July 2012

Updated Estimates of the Affordable Care Act

Today, the Congressional Budget Office released two reports revising estimates for the Affordable Care Act (ACA). The first report provides updated estimates specifically for the coverage provisions in the ACA, to reflect the impact of the recent Supreme Court ruling on the ACA’s Medicaid expansion. The second report estimates various revenue and outlays effects from repealing the entire Affordable Care Act, as per HR 6079 which passed the House earlier this month, including updates from the Court’s ruling. Here are the main take-aways from the reports:

  • The Supreme Court ruling is expected to reduce ACA net costs by $84 billion from 2013-2022.
  • Repeal of the full ACA would add an estimated $109 billion to cumulative deficits over the 2013-2022 period.
  • ACA requirements are expected to increase IRS and HHS administrative costs by $10-20 billion over ten years, which do not score as having a budgetary effect because discretionary spending is already capped by the Budget Control Act.
  • Some future ACA spending has already been shaped both by obligations already contracted for future years on the one hand (and therefore missing from the new score for repeal, after their pre-obligation inclusion in CBO’s 2011 score for repeal), and by ACA-mandated savings practices already introduced on the other. CBO reports neither these last estimates nor their net directional impact on the deficit, but it notes that for these and other reasons, the net fiscal impact of the Affordable Care Act does not equal the reverse of the estimated fiscal impact of repeal.

The Supreme Court overturned the part of the ACA that would have allowed the federal government to withhold all Medicaid funding (from the entire program) from any states that refused the Medicaid expansion.

Due to the Supreme Court ruling about the Medicaid expansion and the states, CBO has revised its March estimate for net coverage provision costs downward by $84 billion to $1,168 billion for the eleven years, 2012-2022. According to the report, this decrease is a result of lower Medicaid enrollment (savings $289 billion, and an additional $5 billion in penalty payments) which CBO expects to more than offset the increase in consequent costs from greater participation in exchange subsidies (adding $210 billion in costs).

Source: CBO

Although six governors in Florida, Louisiana, Mississippi, Nebraska, South Carolina, and Texas have already announced their intent not to expand their Medicaid programs, CBO did not make state-by-state predictions, due to the high degree of uncertainty associated with state decisions. Instead, CBO chose “the middle of the distribution of possible outcomes”: they projected that one-third of the newly eligible population would be in states that fully undertook the expansion; one-half of the population would be in states that partially undertook the expansion (mostly to exactly the poverty line); and one-sixth of the population would be in states that eschewed the expansion. In terms of coverage impact, as was expected, fewer people will be covered under Medicaid (6 million in both 2014 and 2022), more will be covered through the exchanges (2 million in 2014, 3 million in 2022), and more will be uninsured (4 million in 2014, 3 million in 2022).

CBO has also updated its cost estimate for H.R. 6079, repeal of the Affordable Care Act. The total estimated cost of repeal is now $109 billion for 2013-2022, compared to the February 2011 estimate that repeal would add $210 billion to deficits, from 2012-2021. As before, the ACA starts with net annual deficit reduction over the 2012-2015 period, then shifts to net deficit increases the next two or three years before settling into net deficit reduction of greater amounts each year.

Beyond the $84 billion change due to the Supreme Court’s ruling, the overall cost of repealing ACA has changed since 2011 in other ways, which have resulted in more than $100 billion in additional spending on coverage provisions and $34 billion of increased revenue than projected in 2011 for 2013-2021. In addition, the decision by the Administration not to proceed with implementing the CLASS Act, a long-term care insurance program, reduced the cost of repeal by about $85 billion over ten years, because it would have raised substantial revenue through 2021, with outlays increasing in later decades. There have also been downward revisions to health care spending trends, meaning that the Medicare savings are lower (since there is less spending to cut) and the revenue raised from the health insurance excise tax is lower. In addition, as discussed above, some elements from ACA have already been obligated, and the time window for evaluating the budgetary effects has shifted from 2012-2021 to 2013-2022.

It's Not Free Money

Paul Krugman and other advocates of more federal stimulus spending cite today’s extremely low real interest rates, near zero or negative, as reason to borrow and spend this "free money." As Jared Bernstein, another stimulus advocate, points out, though, the notion of free federal debt is a fallacy. The United States has not been without debt since 1837. When more debt gets added, it is very probably here for the rest of our working lives, either directly or indirectly as it prevents us from paying down that much more of our current public debt of some $11 trillion.

Furthermore, interest rates will rise at some point as the economy gets back to normal, (maybe) the flight to safety from European debt slows, and the Federal Reserve winds down its balance sheet and purchases of long-term Treasury securities. Although the Treasury Department is lengthening the average maturity of the public debt to lock in lower rates for a longer period of time, the average maturity still only sits at about five years, and much of the public debt is rolled over within a few years.

To be sure, if we have a federal project we were going to spend money on anyway, particularly one which could help promote economic growth or otherwise reduce future deficits, low interest rates might make it more attractive to do now as opposed to later. And if the upfront costs were offset over a period of time with permanent deficit-reducing changes, the interest concern would be addressed. Still, we should be honest about the cost of unpaid for new spending or tax cuts. Every $10,000 borrowed today will accumulate interest. Over the span of a 45-year working life starting today, based on CBO projections of future interest rates on the debt, that $10,000 will grow to $31,000 after adjusting for inflation. It's not free money.

AARP Event Discusses Population Aging Across the Globe

The American Association of Retired Persons (AARP) hosted an event entitled "Work, Retirement Age, and Fiscal Sustainability in an Aging World." Two professionals in the field of pension public policy and fiscal sustainability led the discussion, providing an international perspective on the difficulty that population aging is posing for budgets across the world.

Christian Toft, a professor at the University of Kassel in Germany and a Cambridge PhD recipient, initiated the discussion by sharing his research on the relationship between pension reform, retirement ages, and labor supply in the United States and the European Union. His discussion spanned a historical retrospective on pension reform policy from 1950 onwards and also provided critical insight on the growth of the elderly workforce through 2060.

Toft noted that while continental European nations are more receptive to quick and responsive changes in entitlement policy, the last major pension reform implemented in the United States came under Ronald Reagan's presidency in 1983. Additionally, he argued that the dramatic reduction in elderly labor force participation since 1950 in the United States is directly related to early retirement age policy. Toft concluded that as a result of retirement age reform in Europe, the European Union could expect to have higher labor participation rates than the United States by 2060, bucking the trend of the past half-century.

The second speaker, Richard Jackson, a senior fellow at the Center for Strategic and International Studies (CSIS), took the discussion in a different direction. He talked about the Global Aging Preparedness (GAP) index, which provides a "comprehensive quantitative assessment of the progress that countries worldwide are making in preparing for global aging." Jackson noted that although the United States scored fairly high amongst the developed nations in the category of income adequacy, the country failed to pass the litmus test for the fiscal sustainability category in the index.

What both Toft and Jackson echoed is the need to address the fiscal sustainability of entitlement funding programs for the aging populations both domestically and internationally. As we previously discussed, aging plays a big role alongside health care costs in the projected future growth of entitlement spending. As a result, federal policymakers should keep an eye on policies that can mitigate the effects of population aging on the federal budget.

GAO: The Debt Limit Fight Cost the Treasury $1.3 Billion

With the debt ceiling projected to come back in play sometime in December or January, it is helpful to be reminded of the cost of the last debt ceiling debate. For a discussion and backgrounder on the federal debt ceiling, see CRFB's primer from last summer.

In terms of new developments, the Government Accountability Office has released a new report that estimates the cost of delaying the debt ceiling increase and the extraordinary measures taken by the Treasury Department. Among the measures were suspending the issuance of State and Local Government Series (SLGS) securities, contributions to pension schemes for government and postal workers, and reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund.

The report estimated that uncertainty from the drawn out fight and last minute resolution lead to higher interest rates on longer-term bonds in the range of 0.3 percentage points (or about 30 basis points). This rise in interest rates increased borrowing costs by $1.3 billion in 2011, and more than that including subsequent years. This may be small compared to the savings from the resulting Budget Control Act, but it was unnecessary considering the solution could have come much sooner.

The GAO report notes that this figure also does not account for the time and resources used by the Treasury Department to manage the debt limit and when looking at the wider economic consequences it is clear that last summer showdown was not without serious cost. If the debt ceiling is to have a useful purpose, it must remind Congress to consider the impact on debt when making future fiscal decisions. The GAO recommends this as well:

Congress usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect. This approach to raising the debt limit does not facilitate debate over specific tax or spending proposals and their effect on debt. In February 2011, we reported, and continue to believe, that Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue to avoid potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way.

In fact, it may be preferable to replace the debt ceiling with a fiscal rule that would automatically restrain deficits and debt in some way if they got out of hand. In addition, the rule could be adjusted for changes in the economy so as to be more flexible in the face of changing circumstances. It certainly would be preferable to the debt limit, which exists independently of the budget process and creates undue uncertainty as we near it.

The IMF Looks at International Fiscal Rules

A new working paper by four authors at the International Monetary Fund takes a look at fiscal rules around the world. The Peterson-Pew Commission on Budget Reform put out a more general discussion of fiscal rules in December, but the IMF specifically looks at similiarities and differences between specific regimes. They note that rules have come in many varieties, both from different levels of government, with different levels of statutory authority, and with different budget variables involved. In general, they break down rules into five broad types:

  • Debt rules
  • Budget balance rules
  • Structural budget balance rules
  • Expenditure rules
  • Revenue rules

Debt and budget balance rules are generally the most common, and the paper notes that they are often used in tandem. Expenditure rules and revenue rules--whether ceilings or floors--are less common, but expenditure rules are more frequently used. Structural budget balance rules, which adjust for changes in the economy, have become more popular lately, since they provide more flexibility for governments when a recession hits. Many countries use a combination of these rules.

The level of authority for each rule varies widely, and the IMF states that the proper authority that a rule has should be determined by circumstance. The highest level of authority are supranational rules, most notably the deficit and debt constraints in the European Union's Maastricht Treaty and Stability and Growth Pact. Below that are constitutional rules, which were quite uncommon in the countries studied. Statutory rules were the most common at the national level, while few rules were done through more informal means, such as coalition agreements.

Finally, the IMF looks at the "escape clauses" that a government can give a budget rule. Many governments allow violations of the budget rules if the economy enters a recession or a natural disaster strikes, as well as an "other" category. The authors argues that it is important that this "other" category be strictly limited to factors outside the government's control and that the definition of a disaster or recession is clearly stated as well.

How did these rules fare in the recession and current European crisis? Many countries, of course, went away from these limits in order to provide fiscal support, whether for the financial sector or for stimulus. However, these countries often specified a path back to normal or made their targets more flexible to account for fluctuations in economic output. It is this latter point the authors emphasize when they declare "these 'next-generation' fiscal rules explicitly combine the sustainability objective with more flexibility to accommodate economic shocks." There is an obvious upside to setting fiscal targets, but the last five years has taught that it is best to allow some room for countercylical policy, or otherwise make the goals unrealistic.

For a comparison of proposed fiscal rules in the US, click here

Support for the Campaign to Fix the Debt

With the roll out of the Campaign to Fix the Debt on Tuesday, there has been plenty of statements of support, as our newest release shows. Some of these statments have come from the co-founders, co-chairs, and Steering Committee members of the Campaign, but there are also plenty of supporters outside the campaign.

The Campaign hopes to gain a groundswell of support for a bipartisan deficit reduction plan. All too often, the voices of partisans and interest groups drown out the ability to work towards a constructive proposal for fixing the debt. Here are some of the voices in support of that plan:

  • Judd Gregg, Co-chair of the Campaign to Fix the Debt: "Without significant, fundamental and comprehensive reforms, the debt will reach 90 percent of the economy within 10 years and exceed 250 percent by the early 2040s. These crippling levels of debt threaten the strength of our economy, our standard of living, and the prosperity of future generations."
  • Ed Rendell, Co-chair of the Campaign to Fix the Debt: "We simply cannot afford all the promises we've made, but, if we do this right, we can make reforms in a way that protects the most vulnerable, prioritizes important investments in areas like infrastructure and education, and enhances economic growth."
  • Martin Flanagan, President and CEO, Invesco: "The American people know there’s a problem, and they know there are no easy answers. They’re ready for solutions and ready for their elected officials to put aside partisanship and get a debt deal done."
  • Robert Zoellick, former World Bank president: "Australia's Foreign Minister Bob Carr hit the nail on the head when he said 'The U.S. is one budget deal away from restoring its global pre-eminence.' A slow growth economy can't lead the world. The United States needs to get its financial house in order to play its rightful role in an international economy facing multiple dangers."
  • Ryan Schoenike and Nick Troiano, Co-founders of The Can Kicks Back: "The choice we face is not one between parties but between action that will restore prosperity and the status quo that will lead to national decline. We expect our leaders to not just talk about their children and grandchildren but to work together to enact a long-term and comprehensive solution to the nation’s fiscal crisis."
  • Alice Rivlin, former OMB and CBO director: "We face two fiscal challenges -- growing the economy faster and reducing the looming debt. The threat of a serious and devastating debt crisis in the U.S. is real, and can be ignored no longer. Failure to act would be devastating, but, if we get it right, we have a huge opportunity to restore America's economic vitality."

In addition, there was significant media coverage of the Campaign launch, which you can see listed here. Major media outlets such as CNN, C-SPAN, and CNBC covered the event. Numerous TV segments, such as on CNBC's "Squawk Box," PBS's "Newshour", and Bloomberg TV, broadcasted segements on the launch or interviewed participants. In addition, news articles from major sources like CNN, the Washington Post, and ABC News were written across the country.

We hope that the Campaign to Fix the Debt will be successful in drumming up support for the fiscal plan our country needs. As Campaign co-founder Al Simpson said:

The voters are way ahead of their elected representatives in realizing we need to honestly ‘do something’ about this problem and that fixing it will require that everyone accept some sacrifices in the things they may like for the good of the country they love. The American public is thirsting for the truth and bold leadership from their elected representatives. This campaign will greatly help to ensure that their voices are finally really being heard – plenty loud and clear – where it counts – in Congress and Washington, D.C.

Bernanke Once Again Warns Congress on the Fiscal Cliff

Federal Reserve Chairman Ben Bernanke addressed Senate Finance Committee on Tuesday and the House Finance Committee yesterday with more warnings about the fiscal cliff at the end of the year. Bernanke told Congress the best way they could help the economy was remove the fiscal cliff and replace it with a long-term comprehensive deficit reduction plan. In particular, Bernanke warned of the impact of the fiscal cliff with a weak economy and the Federal Reserve unable to use monetary policy to offset it.

Fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.

In addition, Bernanke recommended that Congress go long with their fiscal solution to maximize the benefit for the economy and to allow for policies to be phased in gradually.

You might want to go beyond the ten year window. Consider implications of actions for even longer horizons.

Solutions will be difficult and will require compromise. But as we have said before, the worst thing Congress could do is punt. A compromise should be achieved now to give the markets some confidence that our long-term fiscal future is secure. On this, Bernanke agreed, saying "I think just delaying everything, just saying we’re not going to do it, put it off for another year, I think would be a very bad outcome."

Children and the Federal Budget

The Urban Institute held an event today (video here) on children and the federal budget, which involved CRFB Senior Policy Director Marc Goldwein and board members Eugene Steuerle and Dan Crippen. The centerpiece of the event was Urban's newest "Kids' Share" report and what it means for policies related to children going forward.

For background, Kids' Share estimates how much the federal government spent on children in 2011 and how much they are projected to spend through 2022, including both outlays and tax expenditures. Total expenditures declined by $2 billion in real terms from 2010 to 2011, leaving them at $445 billion or about 10 percent of the budget. Through 2022, spending will stay roughly flat after accounting for inflation. Of course, the rest of the budget will be growing in real terms through 2022 and beyond.



Goldwein remarked that the relative restraint of spending on children reflects past choices that have been imposed on the current budget. He noted that spending per person for Social Security and Medicare is more than twice as much as spending per person for children (including state spending) and that those programs, especially Medicare, would grow faster than the economy in the future. Steuerle pointed out that nominal spending levels will rise in the future as the economy grows and more money can be dedicated to programs, but that growth was biased towards mandatory spending programs rather than discretionary programs, where a sizeable amount of childrens' spending lies.

As executive director of the National Governors' Association, Crippen viewed the budget through the lens of rising health care costs in Medicaid, arguing that spending at the state level will be crowded out if its growth is not addressed. Although Medicaid does give some benefits to children, its growth would hurt education spending, which directly benefits children. In addition, Crippen saw potential threats to state spending on children if the federal government cut its revenue stream to states as part of a deficit reduction plan.

Both Goldwein and Steuerle stressed the fact that just because there is a deficit issue doesn't mean that we must squeeze all of the budget. Certainly, there will need to be a measure of restraint but that does not determine where the money is spent. Both of them believed that there was certainly more room for investments in areas where needed. The nation will have to figure out if they prioritize spending on children more than the 10 percent that is currently alotted. As Goldwein said, "Sometimes this country's greatest challenges lead to our nation's greatest triumphs. We have this huge debt it's a real opportunity to re-prioritize our tax and spending code to do the right things that we should be doing anyway."

Fix the Debt Event Recap

Yesterday, the Campaign to Fix the Debt officially launched with a press conference at that National Press Club. The Campaign is intended to drum up support from people across the country for a bipartisan fiscal plan that prevents the exponential rise in debt that is projected to happen. It will also provide resources and ideas for lawmakers who want to be a part of this solution.

The press conference included CRFB president Maya MacGuineas, Fix the Debt Co-Chairs Governor Ed Rendell (D-PA) and Senator Judd Gregg (R-NH), Campaign Co-founder Erskine Bowles, Honeywell CEO David Cote, Peter Peterson, Senator Sam Nunn (D-GA), Steve Rattner, former World Bank president Robert Zoellick, CRFB Board Member Alice Rivilin and Paul Stebbins.

The press conference opened with MacGuineas introducing the event. She said the campaign is meant to bring together businesses leaders and the public to create a welcome environment to put in place a bipartisan plan to fix the debt. She argued that if we "fail to act, the consequences will be immensely serious." She noted that the campaign will have a serious social-media campaign and that it will be "partnering with all sorts of different groups." 

Following MacGuineas, each person gave brief remarks, starting with Gov. Rendell. He said the group has agreed to a few central points: that we need a significant debt reduction plan that includes all parts of the budget, that the deal needs to be bipartisan, that it needs to be a multi-trillion dollar reduction, and that the plan needs to preserve economic growth and protect the needy. Rendell also gave three reasons why he believes this effort will succeed: (1) this is an unprecedented group; (2) it is dedicated to getting a deal; and (3) the consequences of inaction are becoming clearer and clearer to the American people. Finally, he said the deadline for this campaign is July 4, 2013 and that the "era of debt denial is clearly over."

Former Sen. Gregg followed starting by saying that everyone on the stage is a "do-er." Gregg noted that we are in trouble and said that we only need to look "across the pond" to see where bad economic policy can lead us, and that in some ways, the US is worse than some of the European nations were before their crisis.

Former World Bank President Zoellick was also present and argued that the US is one budget deal away from locking in our economic preeminence. He noted that Alexander Hamilton established the foundation for a history of strong credit, but that the budget crisis we are facing will be a test of whether we can continue that. He also added that addressing the debt would help maintain our prominence internationally.

Former Sen. Nunn followed Zoellick by stressing the need for bipartisanship and said neither party will be able to impose its views even after the election. He also noted that "this is not physics, this is not calculus, this is arithmetic," so it is not as if we don't know how to fix the problem. He also expressed his unhappiness that the people who are currently trying to fix the debt in a bipartisan manner are getting little support. He then noted that a rally point could be Simpson-Bowles and that Simpson-Bowles should be the de-facto replacement for the fiscal cliff if no deal is reached.

Peterson followed and said that there is wide support for a deal. He cited a survey of public officials from both parties where the result was 100% that our fiscal situation is not sustainable, that six different think tanks last year all agreed the same and proposed plans to fix the debt, and that polls suggest the vast majority of people from both parties recognize that both spending and taxes need to be part of the deal. He used these arguments to make the point that, "the public is saying that we want to compromise."

David Cote was the next speaker, recalling that he was shocked to learn of the size of the problem as a member of the Fiscal Commission. He noted that the uncertainty over the debt and how it will be resolved is hurting business. Specifically, he called for a simplified tax system that raises more revenue and a simplified entitlement system that spends less. In terms of the global economy, Cote asserted that passing a deal could be the biggest thing to make the US more competitive. 

Rivlin followed and she argued that this campaign is called "fix the debt, but what it really is, is fix the economy" because the debt and the economy are very much interrelated. She also noted that the problem is arithmetic and that "it isn't very complicated, it is doable."

Steve Rattner was next and he remarked, "I cannot think...of a single person that I know of that I work with on Wall Street that does not believe that this is a major life threatening problem for our economy." He noted that everyone on Wall Street knows how big a problem it is and that we should not take our current low interest rates for granted, saying, "markets are not as fast acting and as responsive as you might think them to be." He also argued that markets dislike uncertainty, as evidenced by the debt ceiling debacle last year and closed with, "everyday we let [our debt problem] fester makes it more difficult and harder to fix."

After Rattner was Paul Stebbins, declaring that it never occurred to him starting out in business that "the single greatest long-term threat to my ability to compete in the world economy was the fiscal solvency of the United States." He also stated that the goal of the campaign is to "help create the political will to get this done and to take control of our economic destiny." 

Erskine Bowles spoke last, arguing that "our nation faces the most predictable economic crisis in our history." He pointed out that there are many good ideas on the table already from many bipartisan efforts, and that the only thing we now need is the political will to act. Bowles closed by claiming that the "markets will rejoice if we come together on a bipartisan, balanced plan and if we do that, the future of this country is very, very bright." 

Yesterday's successful launch is just the first step for the Campaign to Fix the Debt. It will require a lot more effort to accomplish the Campaign's goals. To that end, we need your help. Sign up at www.fixthedebt.org to get involved in this effort. 

The full video of the event is below.

Appropriations Update: The Parallel Track of the Process

Since our last Appropriations Update last month, there has not been much action on appropriations bills. On the House side, the full House has passed the Transportation-House and Urban Development bill, the Appropriations Committee has passed the Interior-Environment bill, and the Labor-Health and Human Services-Education bill has been released and is the final bill to make its way through the process. Meanwhile, in the Senate, no action has been taken since the June 22 blog and the full Senate has no intention of passing any of the bills that have been approved by the Appropriations Committee.

But even if both the House and Senate passed all their appropriations bills, that wouldn't be the end of the process. Because overall House spending levels are $19 billion lower than Senate levels, both chambers would need to compromise on funding in each bill--not to mention the policy riders that each body may disagree on. Ultimately, the individual processes will need to be resolved.

That's where the parallel track comes in. A POLITICO article sheds some light on how that would play out, and it is familiar to anyone following the budget in the past four fiscal years: continuing resolutions. Apparently, leaders in the House are willing to agree to a three month CR that funds the government at Senate/Budget Control Act levels for FY 2013 ($1.047 trillion) to avoid a drawn out fight. However, the article also says that no action will be taken until September, when FY 2012 ends.

Of course, it is unfortunate that Congress once again cannot follow the budget process or at least attempt to agree on funding levels in an omnibus bill. It is even more unfortunate that they cannot at least provide more certainty by agreeing to the levels in advance. Instead, lawmakers seem poised to wait once again until the eleventh hour to resolve the FY 2013 budget--and even then, only temporarily. That strategy carries risks, as last year showed: Congress seemed to have a smooth path to passing a CR at the start of FY 2012, but a fight over emergency funding threatened a shutdown in October. At the very least, we should avoid another event like that.

This budget cycle is becoming another example of why we need budget process reform. The current process is not cutting it.

Status of Appropriations Bills
Bill House Status Senate Status
Agriculture Passed by Committee Passed by Committee
Commerce-Justice-Science Passed by House Passed by Committee
Defense Passed by Committee No Action
Energy-Water Passed by House Passed by Committee
Financial Services Passed by Committee Passed by Committee
Homeland Security Passed by House Passed by Committee
Interior-Environment Passed by Committee No Action
Labor-HHS-Education No Action Passed by Committee
Legislative Branch Passed by House No Action
Military Construction-VA Passed by House Passed by Committee
State-Foreign Ops Passed by Committee Passed by Committee
Transportation-HUD Passed by House Passed by Committee

Source: House and Senate Appropriations Committee websites
Note: Italics represent change in status since last Appropriations Update

Spotlight on the States: Structural Challenges

The State Budget Crisis Task Force -- a group of budget experts including the likes of former CBO and OMB director Alice Rivlin, former Federal Reserve chairman Paul Volcker, and former Treasury secretary George Shultz -- released a report yesterday detailing the six biggest threats facing states in terms of long-term fiscal sustainability. They looked at six of the more heavily populated states -- California, Illinois, New Jersey, New York, Texas, and Virginia -- but their prognosis is easily applicable to other states.

Arguably, one of the largest fiscal burdens on states is that of Medicaid. The program is projected to grow faster than the economy or state tax revenue for the foreseeable future, meaning that changes will be needed to prevent the program from crowding out other spending or revenue will have to be raised to pay for it. The report notes that each state has attempted to tackle Medicaid costs in recent years, but there are limits on how much they can do without either violating federal guidelines or hurting providers too much. Coordination between both levels of government on how to control Medicaid costs would be ideal.

Another issue on the spending side is pension and health benefits for retired state employees. These benefits are projected to be underfunded as rising health care costs and aging of the population puts further pressure on these systems. Using conservative estimates, the six states studied have unfunded liabilities totaling over $500 billion. The report notes that pensions often have some level of constitutional protection so they are harder to scale back in a timely manner than other benefits. Beyond reforms to benefits, the report recommends that states more fully and more accurately account for future liabilities.

On the revenue side, the report notes problems of eroding tax bases and increased volatility for income taxes. On the first issue, the sales tax base has eroded due to both state legislative decisions and the growth of (generally) non-taxed Internet sales.  In addition, motor fuels taxes have eroded since the tax rates that are given as cents per gallon rather than as a percent of the sale have not kept up with inflation. Income taxes have become more volatile since they are increasingly made up by revenue from capital gains, which vary based on both the amount of the gains and the decision by investors of whether or not to realize those gains. Revenue from capital gains, as expected, plummeted in the aftermath of the financial crisis. The Task Force urges the federal government to facilitate the collection of taxes on internet sales and urges states to structure their tax system to rely on more stable sources of revenue.

Other Considerations
Two other threats to state fiscal positions come from above and below -- federal and local governments, respectively. With deficit reduction in the cards at the federal level, grants and other forms of aid to states could be reduced; in addition, a tax reform measure may reduce or eliminate, for example, the state and local tax deduction or the municipal bond exclusion, both of which could affect funding streams for states. The Task Force recommends that federal-level body or the CBO quantify the impact of federal legislation on states. In terms of local governments, many of them have been struggling with fiscal problems of their own, and states may have to help them out if the issues become severe. The Task Force advises increased monitoring of local government fiscal status so that they can address problems before they get out of control.

Budget Gimmicks
Finally, the report states that budget gimmicks used to fill short-term gaps have made longer-term fiscal balance harder to achieve. One of the most common gimmicks involves transactions that increase revenue in one year while producing liabilities in the following years. A notorious example of this practice is the Arizona state government's selling and leasing back of many of its own buildings, including the state capitol. Four of the six states studied have pulled forward revenue from a settlement with tobacco companies, one which is intended to compensate for smoking-related health care costs. As state budgets have become more volatile, these gimmicks have become more common, but they have also damaged state fiscal positions down the road. To deal with this, the Task Force recommends that states use accrual budgeting, which would more fully represent the budgetary impact of these gimmicks, and that states strengthen rainy day funds to make volatility less of an issue.

Since many people focus on the longer-term or structural challenges that the federal budget faces, it is appropriate that the Task Force has done the same for states. The report is well worth the read to see the problems that state governments are facing currently and will continue to face in future years.

The Launch of the Campaign to Fix the Debt

Update: C-SPAN has uploaded a video of the event. You can view it here.

Today, CRFB is helping to launch the Campaign to Fix the Debt at the National Press Club.

The Campaign to Fix the Debt is a broad, bipartisan coalition that will work with the American people to take on the urgent task of encouraging Congress and the President to pass comprehensive reforms to control our national debt. Members of the coalition come from a wide variety of political and professional backgrounds, but what unites them is the belief that the country's rising debt threatens our security, standard of living, and economic strength.

The event, which starts at 2 pm, will feature many prominent speakers, including:

  • Dave Cote, CEO, Honeywell
  • Erskine Bowles, Co-Chair, President's National Commission on Fiscal Responsibility and Reform
  • Larry Fink, CEO, BlackRock
  • Senator Judd Gregg, Co-Chair, The Campaign to Fix the Debt
  • Maya MacGuineas, President, Committee for a Responsible Federal Budget
  • Steven Rattner, Chairman, Willett Advisors
  • Governor Ed Rendell, Co-Chair, The Campaign to Fix the Debt
  • Alice Rivlin, Former Director, OMB, Founding Director, CBO
  • Paul Stebbins, CEO, World Fuel Services
  • Ambassador Bob Zoellick

You can view the event live on C-SPAN 3, and we will be live tweeting the event on Twitter (@BudgetHawks). You can also follow the event on twitter with the hashtag #FixtheDebt.