican negotiating position of ZERO compromise by distorting the issues and blaming the only negotiator with both cuts and revenues on the table.

Finally let us look at the contention that the President got revenues the last time, and the sequester was meant only for cuts. (The Bob Woodward position) The sequester was designed as a trigger, to be used only if the so called “super-committee” failed to achieve the requisite amount of deficit reduction. With Republicans refusing to enter a “big deal” on deficit reduction we are left with a series of small deals to achieve the overall goal. So if someone says they are for the Simpson-Bowles framework I am at a loss to see how Republican refusal to enter a “big deal” somehow obviates the need for revenues to be a part of the overall deficit reduction package. Just because the Republicans have insisted on cutting the deficit reduction pie into smaller pieces it does not mean that the overall framework changes. Each piece just gets smaller. And the revenues included in the larger framework must be included in each smaller piece.

I understand that some honest brokers believe that the President has not made sufficient effort on the issue of entitlement reform and spending restraint. And I think people like Brooks believe that if the Republicans negotiated honestly that the President would be spotted for an unwillingness to take bold deficit reduction steps that would anger his base. But they, in their heart of hearts, understand that the Republicans have, through their intransigent negotiating position, exempted the President from that criticism. We just have not gotten there. So many of them have chosen to cut out the Republican middleman and issue the criticism anyway. But cold hard facts are difficult to just swat away, unless you live in the Republican House. Brooks admitted that to Ezra Klein, and in his column addendum. The President, at least for today, is immunized from criticism not because he is perfect, but because he does not have a serious negotiating partner on fiscal issues.

Posted in National News | Tagged , , | Leave a comment

Steve Lynch in Methuen

Posted on February 21, 2013 by billmanzi

U.S. Representative Steve Lynch stopped in Methuen yesterday to talk with residents and supporters at Park Garden Apartments to talk about his candidacy for U.S. Senate. Rep. Lynch talked about his commitment to seniors, and Medicare and Social Security specifically. We learned something about his background and family life, including the many years he spent as an iron worker. Rep. Lynch talked about his personal experience with job loss, and the value he places on growing investment and jobs in the American economy. It was great to have him in Methuen, and we look forward to seeing him again.

Posted in Methuen, National News, State News, U.S. Senate Race | Tagged , , | Leave a comment

Health Care, Deficits, Krugman and Scarborough

Posted on February 19, 2013 by billmanzi

A big scrum has broken out on the subject of the deficit, with Paul Krugman’s appearance on “Morning Joe” setting off a pretty good back and forth on the issue, with Krugman taking a deficit position that Scarborough has chosen to attack as irresponsible. What did Krugman actually say? Krugman has been a vocal opponent of “austerity” policies, pointing to the fact that slashing government spending in times of recession leads to economic contraction and job loss, the last thing that this economy needs right now. He has refused to accept the idea that the “debt” and the “deficit” are immediate threats, rather pointing to the need for economic recovery before the debt issue is fully addressed. I believe that his view is that government spending will fill a hole created by the economic downturn, and that attempts to immediately reduce government spending (austerity) will create economic contraction. Krugman points to the European experience with austerity (Britain, Ireland) as an example of the failure of these policies. In light of the severe recession Krugman’s point is that austerity will create a “death spiral”, with austerity contracting the economy, driving up debt as a percentage of GDP, leading to further austerity, further contraction, and on and on we go.

The so called “deficit scold” network is led by the Simpson-Bowles Commission folks and the Pete Peterson Foundation, with Scarborough as a cheerleader. Their focus is on “entitlement reform”, as it is clear that under current economic conditions the numbers involved (Medicare and Medicaid) just do not work. As Scarborough is fond of saying you can make no appreciable progress on the long term fiscal imbalance without addressing the real drivers of the deficit and our debt: Medicare, Medicaid, Social Security, and Defense. The massive increase in health care costs in the United States have driven this fiscal problem, as both Medicare and Medicaid are sagging under the weight of health care inflation. Scarborough is a Republican who likes to tweek the President for “lack of leadership” on fiscal issues, and who has launched a public relations jihad against Krugman after Krugman said, on his show, that we should not worry about the debt and deficit until the country was on a solid trajectory on job and economic growth. Scarborough has obsessed on it, going back and forth with Krugman through the blogs each writes. Here is Scarborough’s opening salvo:

Mr. Krugman came on “Morning Joe” and declared that Washington needn’t worry about its long-term debt problem until the moment that programs like Medicare begin melting down.
“If we are worried about health care costs in the year 2025, why do we have to worry about it now?” asked The New York Times columnist. It is a question regarding our looming entitlement crisis that is every bit as ridiculous as a healthy 50-year-old man asking why he should bother buying life insurance.

Krugman, of course, has fired more than a few missiles of his own.

On both sides of the Atlantic, the austerians seem to be freaking out. And that has to be good news, an indication that they realize, at some level, that they’re losing the debate.

First up, the sad story of Joe Scarborough, whose response to my anti-austerian appearance on his show has been a bizarre campaign to convince the world that absolutely nobody of consequence shares my views. Why is this bizarre? Because while I could be wrong about macroeconomics (although I’m not), it’s just not true, provably not true, that I’m alone in arguing that the current and near-future deficit aren’t problems. (Among others, there’s this guy you may have heard of).

So in the latest twist, JoScar is citing my Princeton colleague Alan Blinder, who he claims is totally at odds with my position. Hmm. The article he’s citing (which is in the Atlantic, not the New Yorker)), bears the following headline:

“How to Worry About the Deficit: (1) Don’t; (2) Wait a Few Years; (3) Then Worry About Healthcare Costs“

Is there anything we can take out of all of this? Has one side achieved intellectual victory? Anybody being carried out on a stretcher? Despite some of the difficulties in cutting through the nonsense I think there is one point that seems to be a matter of consensus.

1) Everyone in this debate now appears to agree that “short term austerity” is the wrong answer for the American economy. Well maybe everyone but the House Republican caucus. Conservative Alan Blinder, cited by Scarborough above, had this to say in his Atlantic article.

RIGHT NOW: With the economy still so weak, the case for near-term fiscal contraction is weak as well. We shouldn’t kick away the fiscal crutch until the patient is ready to walk. If I am allowed to indulge in wishful thinking, a two-pronged policy that combines modest fiscal stimulus up front with serious deficit reduction thereafter would be even better.

Scarborough has collapsed in front of the Krugman offensive on austerity, and Scarborough’s citation of Blinder makes the Krugman case stronger, not weaker. That issue seems like settled law to me. What about the predictions of doom on borrowing ability and interest rates? The so called medium term? Blinder refutes the assertion, made repeatedly by deficit hawks, that the U.S. Government will not be able to borrow, or that interest rates may spike as a result of deficit spending.

THE NEXT DECADE: Strange as it may seem with trillion-dollar-plus deficits for four years running, the U.S. government still has no short-run borrowing problem. On the contrary, investors all over the world are still clambering to lend us money at negative real interest rates. In purchasing power terms, they are willing–nay, eager–to pay our government to borrow from them!

According to the CBO’s January 2012 projections, the federal deficit as a share of GDP will shrink from 9 percent of GDP in fiscal 2011 to roughly 5 percent of GDP in fiscal years 2015-2018, without any further policy actions. To be sure, 5 percent of GDP is still too high. But coming from the stunning 10 percent of GDP in 2009, it’s a long way down. A reasonable target for deficit reduction over the next decade might be 2 to 3 percent of GDP, starting perhaps in fiscal 2014.

So once again Krugman, and now Scarborough, appear to agree that the warnings of imminent financial collapse, or interest rate Armageddon, are not credible. (Krugman’s assertions that the “deficit scolds” warnings of collapse in two years or less five years ago made him more credible seemed to drive Scarborough crazy.)

So that leaves the long term, with Krugman saying that immediate plans to reduce the deficit by addressing entitlements is not necessary, while Scarborough and others insist on structural reforms NOW. (Even though those reforms generally would not take effect for at least ten years). I guess Krugman believes in the old adage “In the long run we are all dead”. Not as big a difference as Scarborough would have you believe, and one that could be bridged quickly if we lived in a textbook world. But we do not live in such a place. So let us quickly go over some things that Joe Scarborough always seems to forget.

1) If there is going to be some agreement on entitlement reform there must be agreement on revenues. And the revenue number will not be less than Simpson-Bowles, which is about $2.2 trillion over ten years. So far we are at about $600 billion in increased revenues. The Republicans like to say that you cannot tax your way out of this problem. They are right. But you cannot cut your way out either. Hit the Simpson-Bowles revenue number and you can have a discussion on entitlements. Until then the Republicans, and Scarborough, have a one sided argument that is going nowhere.

2) Why do you need revenues? Because as high as spending is as a percentage of GDP (by historical standards) tax revenue is also at a low point. You cannot run this economy with revenues at 15.5% of GDP. It is just not possible. A major reason for that….

3) Health Care inflation. Without health care cost inflation being brought under control we are all dead. (Well, maybe just insolvent). And although Speaker Boehner and Joe Scarborough have ridiculed President Obama’s contention, made to the Speaker, that we do not have a spending problem but rather a health care problem, it is absolutely true. From the Blinder column in the Atlantic:

Now on to health care costs. The next graph adds a fourth line the graph above. It shows primary government spending other than for health care as a percent of GDP. It is the lowest of the four lines in the diagram, tracking down from around 16 percent of GDP now to only about 11 percent of GDP by 2087.In plain English, the costs of everything on which the federal government spends money except health care and interest — and that includes Social Security, defense, you name it — are projected to fall over time as a share of GDP. The message is clear: America doesn’t have a generalized spending problem that requires severe cuts across the board. We have, instead, a massive problem of exploding health care costs.

The graph charts 4 items as a percentage of GDP. Primary spending, Total Spending, Primary Spending Less Health Care, and Revenues. The difference between primary and total spending is outlay for interest payments. The graph shows what Blinder refers to in the above quote, and what Krugman has been saying for some time. It is not a spending problem. It is a HEALTH CARE problem. Until we figure out how to bend that cost curve we are in serious trouble. And if we listen to the austerity now crowd we are in even bigger trouble. Click on the graph for a larger version.

Graph

Graph

http://www.msnbc.msn.com/id/32545640

Visit NBCNews.com for breaking news, world news, and news about the economy

Posted in National News | Tagged , , , | Leave a comment

The Boston Fed: Savings Through Local Government Regionalization

Posted on February 17, 2013 by billmanzi

The Federal Reserve Bank of Boston has just issued a new study on local government in New England, with a focus on Massachusetts and Connecticut. The report, titled “The Quest for Cost Efficient Local Government in New England: What Role for Regional Consolidation?” focuses on author Yolanda Kodrzycki’s well thought out ideas on how local governments can achieve savings and efficiency through regionalization.

The report pays the necessary homage to the tradition of home rule in New England, with acknowledgement of the political difficulties inherent in consolidations across governmental units. Kodrzycki deals with what types of services may be able to be scaled to achieve substantial savings for localities, as well as those services that may not lend themselves to such savings. From the report:

Because local governments perform such a diverse array of services, policymakers need information on which ones are compelling candidates for regional consolidation. Both the experiences of local officials and the findings of scholarly studies indicate that capital- and technology-based services, as well as some other services that require specialized skills, are the services for which interlocal cooperation has the greatest potential for cost reduction. Moreover, in some cases, service quality tends to improve when public services are provided on a regional rather than a local basis. By contrast, most labor-intensive services do not exhibit economies of scale and are provided as effectively (or possibly even more effectively) by smaller jurisdictions.

Kodrzycki homes in on the services that can be shown to have such potential. Both Massachusetts and Connecticut were judged to have the greatest upside potential for savings. I will only focus on Massachusetts. The report highlights three areas where large savings are achievable for Massachusetts, with an estimate that about 20% of current local spending could be impacted. That is a big chunk of money. The areas are 9-1-1 dispatch (Public Safety Answering Points PSAP), local health services, and public pension management.

In the area of PSAPs the study showed Massachusetts has 268 call centers, ranking it 12th in the country per capita. The data also shows that over half of those call centers handle ten or less calls per day. The study, using comparative data, outlines how operational costs scale down on a per call basis as call volume goes up. (In other words the larger the PSAP the lower the cost). Before dealing a little bit more with cost let us diverge to one of the most utilized political argument against such consolidation, which is the potential for diminished service.

Whatever the optimal configuration of PSAPs from a cost standpoint, another pressing concern is the effect of consolidation on emergency response times. We performed a preliminary analysis exploring the relationship between PSAP size and response time, using data provided by the National EMS Information System. With controls for location and a variety of exogenous delay factors (such as language barriers), our tentative results suggest that larger PSAPs are actually associated with faster response times. Thus, consolidation appears to have the potential to shorten the interval between 9-1-1 calls and the dispatch of first responders, an improvement that in turn would tend to have
a beneficial impact on survival outcomes and other indicators of service effectiveness.

Back to costs, with the results being astounding. From the report:

The total operating costs for the hypothetical regional PSAP structure in Massachusetts are estimated at 39 percent of the current costs. Similar calculations using the Maryland and Pennsylvania data yield similar estimates. Thus, the data indicate that by reducing the number of PSAPs to 14, Massachusetts could reduce its overall operating costs by over 60 percent (Table 3). We used a modified procedure based on the New Jersey information,
which indicated the equipment costs for various size categories of PSAPs (as opposed to operating costs for individual PSAPs). These data suggest that Massachusetts might save an even greater percentage in ongoing equipment
expenditures (75 percent) through regional consolidation of PSAPs.

I believe that the equipment issue looms very large on this question. For local PSAP’s that may have just spent valuable capital dollars to upgrade local call systems the savings may be concentrated in operations. But for localities that need additional or updated equipment the savings is through both operations and the capital budget. That is the position Methuen found itself in as we contemplated joining the regional PSAP formed through the Essex County Sheriff’s office. With a state grant for construction of a call center, and with equipment that needed major infusions of capital the City Council rejected the proposal to enter the regional group. The savings foregone by that action amounted to hundreds of thousands of dollars. I digress to show the difficulties involved even where the savings are clear and unambiguous.

In the area of public health the report acknowledges some of the difficulty involved in making valid comparisons. Smaller health departments may actually have lower per-capita costs than larger ones, but that is due to smaller units offering substantially less by way of services. Once service provision is standardized the report shows what you might expect: larger Public Health Departments had lower per capita costs. Massachusetts has 330 Public Health Departments. So after “service equalization” what does the study show in terms of potential savings?

As shown in Table 5, the total cost of consolidated Massachusetts local public health services outside of Suffolk County is estimated to be just above one-half of the current cost. Approximately one-half of the savings result from a more efficient scale of production. The remaining one-half reflects net reductions in services under the “rounded services” scenario.

The study estimates regional consolidation, done roughly on the basis of old county lines, and excluding Suffolk County because of the Boston Health Department’s scale, would produce a 50% reduction in cost statewide. Half of that would be from some diminished services as “standardization” occurred, but half would be from economies of scale. Another pretty hefty number, but another arena where locals would rather pay more in order to control more.

Finally the report goes to pension management. Massachusetts has 100 separate pension systems, and the focus of this study is not money management per se but rather the administrative costs involved in managing these smaller systems. From the report:

Researchers have found that per capita administrative costs are higher for small defined benefit pension plans than for large defined benefit pension plans, in both the private and the public sectors.35
For this reason, some experts have argued in favor of consolidating pension plans within states in order to reduce costs.36 Advances in information technology over time strengthen their position.

In performing an analysis the author examined several different potentials for consolidation, including a consolidation of all local plans, a consolidation of all state plans, and a consolidation that included all plans, state and local. From the study:

For 2007, 54 local government pension plans and 11 state-level pension plans in Massachusetts reported administrative costs to the Census Bureau. We first consider consolidation of all local plans into a combined plan. Such a merger would eliminate the smallest public pension plans in the state (Figure 5, Panel A). According to
the regression analysis, the overall cost of administering pensions for local government employees would fall by about 38 percent (Table 7). Combining all the state-level plans into a single plan (Figure 5, Panel B) would reduce the cost of administration by 13 percent. Incorporating all state and local plans into a single plan with some 500,000 participants (Panel C) would realize even greater economies of scale. The regressions indicate that aggregate administrative costs would fall on the order of about 28 percent from current levels.

Another pretty big savings for taxpayers, and another political front where every inch of ground taken will likely be very costly to those advocating such consolidation.

The author speaks of other potential areas of savings that meet the report criteria, including finance, purchasing, and Information Technology. The report takes a pass on these potentials due to the lack of data that would allow a full analysis. The author is fully cognizant of the difficulties involved, and as far as future policies go advocates for state government to incentivize the locals in the three areas. How? Obviously financial incentives are one way, with the suggestion made (as an example) that grant funding for local call centers be shifted to regional efforts. The desire to remain fully local would become a little bit more expensive for municipalities under this suggested policy.

As a former Mayor I understand the strong resistance to policies that save money through regionalized efforts. Even when faced with savings that are large and beyond dispute locals tend to rationalize bad behavior by disputing the non-disputable, or by inventing potential service issues to rationalize foregoing the savings. For those interested in actually saving money while at the same time providing more and better services this is a report that sheds important light on ways to achieve those savings at the local level. The report can be found here.

Posted in Municipal Finance | Tagged , | Leave a comment

U.S. Senate Polling Shows Tight Race

Posted on February 15, 2013 by billmanzi

One group of folks that certainly must be delighted by all of the Massachusetts election activities has to be the polling community. Here in Massachusetts there certainly has been no down time for them. With the upcoming Special Election for U.S. Senate they will be busy for the foreseeable future. WBUR and Mass Inc have just put out some polling data on the Democratic race between U.S. Reps. Steve Lynch and Ed Markey. I have looked it over, and I think it certainly identifies what might be the major point in that race: What ballot will be taken by unenrolled voters? Will they pull a Democratic ballot or a Republican one? The Republicans appear to have four candidates in the race, and at first glance at least three have a plausible road to victory. So there will be a contested primary. What does that have to do with the Democrats? The numbers please!

Let us start by looking at the favorable/unfavorable data. We see some similarities, with Markey having a higher unfavorable. Lynch comes in at 29%/12%, with 30% having no opinion, and 27% never having heard of him. Markey sits at 29%/19%, with 26% undecided, and 25% having never heard of him. Obviously both candidates have an opportunity to shape voter views on themselves, and maybe to shape voter views on the other guy. That is where finances may play a large role. The survey asked which ballot the respondent would be likely to pull, with 48% saying Democratic, 26% Republican, and 27% not willing to say, or saying neither.

In the main event Markey leads Lynch by a 38% to 31% margin, with 26% undecided, and 4% with “other”. So we now return to the question of what the Republican primary has to do with the Democratic primary. Pollster Steve Koczela talked about that factor: From WBUR:

“One of the interesting things about the Democratic primary is it could actually be affected by the Republican primary, and what I mean by that is that where unenrolled voters vote on primary day actually will affect the Democratic primary,” Koczela said. “Right now, Steve Lynch actually does slightly better, I mean within the margin of error, but slightly better among unenrolled voters, and much better than he does among registered Democrats, where Markey has a pretty significant lead.”

The Markey lead with Democrats stands at 42% to 25%, but Lynch leads with unenrolleds who are planning on voting in the Democratic primary by a 38% to 34% margin. So that dynamic certainly will play some sort of role in this race. I am sure that the race is closer than Ed Markey would like, and my own guess is that it will tighten even more in the next few weeks. Another interesting figure shows that Lynch is the stronger candidate against a generic Republican, leading the unnamed R by a 39% to 23% margin, with 38% undecided. Markey’s lead over that generic R is at 38% to 28%, with 34% undecided. That difference is reflected in the larger lead that Lynch has over Republican Dan Winslow, with Lynch leading that match-up by a 44% to 20% margin, with 36% undecided. Markey leads that match-up by a 43% to 24% margin, with 34% undecided. Lynch, at least for today, seems to be the stronger general election candidate.

The survey showed some political strength for former Senator Scott Brown, who has a 58% favorable rating, with 62% saying he should run for office again. Mass Inc also asked about support for Governor Deval Patrick’s program of tax increases to fund transportation and education initiatives. Those that “support” the proposal, (somewhat or strongly)come in at 42%, with those opposed (somewhat or strongly) coming in at 50%, with undecided at 8%. The Governor, for all of the talk about strong opposition to tax hikes, appears to be closer than many might have thought.

The Senate race is just starting, but the outlines of the race are taking shape. After looking at the numbers you would still have to make Steve Lynch the underdog, but you can see a path to victory for him. Link to the WBUR poll here.

Posted in National News, State News, U.S. Senate Race | Tagged , , , | Leave a comment

States and Localities Continue to See Large Health Care Cost Increases

Posted on February 14, 2013 by billmanzi

A new analysis by the Pew Project for the States shows that while health care costs nationally are rising at a slower rate the costs for local and state governments are rising at double digit rates, and consuming an ever larger share of those budgets. From Pew:

While total U.S. health care spending grew slowly in 2011, rising about 4 percent, the story for state and local governments was dramatically different, according to the latest data from the Centers for Medicare & Medicaid Services. Health care spending by states and localities increased 10 percent, and consumed a larger share of revenues—about 3 out of every 10 dollars—than has been the case for these expenses since at least 1987.[1]

The POOR economy has driven a large increase in medicaid rolls, with much of that financed for three years by the federal stimulus program (ARRA). But that money has dried up. Pew talks of that dynamic, and the resulting impacts.

Under the American Recovery and Reinvestment Act (ARRA) and later legislation that extended certain ARRA provisions, the federal government contributed an extra $103 billion to Medicaid, with states receiving the bulk of that total in 2009 and 2010. So, while the recession swelled Medicaid rolls and drove increases in total program expenditures, states’ share of Medicaid spending actually declined from $146 billion in 2008 to $135 billion in 2010.[2]

The extra federal Medicaid money stopped flowing at the end of June 2011, which was the primary reason state Medicaid expenditures rose to $165 billion in 2011—a 22 percent increase from 2010.

So the locals are seeing a big increase in overall costs. And for those that do not believe or understand what is driving our nation towards insolvency look no further than health care. Without addressing the underlying and continuing spiral in health care costs there ultimately is no solution to our fiscal problems.

For state and local governments, health care spending as a share of revenue increased from 16 percent to 30 percent from 1987 to 2011 (the entire period for which data are available). After adjusting for inflation, their combined health care expenditures increased by 241 percent over that time period.[3]

The most significant elements of this expansion were contributions to public-employee health insurance premiums and Medicaid, which experienced inflation-adjusted increases of 430 percent and 315 percent, respectively.

Pew’s analysis of projections from the Centers for Medicare & Medicaid Services shows that state and local spending is expected to rise nearly 55 percent in inflation-adjusted dollars between 2011 and 2021, driven largely by anticipated growth in Medicaid.

Looking further ahead, the Government Accountability Office (GAO) warns that health care spending is the primary driver of the long-term fiscal challenges that it expects state and local governments will face. According to the GAO’s simulation, state and local health-related expenditures will nearly double as a percentage of gross domestic product between 2012 and 2060.[4]

A little bit of a silver lining is the statistic cited by Pew showing that spending per individual in medicaid grew at a slower rate than the private insurance market did. Some solace, but the underlying trends and numbers are still pretty scary, and do not portend well for our future fiscal health.

Posted in Health Care Reform, Municipal Finance, National News, State News | Tagged , | Leave a comment

Sequester Blues

Posted on February 12, 2013 by billmanzi

Just about all sides agree that Congress is a dysfunctional body, but that is where agreement ends. With both the sequester and the Continuing Resolution that funds the federal government staring us in the face there appears to be little or no communication between the parties to try to resolve the ongoing budget saga. I had an opportunity to listen to U.S. Congress Reps. Niki Tsongas and John Tierney at a Merrimack Valley Chamber of Commerce breakfast this week, and while Congresswoman Tsongas expressed “optimism” and had words of praise for Speaker Boehner I do not share that (short term) optimism.

The Republicans, having been rolled on taxes (in their minds), during the fiscal cliff imbroligio, have now dug in on the sequester, saying that they will allow it to occur even though Defense takes a major hit from that process. They will only consider other “cuts” to replace the sequester cuts, with the original House bill passed to replace the sequester simply replacing the defense cuts with deep cuts to social programs helping our citizens that are in the most need. It is a non-starter. The President seeks some additional revenues to go along with the budget cuts to get to the sequester number, and the Republicans are saying that is a non-starter. At this point you might expect me to say that negotiations have begun to bridge the gap, but alas I cannot say that. Both sides have now determined that political positioning in advance of the sequester will determine the political winners and losers once the sequester cuts are imposed. Is that any way to run a government? It is how we run ours. Let us take a look at some of the facts involved, and see if we can divine what might happen after the sequester.

Both sides are now seeking political advantage, and the lack of trust that has been built up certainly makes that unsurprising. But what is the fight really about? Let us look at the claims.

The Republicans claim that they “have done revenues” through the fiscal cliff deal. In general they generically claim to be supportive of the Simpson-Bowles framework for deficit reduction, and where it serves their purpose they trumpet that loudly. They also pose the rhetorical question “You just raised taxes, why are you asking for ANOTHER TAX INCREASE?” We are done with tax increases!!!! Don’t they have a point? Has the President gone “tax crazy”? A close examination of the facts leads you to see the type of shell game that is being played here. wHAT ARE THOSE FACTS?

The Simpson-Bowles Commission advocated for increased revenues through a reform of the tax code that would close loopholes and actually lower and simplify marginal tax rates. The Commission assumed, in their so called “baseline”, that the Bush tax cuts for top earners would be allowed to expire. They calculated that revenue in advance of their calculations, and they were right to do so. The President and Democrats compromised on the issue, raising the threshold for top earners seeing an increase in marginal tax rates from the $200,000 mark to the $400,000 mark. Bottom line is that the revenue raised, over ten years, went from $800 billion to $600 billion. Simpson-Bowles, after assuming $800 billion in revenue from that change as a part of their baseline, raised taxes by $1.6 trillion over ten years. They achieved this largely, though not exclusively, through loophole closings. What does all that data tell us?

It shows that Republicans, in fighting a scorched earth policy on taxes, now consider the revenue question closed after less revenue was achieved than the Simpson-Bowles baseline. The President, although he has not endorsed Simpson-Bowles, simply wants to implement the other revenues that are envisioned by that Commission through tax reform. And while I agree that the time frame for achieving tax reform is simply not there in light of current budgetary calendar deadlines the question needs to be asked as to why that is? The President has asked repeatedly for a large deal on the fiscal question, but Republicans see those negotiations as a one way street, with offers that are laughable in terms of revenue offered, especially in light of Simpson-Bowles. Even the Republican claim that the fiscal cliff deal offered revenue but no cuts needs to be examined closely. The claim itself is true, but again we must ask why? The Republicans gave up on the revenue question for political reasons, but the President had offered, again, a larger deal that would have mirrored Simpson-Bowles in terms of deficit reduction achieved. It could have, and would have, included cuts that may have offended some Democratic constituencies. The Republicans opted for the final product by boxing themselves in, and refusing to negotiate a larger fiscal deal.

I realize that negotiations require two to tango, and Republicans will see the above as mere partisanship. But it is all true. The President, under normal circumstances, might be subject to some criticism on the poor results of all of these negotiations. In my view he has had it with the failure of the Republicans to negotiate in good faith prior to the election. They took a shot, and they lost. As I am fond of saying “bad faith begets bad faith”. If the President has taken a tough position now it is as a direct result of the Republicans acting in bad faith before the Presidential cycle, confident in the belief that the President would be defeated. At this point the idea that the President will bring forward modifications to entitlements for the crumbs being offered by the Republicans is actually laughable. A ten year plan that hits the Simpson-Bowles deficit targets requires a lot more revenue than the Republicans are willing to give, and on that basis we will lurch from fiscal crisis to fiscal crisis. And I believe that the Sequester will go into effect. What then?

The Republicans will be under immense pressure from the military, from defense contractors, from the Republican Party wing dedicated to military interventionism around the world. That prospective Republican civil war over the sequester has already started. Bill Kristol, over at the Weekly Standard, has made a strong case against allowing the sequester to occur. He believes it will debilitate our military:

Republicans—as well as Secretary of Defense Leon Panetta and defense experts across the political spectrum—have explained so many times how damaging the sequester would be to our military that there’s no need to restate the case here. But consider last week’s announcement by the Navy that, just 48 hours before its deployment from Norfolk to the Gulf, the USS Harry S. Truman would not sail but instead be put on alert to “deploy on short notice.” This will leave only the USS John C. Stennis in the Gulf, until it is replaced by the USS Dwight D. Eisenhower—meaning our aircraft carrier presence in the Persian Gulf will be reduced from two carriers to one. Christopher Harmer, naval specialist at the Institute for the Study of War, explains the consequences:

It’s a drastic move: The continuous deployment of two U.S. aircraft carriers to the Persian Gulf area guarantees an immediate and crushing military response to any provocation—especially to one coming from the Iranians. .  .  . The typical deployment pattern for two carriers in this area is to station one carrier in the Persian Gulf, inside the Strait of Hormuz, and one outside the Persian Gulf, patrolling the Arabian Sea, Somali Basin, Gulf of Aden, Red Sea, or Indian Ocean. .  .  . Maintaining one aircraft carrier inside and one outside the Strait of Hormuz ensures that the Iranian Navy is constantly aware that any attempt to close the Strait will result in an overwhelming military response. A two-carrier presence has a much greater deterrent effect than a single carrier would.

In light of Kristol’s views on matters in the Middle East this is an unacceptable outcome for him and the neo-con wing he speaks for. But Charles Krauthammer had advocated for letting the sequester occur. So Republicans continue to not have a cogent position, even on something as fundamental as the sequester. That “divergence” makes them a difficult group to negotiate with, as leadership simply cannot deliver votes for ANY deal. I am not sure how the President can get blamed for the lack of a deal when he is negotiating with that group. And as the American public surveys the wreckage after the next round I do believe that they will reach the same conclusion.

Posted in National News | Tagged , , , | Leave a comment

Storm Management

Posted on February 9, 2013 by billmanzi

Having a bit of storm management myself I think that Governor Patrick did an outstanding job of managing the state response to the great storm of 2013. The Governor has a strong record in managing natural disasters, and his performance here was in line with those past performances. Despite that record of successful management the Governor took a wee bit of flack over the driving ban he imposed during this storm. I had a bit of fun over that with my radio pal Ted Panos, who was out surveying the storm yesterday. But the criticism was not all lighthearted, as some folks appeared to be genuinely put out by the driving ban. They could not be more wrong.

The job of a CEO is to ensure that the community served is safe for residents, and that safety includes the ability of public safety personnel to be able to traverse the roads. The Commonwealth had the advantage, this time, of plenty of advance notice of the storms arrival. The Governor, knowing the severity of the storm would tax snow removal personnel, rightly cleared the roads to make their jobs easier, and our recovery faster. Not to mention the fact that unprepared drivers would be placing themselves in harms way, as we have seen many times before.

The rhetoric was familiar, with accusations of “nanny state”, and other such nonsense. It was as if the Governor had been hoping for a big storm so he could force people to stay home. Maybe that is why he ran for Governor. In any case Chief Executive Officers need to administer, and provide for the overall benefit of the public. The Governor did a very good job, and I would be more than willing to be critical if it was warranted. It was not.

Posted in State News | Tagged | Leave a comment

Massachusetts House Passes Supplemental Budget

Posted on February 8, 2013 by billmanzi

The Massachusetts House of Representatives passed a supplemental budget this week which added some spending, and dealt with the Patrick Administration’s request to deal with a $550 million dollar shortfall in this budget cycle. The House declined to accept the Governor’s recommendation for a 1% cut to local aid, but ratified the further utilization of the rainy day fund advocated by Governor Patrick. Notable action from the House included: (State House News Service)

The House voted 141-13 for a bill delivering $44 million for the emergency shelter system, $25 million for public counsel services to eligible defendants, and $30 million to cover costs associated with an evidence tampering scandal at a state drug testing lab. Lawmakers said costs to taxpayers from the drug lab scandal, which House budget chief Rep. Brian Dempsey called a “disgrace,” could rise even higher. …The supplemental budget submitted by Patrick draws another $200 million out of the state’s rainy day fund and makes about $25 million in cuts to non-executive branch agencies on top of the $225 million Patrick slashed within the executive branch to help bridge a projected $540 million mid-year budget gap brought about by lower-than-expected tax revenues. The House jettisoned Patrick’s request to further cut local aid by $9 million and did not include another $10 million in cuts that required legislative approval.

Even though the House spared localities from the 1% cut ($9 million statewide) the Governor, using his 9C Budgetary authority, had reduced other local aid accounts by $28.5 million in December. From the Massachusetts Municipal Association letter to the House of Representatives:

In December, Governor Patrick used his “9C” emergency budget powers to cut $28.75 million from important municipal and education aid accounts that fund local budgets, including the elimination of $11.5 million from the Special Education Circuit Breaker program, $5.25 million from the McKinney-Vento account to reimburse cities and towns for the transportation of homeless students, $1 million from regional school transportation reimbursements, $6 million from municipal incentive grants, and $5 million from six other reimbursement programs. Cities and towns absorbed this $28.75 million reduction, even though it came five months into the fiscal year, sharing in the efforts to close the state’s estimated $540 million budget gap.

Some other action taken by the House included a freezing of the unemployment rates for business, avoiding a $500 million dollar hike. The January revenue figures came in above the budgetary benchmark by $173 million, an important number after the prior months numbers lagged badly, creating the shortfall that the Governor has sought to close. But that number may have been positively impacted by the fiscal cliff issue in Washington, with some economic activity moved up to avoid change in federal law, creating a blip in state revenues.

According to the Department of Revenue, tax collections in January totaled $2.28 billion, a 12.2 percent or $249 million increase over January 2012. The tax haul eclipsed the monthly benchmark by $173 million, with “weak” withholding and corporate and business tax collections offset by stronger estimated income tax payments, according to DOR. Tax collections over the first seven months of fiscal 2013 are up $455 million or 3.8 percent compared to the same period in fiscal 2012 and are running $307 million above a benchmark that was revised downward midyear by the Patrick administration as the governor made $225 million in unilateral budget cuts in December.

There were a number of Republican amendments beaten back, and some Democratic ones as well. On that score nobody should be overly concerned, as a supplemental of this importance essentially needs to be a “clean” bill. It will move over to the Senate for Tuesday action. The remarks of House Ways and Means Chair Brian Dempsey are below.

http://www.statehousenews.com/video/13-02-06dempsey/player-viral.swf

Posted in Municipal Finance, State News | Tagged , , , | Leave a comment

Job Poaching Between States.Tax Incentives Gone Wild!

Posted on February 6, 2013 by billmanzi

There has been much talk on Beacon Hill about the existence of tax expenditures in the state budget, and the desire to get rid of some of the less productive ones. I have done one earlier post on tax expenditures, and they are considered to be so important that they now produce a “tax expenditure” budget at the State Level, which details these items in excruciating detail. One of the areas we are all familiar with is the utilization of tax incentives to attract business to a locality or a state, with that being one of the items that I consider to be a true “tax expenditure.” During my Administration as Mayor of Methuen we used tax incentives on a couple of occasions, after public vetting and discussion. There is a new report out, from the Washington based “Good Jobs First” organization that is highly critical of tax incentives given to lure existing business and jobs from state to state. I believe they make some pretty powerful arguments, and they provide detailed examples of what they consider to be wasteful expenditures by some states that use incentives to relocate business and jobs without creating any additional economic activity.

The report,titled “The Job Creation Shell Game“, attached below in pdf format, was covered in a story at Governing magazine. The Executive Director of Good Jobs First commented for the Governing story.

Greg LeRoy, the group’s executive director, said many incentive-laden deals aimed at out-of-state employers lead to little, if any, net job growth. “It’s not a winner for the state, it’s economically irresponsible and it shortchanges the companies that really matter,” he said.

The report itself indicts the process that has allowed corporations to shift locales to garner huge tax breaks without providing true economic benefit. From the report:

What states euphemistically call “business recruitment” is often nothing more than the pirating of jobs by one state from another. This piracy is bankrolled by property, sales and income tax breaks, land and infrastructure subsidies, low interest loans, “deal-closing” grants, and other subsidies to footloose companies.
For trophies such as corporate headquarters, some states even offer per-job cash grants to finance executive relocations.The dark flip side of subsidized job piracy is “job blackmail,” politely called “retention incentives.” With subsidies readily available to any company that creates the appearance of moving, states are more eager to pay companies to stay.

I believe the the study hits some important points, and makes several recommendations that are both pragmatic and achievable.

To cool these job wars, the report recommends that states demonetize interstate job fraud. That is, the states should stop subsidizing companies for existing jobs that are treated as “new” simply because their location has changed. The study reveals that the vast majority of states already know how to do this: four-fifths of the states already refuse to pay for intrastate job relocations. For at least one and sometimes most of their major incentive programs, 40 states disallow subsidies for existing jobs that are merely being moved within their own borders.The report also recommends that states end their business recruitment activities that are explicitly designed to pirate existing jobs from other states. It also suggests a modest role for the federal government: reserving a small portion of its economic development aid for those states that amend their incentive codes to make existing jobs ineligible for subsidies and certify that they no longer engage in raiding.

In terms of local and state incentives Massachusetts requires “new job growth” (for the state portion) in order to give a subsidy, and in my experience that definition is tight, and strictly adhered to. The locals have an ability to do some Tax Increment Financing, which would give some property tax relief on the “incremental” (increased) value of property owned by a “new” business entity after a development. Massachusetts policy on “job retention financing” for in state companies, or “job incentive financing” that may be offered to out of state companies, appears to be on sturdy ground as evidenced by the Curt Schilling case, which was cited in the study. But we have had our share of controversy in this area as well, including criticism of deals for Raytheon and Fidelity where job losses occurred in spite of lucrative tax deals bestowed. Senator Mark Montigny has been a strong advocate for evaluating these tax deals on a continuing basis, and revoking them where they are no longer effective, or the company is failing to fulfill their obligations.

Job poaching by giving away scarce tax dollars may make a politician look good in the short term, but the specific examples cited in the study absolutely warrant scrutiny. Corporations are indeed gaming inter (and intra) state relocations to extract tax dollars from states and localities, with negative impacts being felt nationwide.

The net effect of these piracy lures and blackmail payoffs is to divert economic development resources away from helping companies expand or start up, where virtually all the job-growth action is. And when many states are still making painful budget cuts, putting lots of eggs in a few corporate baskets reduces funding available for the low-risk, high-payoff investments in education and infrastructure that benefit all employers.

It is a great report, and while I realize that business incentives can be a powerful tool, I believe that the cross-border raids are not serving the needs of taxpayers or other businesses. The Good Jobs First folks have produced a report that should have both federal and state legislators asking some hard questions about the true value of many of these “business tax incentives”.

State Tax Incentives

Posted in Municipal Finance, National News, State News | Tagged | Leave a comment