Joseph Krist
Municipal Credit Consultant
THE HEADLINES…
ACA REPLACEMENT INTRODUCED TO A VERY TEPID RECEPTION
NEW JERSEY
COULD PENNSYLVANIA BUDGET SEE A HIGH FROM MARIJUANA?
PHILADELPHIA BUDGET
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ACA REPLACEMENT INTRODUCED TO A VERY TEPID RECEPTION
Speaker Paul Ryan has finally released drafts of two measures which would dismantle the core aspects of the ACA, including its subsidies to help people buy coverage, its expansion of Medicaid, its taxes and its mandates for people to have insurance. In its place, Republicans would put in place a new system centered on a tax credit to help people buy insurance. That tax credit would range from $2,000 to $4,000 a year, increasing with someone’s age. That system would provide less financial assistance for low-income and older people than The ACA, but it could give more assistance to younger people and those with higher incomes.
Republicans acknowledge that their plan will cover fewer people. House committees are expected to vote on the measures this week, with the full House voting on it soon after that. The repeal of the Medicaid expansion would not take effect until 2020, and the bills would grandfather in current enrollees so that they can stay on the program. But once 2020 arrives, the federal government would no longer provide the extra federal funds that allow for expansion.
Passage is not a certainty in the House. Conservatives in the House Freedom Caucus call the bill’s tax credit is a “new entitlement.” As for other widely discussed issues, the bill would maintain the ACA’s protections for people with pre-existing conditions, who could still not be denied coverage. Instead of The ACA’s mandate, the bill would seek to encourage healthy people to sign up by allowing insurers to charge people 30 percent higher premiums if they have a gap in coverage.
The measure repeals The ACA’s taxes, such as the medical device tax and health insurance tax, starting in 2018. To avoid one of the most controversial issues, the bill does not include a Republican proposal in earlier drafts to start taxing some employer-sponsored health insurance programs. Instead, the measure would keep The ACA’s “Cadillac tax” on generous healthcare plans starting in 2025 in order to prevent that legislation from adding to the deficit in that decade.
A number of points will prove contentious in the Senate. Four “moderate” Republican senators from states that expanded Medicaid under the ACA have sent a letter to the Majority Leader saying they can’t support a draft House repeal bill because it won’t protect people enrolled in the health entitlement. “We are concerned that any poorly implemented or poorly timed change in the current funding structure in Medicaid could result in a reduction in access to life-saving health care services,” Sens. Rob Portman of Ohio, Shelley Moore Capito of West Virginia, Cory Gardner of Colorado and Lisa Murkowski of Alaska wrote in a letter to Majority Leader Mitch McConnell.
“The February 10th draft proposal from the House does not meet the test of stability for individuals currently enrolled in the program and we will not support a plan that does not include stability for Medicaid expansion populations or flexibility for states.” Nationwide, more than 11 million people got Medicaid through the expansion under The ACA. In Ohio alone, some 700,000 residents obtained insurance because of the state’s expansion.
Senators Capito and Murkowski have been clear in expressing their concerns about the impact on rural healthcare availability under repeal. Other Senate opposition could come from Sen. Orrin Hatch who will not support a repeal which does not include a repeal of all the including the Cadillac tax. The American Hospital Association announced Tuesday its opposition to the GOP’s healthcare reform plan. It referenced the proposal that would strike funding for states to expand Medicaid beyond 2019. The AHA suggested other alternatives, such as greater use of federally approved waivers, which have given states a method to test out different ways to implement Medicaid that maintain the program’s objectives but do not follow federal rules.
“The expanded use of waivers with appropriate safeguards can be very effective in allowing state flexibility to foster creative approaches and can improve the program more effectively than through imposing per-capita caps,” it said. It asked Congress to wait for the Congressional Budget Office (CBO) to score and release estimates on how many individuals the GOP version would cover before moving the bill forward.
The American Medical Association also weighed in. While it agrees that there are problems with the ACA that must be addressed, it cannot support the AHCA as drafted because of the expected decline in health insurance coverage and the potential harm it would cause to vulnerable patient populations. The AMA has long supported advanceable, refundable tax credits as a preferred method for assisting individuals in obtaining private health care coverage. It is important, however, that the amount of credits available to individuals be sufficient to enable one to afford quality coverage. We believe that credits should be inversely related to an individual’s income. This structure provides the greatest chance that those of the least means are able to purchase coverage. The AMA believes credits inversely related to income, rather than age as proposed in the committee’s legislation, not only result in greater numbers of people insured but are a more efficient use of tax-payer resources.
The AMA policy also supports increased flexibility in the Medicaid program so that states may pursue innovations that improve coverage for patients with low incomes. It expressed concern, however, with the proposed rollback of the Medicaid expansion under the ACA. It urged that that Medicaid, CHIP, and other safety net programs are maintained and adequately funded.
States that did not expand Medicaid
States that expanded Medicaid
State, county, and hospital credits will all see a negative impact from the current bill. Less coverage overall and less coverage for low income and indigent patients will strain state and county budgets. Not only will hospitals face lower revenues but greater uncompensated care burdens and a reversal of the trend away from use of the emergency room as the source of primary care. Hospitals in areas which already face service constraints and weaker financial profiles will be placed under additional stress.
There is no official estimate from the Congressional Budget Office, they have no idea yet how much their American Health Care Act costs and how many people might lose their health coverage because of it. Seven Republican senators have gone record opposing parts of the bill. Republicans can lose only two votes in the Senate and still pass the repeal bill through a fast-track process that requires a simple majority vote. The outcome is far from certain.
NEW JERSEY
One of Gov. Chris Christie’s legacies will be his failure to fund or fundamentally restructure his state’s pension underfunding problems. He used his budget address to one last attempt at addressing government worker pensions, proposing to dedicate revenues from lottery ticket sales to the distressed fund. Christie said pledging the lottery as an asset to the pension fund would have “the same effect as a cash infusion,” slashing $13 billion from the pension fund’s $66.2 billion in unfunded liabilities.
The lottery, which is expected to bring in $965 million this year, helps fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers. The lottery, which is expected to bring in $965 million this year, helps fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.
Under the state Constitution, lottery proceeds must be spent on state institutions and state aid for education. The state pays a number of costs on behalf of local school districts that can be categorized as aid, including the employer share of the Teachers’ Pension and Annuity Fund. Under the state Constitution, lottery proceeds must be spent on state institutions and state aid for education. The state pays a number of costs on behalf of local school districts that can be categorized as aid, including the employer share of the Teachers’ Pension and Annuity Fund.
The proposal raised questions about how the services currently funded by lottery proceeds would be funded. Christie contends that the plan “if implemented correctly, would not only increase the value and stability of the pension funds immediately, but it would also please bond investors and credit rating agencies.” We could not disagree more. Regardless of the funding scheme adopted, a signature feature of the Governor’s tenure has been his consistent failure to fund annual required contributions (ARC). Wherever he finds the money, a payment equal to at least the ARC would be much more impressive to raters and investors alike. funds immediately, but it would also please bond investors and credit rating agencies.
COULD PENNSYLVANIA BUDGET SEE A HIGH FROM MARIJUANA?
Auditor General Eugene DePasquale said Pennsylvania should strongly consider regulating and taxing marijuana to benefit from a booming industry expected to be worth $20 billion and employ more than 280,000 in the next more sane policy to deal with a critical issue facing the state. Other states are already taking advantage of the opportunity for massive job creation and savings from reduced arrests and criminal prosecutions. In addition, it would generate hundreds of millions of dollars each year that could help tackle Pennsylvania’s budget problems.” “The revenue that could be generated would help address Pennsylvania’s revenue and spending issue. But there is more to this than simply tax dollars and jobs,” DePasquale said. “There is also social impact, specifically related to arrests, and the personal, emotional, and financial devastation that may result from such arrests.”
DePasquale cited Colorado’s experience with legalization. In Colorado’s experience, after regulation and taxation of marijuana, the total number of marijuana arrests decreased by nearly half between 2012 and 2014, from nearly 13,000 arrests to 7,000 arrests. Marijuana possession arrests, which make up the majority of all marijuana arrests, were nearly cut in half, down 47 percent, and marijuana sales arrests decreased by 24 percent.
DePasquale said Pennsylvania has already benefited by some cities decriminalizing marijuana. In Philadelphia, marijuana arrests went from 2,843 in 2014 to 969 in 2016. Based on a recent study, the RAND Corporation estimated the cost for each marijuana arrest and prosecution is approximately $2,200. Using those figures, that’s a savings of more than $4.1 million in one Pennsylvania city. Last year, York, Dauphin, Chester, Delaware, Bucks and Montgomery counties each had more arrests for small amounts of marijuana than Philadelphia. Those counties had between 800 and 1,400 arrests in 2015.
In Colorado, total state revenues from all sources of marijuana sales taxes and licensing fees in 2016 was $119.8 million. This was an increase of 57% above 2015 collections. In Washington state, FY 2017 marijuana sales tax collections are estimated to total $201 million, an increase of over 7% above FY 2016 collections.
We suspect that legalization will not be an easy sell in socially conservative state is wide. The Auditor General’s statement does start a conversation however in a state that faces serious revenue and pension expense issues going forward.
PHILADELPHIA BUDGET
It has only been in place for less than three months and is the subject of pending litigation challenging its validity, but the Philadelphia Beverage Tax is being counted on heavily by the City’s Mayor for three major policy initiatives. Full implementation of the three programs cannot happen, however, until the resolution of litigation brought to try to block the tax. The FY18 Budget and FY18-22 Five Year Plan continue an effort to ensure all three- and four-year-olds in the city can gain access to pre-K through Philadelphia Beverage Tax revenues.
The Philadelphia Beverage Tax revenue also provides necessary revenue to fund a community schools initiative. Over the Five Year Plan, 25 community schools will be created. The third major initiative to be funded through the Philadelphia Beverage Tax is Rebuilding Community Infrastructure (Rebuild), a multi-year program to transform neighborhood parks, recreation centers, and libraries across the city. The tax will support debt service to pay for $300 million in borrowings, which, combined with $48 million in the City’s capital program, will leverage foundation support (such as support from the William Penn Foundation) and funds from other governments to bring the total amount of the program to $500 million.
On September 14, 2016, a lawsuit challenging the PBT was filed by the American Beverage Association and other co-plaintiffs in the Court of Common Pleas. This complaint was dismissed in its entirety by the Court of Common Pleas on December 16, 2016. Following the decision, the plaintiffs appealed the ruling to the Commonwealth Court of Pennsylvania. The appeal is currently on an expedited scheduling track before the Commonwealth Court and is scheduled for oral argument during the first week of April 2017. Until the PBT litigation is resolved, the City will not be able to issue borrowings for the $300 million that it plans to invest in Rebuild. In addition, the City will not be able to use $75 million of William Penn grant funds that are conditioned on bond issuance. An additional $20 million is contingent on funding from other sources, such as grants from other foundations.
Three-quarters of the City’s General Fund revenue comes from local taxes, and 18.5% of this tax revenue is Real Property Tax. In addition, over 60% of the local tax revenue generated for the School District of Philadelphia comes from the Property Tax. The General Fund started FY17 with an unreserved fund balance of $148.3 million and is projected to end FY17 with a fund balance of $100.7 million. The year-end fund balance for FY18 is projected to be $87.5 million. Over the next five years, the fund balance is projected to decrease to a low of $68.7 million in FY20 and then build back up to $101.8 million in FY22. For each year of the plan, the fund balance is below the City’s target. With high fixed costs such as the City’s contribution to the pension fund, the School District of Philadelphia, debt service, and indemnities, other important services and programs are squeezed for resources.
The Philadelphia Municipal Retirement System is currently 44.8% funded with a $6 billion unfunded liability, based on the July 1, 2016 preliminary valuation. Each year, an increasing share of City resources goes towards paying pension costs and therefore cannot be used to provide additional resources for current services or to pay for further tax rate reductions. To address this challenge, the Kenney Administration, working with municipal employees, the Pension Board, and City Council, has launched a three-pronged approach to improve the health of the Pension Fund from 44.8% to 80% in about 13 years.
In 2014, the State Legislature required that the City dedicate a portion of local sales tax revenue to the Fund. Although the additional sales tax revenues could be counted toward satisfying minimum municipal obligation (MMO), the amount required under state law, the City will meet its MMO independent of these revenues, so that sales tax dollars directed to the Fund will be over and above the MMO. Over this Five Year Plan, the sales tax revenues are projected to be worth about $233 million.
Current employees would make additional contributions based on a progressive tiered contribution structure; those with higher annual salaries would pay a higher contribution rate. These additional contributions would increase the assets of the pension fund over time rather than be used to reduce the City’s contribution to the fund. At the same time, newly hired workers would participate in a new, stacked hybrid pension plan. The proposed stacked hybrid plan combines a traditional defined benefit for the first $50,000 of an employee’s pensionable earnings, and an optional 401k, with an employer match, for earnings above this amount.
The Board of Pensions has also been consistently making the Fund’s actuarial assumptions more conservative – reducing the chances of the plan falling short of projected investment returns. Since FY08, the Board has incrementally lowered the assumed rate of return eight times from 8.75% to the current rate of 7.70%. Through consultation with the City’s actuary, the Board also approved changes to make the mortality rate and other demographic factors more conservative. While fiscally prudent, these changes also lower the actuarial funding percentage in the short-term and increase the City’s required contribution. The most recent reduction to the earnings assumption, from 7.75% to 7.70% in February 2017, reduced the funding percentage by 0.02% and increased the MMO by approximately $5 million each year, for an additional $27.6 million over this Five Year Plan (across all funds).
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