Will State Officials Moving to New Federal Agencies Affect Policy?

State officials have always found career paths that led to service in the federal government.  In areas where state law has historically been developed within a federal statutory framework, many aspects of environmental protection being an example, state officials moving into federal positions is nothing new.  Two recent major pieces of federal legislation, the Patient Protection and Affordable Care Act (PPACA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have created new law in policy areas previously directed by the states.  For the first time, the federal government will be taking a lead role in insurance regulation and, accordingly, experienced state insurance regulators have made the jump toWashington,D.C.

While these relatively new federal laws will certainly have a direct affect on state regulation, it is worth noting that the movement of state officials to the federal level can itself affect both state and federal policies.

New Agencies Under the PPACA and Dodd-Frank

Enacted in 2010, the PPACA engaged state regulators directly.  The language of the Act recognized the need for direction from the states by specifically requiring recommendations from the National Association of Insurance Commissioners (NAIC) on a variety of topics.  As new departments were established in the United States Department of Health and Human Services (HHS), current and former state insurance commissioners were logical candidates to fill key positions.

While this trend arguably started with the appointment of HHS Secretary Sebelius, former Kansas Governor and Insurance Commissioner, prior to the enactment of the PPACA, it certainly intensified after enactment.  Former Maryland Insurance Commissioner Steve Larsen served as Director for the Division of Insurance Oversight for less than a year before his appointment as Deputy Administrator and Director of the Center for Consumer Information and Insurance Oversight (CCIIO) in the Centers for Medicare & Medicaid Services (CMS).  This was followed by the appointment of the then current Pennsylvania Insurance Commissioner Joel Ario to direct the new Office of Insurance Exchanges within CCIIO.

The enactment of the Dodd -Frank Act only a few months after the PPACA created a similar dynamic, establishing the Federal Insurance Office (FIO) in the Treasury Department.  While implementation of Dodd-Frank has taken longer to begin, Illinois Department of Insurance Director Michael McRaith left his state position this summer to head FIO. 

Affects on Policy

We have already seen some of the ways in which these former state officials have affected federal policy towards the states.  This maybe clearest in the case of Joel Ario at the Office of Insurance Exchanges, as he moved directly from being a key member of the NAIC Health Insurance and Managed Care to leading the development of recently proposed federal rules addressing the creation of state health benefit exchanges.  While these rules have not yet been finalized, their current provisions allow the states flexibility in their implementation efforts.  That flexibility has been a frequent request from both the NAIC and the states themselves.  As these rules are only an early step in federal direction of PPACA implementation, it will be interesting to see if this trend continues in future federal rulemaking.  As Director Ario is scheduled to leave his position in late September, there may be a change in direction from the administration.

The affect of state officials on policy under the Dodd-Frank Act is more difficult to see.  The PPACA moved much of the high level policy making concerning health insurance to the federal level; however, fewer state insurance laws were preempted by Dodd-Frank, which focused FIO’s direct authority on international insurance issues and the Terrorism Insurance Program.  Director McRaith will also be informed by analysis and information from the Federal Advisory Committee on Insurance (FACI), composed in part by state insurance commissioners and other state policy makers appointed by the Department of Treasury.  While FIO’s role is confined mostly to monitoring, it will have the ability to propose greater regulation of specific insurance entities through recommendations to the Treasury Department’s Financial Stability Oversight Council.

If the movement of state officials to federal positions under the PPACA encouraged flexibility on the part of HHS as it directs initial implementation, this may not be the long term result.  If health care insurance policy is driven more aggressively at the federal level, states will have fewer policy decisions to make.  While less likely, FIO and the FACI could bring more state conformity to recommended federal policies.  Ultimately, states will be increasingly dealing with policymakers at the federal level that have emerged from their own ranks.  Will former state officials bring their experiences to bear as federal policy makers?  Will current state officials look to work more collaboratively with their new federal counterparts?

By Robert Holden, Esq., Vice President

State Answers to Federal Debt Questions

By Steve Arthur, Vice President

With an agreement finally having been reached over the debt limit, what are the next steps for Congress and the President?  We can look to the states to see what may happen in DC over the next two to three years. 

Some will argue that because 49 states have a balanced budget requirement, there is nothing to hold Congress accountable for deficit spending.  I would disagree.  The credit rating agencies’ threats to downgrade U.S. government debt may have a serious impact on elected officials and force them to finally get serious about the nation’s deficit spending.  As the states have shown, it won’t be an easy process and will likely take more than one year, but the states’ experience is a guide to what we can expect at the federal level.

Like the federal government, the states have faced significant budget deficits as a result of the recession.  The National Conference of State Legislatures (NCSL) reports that the states faced a combined $174 billion shortfall for FY 2010 (for most states beginning July 2009) on a combined General Fund budget total of approximately $600 billion, or 23%.  This is a smaller, but comparable amount to the federal gap. 

To get a general sense on how states resolved their budget deficits for the last three years, you can look at NCSL’s database that tracks each state’s budget cuts and revenue increases for the past three years.  The data shows states have been making spending cuts each year for the past three years, but it also appears that major cuts were made in both 2010 and 2011, with fewer cuts being made this year as revenues have begun to improve.

However, the revenue data is very interesting.  If you print out a chart of all revenue increases for each year, there are 12½ pages of increases for FY 2010.  That number drops to six full pages for FY 2011, but drops down to just over 2 pages for 2012.  Clearly, many states are moving away from revenue increases to deal with their budget deficits and doing so in a more serious manner.  For example:

• New York – With the budget 120 days overdue in 2010, this year’s budget was on time and included significant cuts.
• California – After the budget was passed over 100 days late last year, the state also passed a budget on time with no new taxes.  No taxes were included because the state’s Constitution requires a 2/3 vote for tax increases.
• Washington – After raising taxes in 2010 to balance its budget, Washington State passed a no tax increase budget this year, in part because of a 2/3 vote requirement to raise taxes.

Even though most states appeared to lean more heavily on cuts to balance their budgets this year, there were significant exceptions:

• Illinois – Approved a significant increase in the personal and corporate income tax rates to balance their budget this year.  
• Connecticut – Among other items, the state increased income and sales tax rates and added a “luxury” tax for certain items to balance its budget.

Of course, there were also some states that never had to face huge budget fights.  Either because of their tax structure, economic profile or history of good fiscal stewardship, those states were able to pass budgets without making news.  Unfortunately, those states are unlikely to provide much guidance for the federal government because of the serious fiscal condition of our federal government.

Even for those states with larger problems, they did take a variety of paths to balance their budgets, and for the most part budgets were passed on time.  One widely reported exception was Minnesota, where a budget disagreement shut down the government for three weeks.  The approved budget did not include any tax increases, but did include some significant accounting gimmicks used by other states that prevented more significant budget cuts.  One of the most interesting items to come out of Minnesota was that It appeared most Minnesotans didn’t seem to be clamoring for the government to be re-opened until liquor licenses started to lapse.  This weakened Governor Dayton’s hand in negotiations because he felt there would be a public outcry for services when the state shuttered its doors.

So what can we learn from the states’ experiences that might be relevant in DC?

First, there are going to continue to be significant fights over the level of funding.  Just as the states have seen very divergent views on the size and scope of government, that fight is going to continue in Washington, DC.  As the states have shown, there are no easy answers to bridge those differences.

Second, the Minnesota experience may be bad news for Democrats.  This is not 1995 and a government shutdown may not cause the outcry that it did during the Clinton-Gingrich faceoff.  If the nation receives a federal shutdown like Minnesotans treated their state shutdown, Republicans may be in a very good position to extract additional concessions from Democrats during the appropriations process.

Third, state legislators are dealing with their budget problems directly.  It did take most states a couple of years of gimmicks and one-time fixes before getting serious, but once the reality of long term reduced revenue projections sinks in, states are now making serious choices to address their budget imbalances.  This is one reason even Democratic Governors have started taking on the state employee unions.  Expect to see this at the federal level in the next couple of years.

Finally, the 2/3 vote requirement for tax increases did force budgets to be balanced with spending cuts.  Both California and Washington State saw this happen with Democrats in control of both houses and the Governor’s mansion.  In addition to pushing for a balanced budget amendment, there will be a significant push by Republicans for some sort of super majority requirement.  Those state examples will also encourage Democrats to push back hard against those proposals.

While there are huge differences between the states and federal government such as a balanced budget requirement, the pressure to fix our budget problem is mounting and it will force more aggressive action than we have seen proposed to date.  If Congress wants to know how the debate will play out, they should look to the states.

By Steve Arthur, Vice President

Local Governments Choose Bad Over Worse

By Stefani Millie, Vice President

As state governments continue to deal with budget gaps, so too are the nation’s cities, counties and towns.  Local governments’ fiscal concerns mirror what is going on in most states, with employee-related costs for health care coverage and pensions having the largest negative impact on the local government’s ability to fund. 

Similar to the states, local governments are taking varied actions to help deal with these costs.  Many are requiring employees to pay more for their health care or pensions. A number of cities and counties in California included referendums on the November 2010 ballots to cut public pension costs. In some cities, such as Huntington Beach, California, employees voluntarily agreed to pay more into their pensions to avoid cuts. However, for other local governments, funding pensions has become very difficult to accomplish.  The Prichard, Alabama public pension fund ran out of money in 2009 and the city stopped sending checks to retired workers. This is an extreme example, but it shows how some localities must make substantial changes to their pension systems, or risk running out of money.

According to an analysis conducted by Professors Robert Novy-Marx (University of Rochester) and Joshua Rauh (Northwestern’s Kellogg School of Management), underfunded pensions for municipal and local government employees total $574 billion, which averages $14,000 per household. For residents of some large cities, the pension situation is worse. For example, New York City’s unfunded pension liabilities total nearly $39,000 per household. Cook County, Illinois Treasurer Maria Pappas announced June 21 that the debt carried by the various governing bodies within the county total $108 billion, with pension benefits totaling over $50 billon of that amount; $25 billion of that is unfunded pension liabilities. The debt load averages $63,525 per Chicago household and nearly $33,000 per suburban household.

Local governments in some states have asked for help from their state legislatures. June 13, the Rhode Island League of Cities and Towns requested legislation to revamp the rules for municipal pensions, in order to financially assist struggling local governments.  In Florida, Governor Rick Scott (R) signed legislation that requires state and local government employees to contribute to their pensions. The Florida League of Cities supported the legislation and participated in the Governor’s bill signing ceremony on June 23.

In these times of tough fiscal conditions, as revenues for local governments are declining and funding from other sources disappearing, are local governments becoming more fiscally conservative?  To deal with the shrinking revenues, many local governments have cut spending and instituted hiring freezes, furloughs and/or layoffs. It is estimated that local government job cuts in 2010 and 2011 will approach 500,000. Some localities are also privatizing services, and are looking for other innovative ways to save resources, such as sharing services with other local governments, or even consolidating government functions and/or local governments. The Rhode Island League of Cities and Towns has also requested legislation to make it easier for communities to enter into agreements to share services.

What about increasing revenue?  It appears that more localities are looking for ways to reduce spending rather than looking for additional revenues.  In an era of falling home prices, property tax-dependent localities are going to find filling deficits with tax increases a very hard sell.

If revenues continue to decline for localities, as predicted, what path will local governments choose? Will we see more requests of state legislators to provide regulatory relief? How long can localities be innovative in finding fiscal savings before they are forced to find ways to increase revenues?