An Early Look at the 2012 Legislative Session

By Joshua Veverka, Vice President

Over the course of the past month Stateside Associates professionals interviewed contacts in all 50 states to get a sense of the top issues that will face lawmakers in the coming year.

With state budget debates looming and a busy election cycle serving as the backdrop for the 2012 legislative session, we provide you this list as a preview of some of the issues expected to dominate agendas and headlines in 2012.

Please note that next year is the second year of the biennium for most state legislatures—only New Jersey and Virginia start their biennium in even years. Twenty-seven states and Puerto Rico allow for at least some legislation to carry over from the 2011 session into 2012. Four states (Montana, Nevada, North Dakota and Texas) will not hold regularly scheduled sessions.

While the issues described herein will dominate the dockets of state legislatures next year, this list is far from exhaustive. The wrangling for early primaries and the focus on the presidential election will likely lead to electoral reforms cropping up in statehouses. Issues surrounding labor and public employee unions, such as pension reform and collective bargaining, will certainly be discussed in the wake of the vocal debates in Wisconsin, Ohio and New Jersey.  Public safety and the environment issues are always prevalent, and technological advances spur new legislative initiatives every few months.

Legislative Elections

In the 50 states 86 of the 99 total legislative chambers will be holding elections, in which 81% of all state legislative seats will be considered. The partisan splits in chambers in more than half of states, ten or fewer seats separate the majority from the minority. Even though party control is not expected to change in the majority of states, a presidential election and redrawn legislative districts provide little reassurance when it comes to the balance of power within and across states. When it comes to campaign issues, expect legislators to focus pull out issues popular with both Democratic and Republican constituencies meant to excite each party’s base.

Budgets

After several years of deep cuts, state budget situations are showing signs of recovery, but remain significant effects from the recession remain. According to the National Conference of State Legislatures (NCSL), FY 2012 marks the fourth consecutive period that states have faced significant mismatches between revenues and spending. After lengthy budget debates in the 2011 session only New Hampshire and Washington project deficits at the end of FY 2012.

But state budget experts are still very worried about the situation. The budget projections used by states are based on tax collection rates that continue to lag behind expected tax revenues. Stimulus money is gone. Clever accounting can only push off costs for so many years. More than 20 states are anticipating a budget gap for FY 2013 and FY 2014 and all projections show this number growing in the coming years. Therefore, the 2012 legislative sessions will be marked by sharp budgetary battles in which legislators will be forced to reform state government, continue cost cutting and/or increase revenue.

Economic Development and Job Growth

Numerous states have seen jobless rates continue to climb, including states that have traditionally outperformed the rest of the country in the South and the West. Legislators in at least 15 states, including Arizona, Florida, Georgia, Louisiana, Mississippi and Utah have indicated that job growth and economic development will be the centerpiece of the next session. Legislators are expected to advocate several priority proposals in this regard including manufacturing facility development and modernization incentives, small business financing programs and financial incentives for job creation. Tax credits and incentives for hiring unemployed residents were approved in states like Alabama, Florida and Maryland in the 2011 session and many of the states mentioned above will consider similar legislation in 2012.

Education

Education funding and reform is a priority for lawmakers every year. One trend on the education front is the effort by states to pull away from federal education mandates. Eight states have indicated an intention to pursue waivers from the federal “No Child Left Behind” law. The new policy announced by the President last month is that in order to receive these waivers states will need to develop and implement certain standards for math and reading, create systems to measure school performance and develop teacher and principal evaluation programs. All this will take place during the 2012 session—lawmakers will approach public education with even less funding while trying to perform at a higher level.

Energy

The hot energy issues next year will be the plans that propose increased development of energy resources while aiming to develop future energy transmission corridors and other infrastructure. In the 2011 session three in every five states considered energy transmission language. The number of states tackling energy will likely increase in next year’s session—legislators in more than 25 states have noted energy issues as a major priority for 2012.

No energy proposal will be one-size fits all. The focus of any energy legislation will depend on the specific energy issues at play in each state. Transmission line deployment is a big issue in Western states like Wyoming and Montana. Pipeline development and hydro-fracking regulations will dominate the oil and natural gas discussions in states throughout the Marcellus Shale region and in Southern and Western States. Alternative and renewable energy sources will be discussed in states throughout the country, including in Maryland where Governor O’Malley (D) is in favor of an off-shore wind energy project.

Immigration Reform

Although state legislatures considered more than 240 immigration-related measures in 2011, only 10 states enacted legislation. Despite the plethora of bills considered, lawmakers have been hesitant to expend political capital on immigration reform until federal challenges to state immigration reform attempts are finalized. Until that happens the discord between the federal government and states on immigration policy will continue to set the tone for immigration efforts throughout the 2012 session.

While a federally-driven comprehensive immigration reform package is possible, it’s more likely we’ll see one or more bills narrowly targeting employment and the electronic verification of workers.

One development that will make states more willing to tackle immigration measures was a recent ruling from U.S. District Judge Sharon Blackburn to allow much of Alabama’s H.B. 56 to take effect. This ruling, along with previous rulings in Arizona and Georgia, may start to provide a roadmap for other states to follow.

Medicaid

Health care reform and funding for state Medicaid programs are always a priority issue in the states. Add to that the fact that revenue growth is not expected to keep pace with anticipated increases in Medicaid costs mandated by federal health care changes. To defray these costs, states will look to increase utilization of Medicaid managed care in place of traditional fee for service plans. At least 19 states decided to expand Medicaid managed care in 2011 and nearly all states will continue to consider additional proposals as they prepare for the projected addition of 16 million adults to the Medicaid rolls by 2014.

Redistricting

Only the four states with elections this calendar year (Louisiana, Mississippi, New Jersey and Virginia) were required to have redistricting completed this year. All four were approved in time for elections to take place on-time, but not without legal challenges. The deadlines for the other 46 states to finalize their maps are before state primary and general elections are held next year. While a number of other states have already redrawn districts, the threat of legal challenge have been ubiquitous in almost every case. Several legislatures have scheduled special sessions through the remainder o the year to tackle redistricting, but expect the debate to carry-over well into next year. The closer to a regularly scheduled election a given state redistricting battle gets, the more noteworthy an issue redistricting will become.

Tax Expansion and “Reform”

Legislators are wary of tax increases in good times—broadening revenues by raising taxes during an economic slump becomes a very hot-button issue. According to NCSL, 2011 marked the first year in the last ten that states reported lowering taxes more than they increased them. While the numbers may have been skewed by some large cuts or by the expiration of few temporary tax hikes, it demonstrates the pressure legislators feel when it comes to raising taxes.

Corporate tax rates have been cut in 20 states since the year began and 12 states lowered general sales tax rates. To make up for lost revenue from these and future tax cuts, states will get creative in identifying revenue streams by reforming business taxes, reducing or eliminating certain credits and exemptions and expanding the sales tax base.

One of the visible efforts taking hold is the move by many states to collect sales taxes from online retailers. Internet sales taxes have been a target for states for a number of years and its lean economic times that increase pressure to pursue it as a possible new revenue stream. Lawmakers in 15 states considered “Amazon Tax” style language this year. Numerous other states examined different approaches to capture this revenue. The legislation that passed in California, coupled with the recent agreement between the state and Amazon to begin collecting online sales taxes in 2013, may serve as a striking model for action elsewhere.

Despite only passing in five states, bills to the increase the taxes levied on alcohol and tobacco products were considered in 43 states this year. In addition, policymakers in nearly half of all states attempted to tax foods and beverages that are deemed to lack nutritional value.  Ostensibly designed to promote health, the taxes are earmarked to fund the healthy lifestyle and obesity prevention programs that have become a priority across the country.

State Reaction to Health Care Reform

As the federal Patient Protection and Affordable Care Act is implemented, the states are coming to grips with its realities and expressing their concerns.  Last month I mentioned that 22 states had proposed constitutional amendments or other legislation that would prohibit an individual mandate to purchase insurance.  Since that time, the number of states has grown to 36, with Virginia, Utah and Idaho enacting legislation.  Additionally, 16 states have decided to file suit to challenge the constitutionality of the individual mandate under the new federal law.  State objections and concerns are not limited to just ideological opposition to the individual mandate.  The more imposing challenge for the states, also addressed in the legal challenges, is the massive new requirements on state Medicaid programs.  The possibility of large unfunded mandates on top of already stretched budgets has motivated states to address these issues.

14 state Attorneys General (including Florida, Alabama , Colorado, Idaho, Michigan, Nebraska, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, Indiana, and Louisiana) have joined in a suit filed with the U.S. District Court for the Northern District of Florida to challenge the constitutionality of the Patient Protection and Affordable Care Act, with a 15^th, Virginia’s Attorney General Ken Cuccinelli, filing a separate lawsuit to do the same.  Arizona enacted legislation yesterday to overcome their Attorney General’s refusal to engage in a lawsuit.  While it has received more attention, the individual mandate portion of the federal law does not come into effect until 2014.  Of more immediate concern to the states are the implementation costs of adding, on average, an additional 25% to the enrollees already receiving Medicaid, in advance of the 2014 deadline. 

Under new federal requirements, states will be required to expand their Medicaid eligibility to 133% of the federal poverty limit for currently covered populations, children and their parents, while for the first time establishing eligibility for childless adults.  For states that already offer Medicaid benefits at this level, including services to childless adults, there will be relatively few new enrollees.  However, 39 states do not currently offer this level of eligibility for Medicaid, and are expecting a considerable increase in enrollees.  Based on the potential of covering most of their non-elderly, uninsured population, states like Texas, Utah, and Virginia could see increases of over 50% in their Medicaid enrollees   The direct costs to cover reimbursement for new enrollees will be supported by federal matching funds, with the federal share of costs at 100% in 2014, gradually falling to 90% by 2020.  Many states are concerned that even a 10% increase in costs will be difficult to sustain under current state budget projections and that administrative costs to accommodate and administer the expanded number of enrollees have not been addressed.  Changes in how pharmacy rebates are collected from manufacturers participating in Medicaid are causing concerns for state revenue streams as well.  Increases in the rebate percentage will be retained at the federal level, requiring the states to revisit their rebate amounts. 

While Medicaid is one aspect of expanding coverage to the uninsured, an additional aspect of this goal under the new law is the establishment of high-risk pool programs to provide insurance access to adults denied coverage due to preexisting conditions.  While this program will be phased out in favor of Health Insurance Exchanges by 2014, a high-risk pool is required to be implemented within 90 days.  As a result, The Department of Health and Human Services is looking at using existing state high-risk pool plans as foundations to build an expanded federal program.  Groups like the National Association of State Comprehensive Health Insurance Plans are lobbying for this policy, pointing out that the federal legislation requires the pools to be set up through non-profit entities and the that the 90 day timeframe is too short to create an entirely new entity.  Should this occur, the states will have enormous influence on how these programs are managed, even prior to the development of the state exchanges.

States are focused on addressing how they can affect implementation.   While the Department of Health and Human Services will fill in many of the blanks left in health care reform, the states will still have a major role in shaping health policy.

Robert Holden, rah@stateside.com

Heath Care Debate Returns to States

The pendulum of health care reform has swung back towards state governments.  In the February 2, 2010, issue of the Wall Street Journal, Anna Wilde Mathews notes in her article “States Restart Health Care Push” (may require subscription) that the uncertainty of federal health care legislation has pushed reform back to the states.  Mathews correctly reports that, prior to the Obama administration, health care reform efforts were pursued primarily at the state level.  Massachusetts stands as the prime example of state reform.  California was expected to follow suit, but a poor economy and a wait and see approach due to the possibility of federal reform froze the progress of many state reform efforts under consideration.

While the absence of federal legislation may now inspire states to reconsider these proposals, budget necessities are forcing state legislatures to deal with health care issues in a more focused way than Congressional efforts.  Federal legislation included efforts to expand coverage as well as provisions aimed at “bending the cost-curve.”  Expanding coverage at the state level, either through state Medicaid and Children’s Health Insurance Program (CHIP) eligibility expansions or through comprehensive single-payer plans, is now off the table in most states due to budget concerns.  As a result, states are now targeting the cost factors that federal proposals postponed into later years or did not address at all.

State Medicaid plans are the largest factor in the push to control costs.  The stimulus bill provided states with increased federal matching funds for state Medicaid plans.  These matching funds were stipulated on states maintaining 2008 eligibility levels in these programs.  With this assistance ending December 31, 2010, it was possible that the states could escape, or at least delay, cost reduction efforts (including eligibility restrictions) until a recovering economy started providing additional state tax revenues.  As the recovery continues to move slower than expected, states are now facing the daunting task of funding their Medicaid plans with even lower revenues and less of a prospect for immediate federal help.

Budget gaps are forcing states to look at every option.  States are addressing pharmaceutical costs by creating new prior authorization requirements for certain drugs and encouraging the use of generics.  They are increasingly utilizing mail order systems and negotiating for lower reimbursement and increased rebates from pharmaceutical and medical equipment providers.  Health service providers are also receiving lower reimbursements, and some optional Medicaid services (dental, optometic, and others) are being eliminated altogether.  In addition to these reductions in services and reimbursement, plan enrollees are being required to pay more in co-payments and more states are looking at higher taxes on hospitals and insurers.  These efforts may forecast the policies the federal government adopts as Medicare costs continue to grow.

While coverage issues are largely on hold, states are acting under their authority as the primary regulators of the insurance market.  States continue to impose coverage mandates on health insurers, either through mandated benefits or, increasingly, mandated coverage for dependants in their 20s.  Nevertheless, reform proposals not addressed at the federal level are being considered.  Twenty two states have proposed constitutional amendments or other legislation that would prohibit an individual mandate to purchase insurance, as in Massachusetts, or limit the ability of the state to limit access to providers or health plans.  In addition, states have proposed measures that would allow residents to purchase plans available in other states, in effect eliminating their own mandated coverage requirements in an effort to make more affordable options available to consumers.

Robert Holden

February 2010