Politics

Legislatures 2006: Issues to Watch

As legislatures in most states come back into session this month, their members will be spending an unusual amount of time dealing with issues that involve other levels of government.
by | January 2006

As legislatures in most states come back into session this month, their members will be spending an unusual amount of time dealing with issues that involve other levels of government.

Congress, for example, voted to add a prescription drug benefit to Medicare in 2003, but gave states a large role in implementating the program. As a result, legislators will be fine-tuning the benefit, which went into effect on January 1. State action in other areas, such as immigration and eminent domain, may hinge on how--if at all-- Congress addresses these issues this year.

While legislators keep an eye on the feds, they will have to lend an ear to local governments. Municipal officials are concerned that state and federal action will deprive them of powers and revenue sources they currently enjoy. They will lobby states not to restrict their eminent domain powers or undermine their ability to offer franchises to companies that provide video services. City and county governments will also be major stakeholders in debates over whether to cut property taxes.

The private sector, of course, is hardly a bystander in the legislative arena. Bills under consideration in many states would prod businesses to offer health care coverage to more of their workers, something many companies oppose. Business groups are also fearful that if states crack down on illegal immigrants, as many legislatures are considering, they will be deprived of a source of cheap workers. Organized labor, meanwhile, will fight efforts to make pensions for state employees less generous.

How lawmakers will address important issues in 2006 is anyone's guess. But one thing is clear: As policy makers weigh their choices, they will be keenly aware of their constituents' views. After all, more than 80 percent of legislators will be up for reelection this year.

EMINENT DOMAIN

As a result of the U.S. Supreme Court's landmark decision in Kelo v. New London, which affirmed the use of eminent domain for economic development, more than 20 state legislatures are likely to consider bills restricting eminent domain this year. Last fall's ruling generated an immediate backlash among both conservative property- rights advocates and liberal critics of big business. "To have a private group come in and say, 'We want this just because we think we can make more money off of it,' and to have the local government help, that is just wrong," says Oklahoma state Senator Daisy Lawler. A few states, including Alabama, Delaware, Ohio and Texas, have already passed measures restricting eminment domain.

Legislative action will not happen without a fight, however. Municipalities and redevelopment authorities are lobbying legislators not to curtail their use of eminent domain. They argue that sweeping eminent domain restrictions could undermine widely accepted local government goals, such as redevelopment of blighted areas and brownfields.

Business groups, on the other hand, have largely stayed on the sidelines or are advocating for limits on the use of eminent domain for economic development. The National Association of Realtors is backing restrictions in state legislatures. "A lot of small businesses could be gobbled up by big competitors," says Maryland Delegate Anthony J. O'Donnell, a supporter of eminent domain restrictions.

Even without the help of the business community, municipal representatives seem to be getting through to some legislators. Although many lawmakers remain convinced that action is necessary, they speak of hearing from different stakeholders and balancing competing interests. Just how extensively legislators decide to restrict eminent domain will hinge on the details of the bills they consider--how they define terms such as "economic development" or "blight" or "public purpose." In some states, lawmakers will also be deciding between statutory and constitutional approaches.

Municipal representatives are having a tougher time selling their perspective to federal lawmakers. Last year, the U.S. House of Representatives voted 376 to 38 to withhold federal funds from governments that use eminent domain for economic development. "We've had conversations with members of Congress that will talk to us," says Don Borut, executive director of the National League of Cities, "but they are not willing to go out front." Federal legislation could supersede state laws, but irrespective of what Congress decides, legislators have vowed to act on the issue.

HEALTH INSURANCE

Legislators will grapple with conflicting impulses when considering health care issues this year. Many want to expand coverage to the nation's 45 million uninsured and improve the quality of care for everyone else, but at the same time, Medicaid expenses represent ever- larger shares of state budgets, leading to a desire to cut costs. In the face of this conundrum, an increasing number of policy makers are looking to the private sector to shoulder more of the burden, either willingly or forcibly.

Last year, for example, Maryland's legislature passed a bill requiring businesses with 10,000 or more employees in the state to dedicate at least 8 percent of their payroll to health care costs. Although Governor Robert Ehrlich vetoed the bill, supporters are optimistic they can override his veto this year. At least a half dozen states, including Michigan, New Jersey and Pennsylvania, will consider similar legislation this year. Others, such as Massachusetts, will mull requiring businesses to pay a tax if they do not offer health insurance. Some states will consider requiring businesses to report how many of their employees are on Medicaid or other government-funded health care programs, a possible precursor to laws akin to the bills under consideration in Maryland and Massachusetts.

Supporters of these measures say that because states end up footing the bills for employees who do not get health coverage at work, taxpayers ultimately bear the costs. They also argue that if businesses can get away with not offering health insurance, then companies that do offer coverage will be hurt. "We have to pick up the costs when the employers are not doing so," says Delegate Anne Healey, sponsor of the Maryland legislation. "It puts the employers who are doing the right thing at a competitive disadvantage."

While Democrats generally support these efforts, most Republicans and business groups oppose them. They argue that such requirements would harm the business climates of their states and lead to higher prices for consumers. Fearing a national trend, Wal-Mart--the only company that currently would be affected by Maryland's bill--has deployed 12 lobbyists to the state to try to defeat the legislation.

Other states will consider a more conciliatory approach. Iowa Governor Tom Vilsack has identified assisting small businesses in providing health coverage as a legislative priority. Montana approved legislation with the same goal last year. "If you give them the tools to get things done," says Vilsack spokesperson Jennifer Mullin, "they will take the high road."

TELECOM REGULATION

A variety of telecom issues are on the legislative agenda. In addition to continuing efforts to limit the ability of municipalities to offer broadband, a new issue is coming to the fore in statehouses nationwide: Many states--likely including California, Connecticut, Michigan, Minnesota, Missouri, New Jersey, North Carolina and Virginia--will consider bills that would allow companies to receive statewide franchises to provide video service.

Currently, to offer video service, companies have to apply for franchises at the local level, deals that typically require them to pay fees and be subject to local regulation. Phone companies would like to break into the cable business, but, with so many local governments involved, they have struggled to do so. Thus, phone companies are leading this year's legislative push in the hopes of obtaining franchises for entire states in one fell swoop.

Predictably, the biggest opponents of statewide franchise bills are cable companies, the sworn enemies of the phone companies, who plan to jealously guard their turf against encroachment. Municipalities also are concerned with the legislative push, worrying that they could lose out on franchise fees and regulatory authority if such bills pass. On the other hand, advocates of the measures argue that they will increase competition and lower prices for consumers.

Texas was the only state to approve a statewide franchise last year. The Texas legislation may represent a model for others to imitate in order to win broad-based support. Initially, municipal representatives were dead-set against the bill, but lawmakers offered concessions, grandfathering in existing franchises and ensuring that fees from statewide franchises would be redirected to local governments. The result was that although big cities still opposed the final bill, the Texas Municipal League stayed neutral, and the legislation passed.

Congress may also get involved in the debate. Phone companies will seek a law to allow for federal video franchises. If approved, the legislation would render local or state franchises unnecessary, a possibility that has municipalities concerned. "It's an onslaught against the local franchising authority," says Marilyn Mohrman-Gillis, director of the National League of Cities' Center for Policy and Federal Relations.

PROPERTY TAXES

With rapidly rising real estate values hitting homeowners with higher taxes, legislatures across the country will consider cutting property taxes this year. But the impetus behind the bills will have as much to do with school funding and a desire to shift certain taxes from the local level to the state level as it will with any property tax revolt. States that will likely discuss property tax cuts include Alabama, Idaho, Indiana, Nevada, New Jersey, North Dakota, Pennsylvania, South Carolina and Texas.

Since property taxes generally are levied at the local level and often fund public school systems, any discussion of property taxes almost inevitably links to school funding. Texas will reconsider its property tax system because the state Supreme Court deemed the present system unconstitutional last year, while North Dakota's lawmakers, who do not go into regular session until 2007, are mulling changes to their system amid the backdrop of a similar suit. Even in states such as New Jersey and South Carolina, where the property tax debate is largely motivated by a desire to lower taxes, school funding issues also come into play.

Most of the bills being proposed will strive to replace property tax revenue with increases in other taxes. Many states are running surpluses and could--at least temporarily--direct their extra revenue to localities to compensate for property tax cuts. But, with fresh memories of tough fiscal times, most legislators will be reluctant to do so. "Whether that is going to be ongoing is a big question," says North Dakota Representative C.B. "Buck" Haas of his state's surplus. "It might be just a little blip."

A few states may also mull measures to cut property taxes indirectly, by limiting increases in real estate assessments or the frequency of assessments. Discussions in Alabama have centered on shifting from annual to quadrennial assessments, while a Nevada legislator is proposing a ballot measure to cap assessment increases at 2 percent or the rate of inflation, whichever is less.

Supporters of property taxes tout the stable revenue stream they provide and worry that their removal could lead to boom-and-bust cycles in state government. "The problem is doing something with the property tax and replacing it with a volatile tax, like the income tax," says Brigham Young University Professor Gary Cornia, former president of the National Tax Association. Although some legislators think property taxes are more volatile than experts acknowledge, many also recognize the importance of property taxes, in addition to sales and income taxes. "People will argue that you need all three and probably you do, but at what share?" says Haas. "That's the question we're wrestling with."

IMMIGRATION

With immigration issues roiling all levels of government, legislatures will host a variety of spirited immigration-related policy debates. To proponents of stricter enforcement of immigration laws, the increasing focus on illegal immigrants is the result of lawmakers' finally paying attention to the concerns of their constituents. "The grass roots are finally connecting to the elites," says George Grayson, a former Virginia legislator and professor at the College of William and Mary. In contrast, opponents of tougher laws or tougher enforcement smell rank political opportunism in election year anti-immigration talk.

Regardless of the motives involved, legislators will consider a number of approaches to address the 10 million or more illegal immigrants in this country. A handful of states will consider measures that would require individuals seeking state services to offer proof that they are legal residents. Arizona moved in this direction by passing Proposition 200 in 2004, and at least seven states considered similar legislation last year. Such an approach may gain traction this year in Georgia, where Republicans control the legislature and will pursue a bill akin to Proposition 200. "It's actually patterned after the federal law that is already in existence," says Georgia state Senator Chip Rogers, wryly noting the lack of enforcement of federal immigration laws.

Although a flurry of immigration-related bills will be introduced, in recent years the vast majority that were introduced did not pass. One reason for the low success rate is that businesses benefit from cheap immigrant labor, so they tend to oppose stricter immigration laws. That is especially true when states propose bills to deny state contracts to businesses that employ illegal immigrants or punish businesses that employ undocumented workers, as more than 10 states did last year.

While most of the immigration legislation in statehouses this year will seek to get tough on illegal immigrants, some bills will attempt to expand benefits and services. For example, a Massachusetts bill would make illegal immigrants eligible for in-state tuition rates--a benefit they already enjoy in nine states--and legislation in Nebraska and Indiana would offer driving certificates to members of the undocumented community. "State and local governments have an opportunity to do something positive in not just welcoming but integrating immigrants into their communities," says Tanya Broder, a staff attorney with the National Immigration Law Center.

The situation is further complicated by the possibility of federal action. The congressional picture is murky, with a number of bills under consideration that would dedicate more resources to border enforcement or offer undocumented immigrants a way to legalize their residency status.

PENSION PLANS

Many legislatures will have little choice this year but to invest large sums of new money in state pension systems or to pursue overhauls to make them less generous. In terms of the sheer amount of money involved, no fiscal challenge is more daunting than unfunded pension liabilities. Even many small states have long-term liabilities in excess of a billion dollars and in many larger states the totals come to tens of billions. "We have postponed the day of reckoning in every way imaginable, but it's here now," says New Jersey Assemblyman Richard Merkt.

Pensions became a common trouble spot through the confluence of legislative misjudgments and national economic conditions. Many states offered generous new retiree benefits to their employees in the 1990s or failed to invest adequately in their pension systems. Then, the economy weakened at the beginning of this decade, and the stock market turned more bearish as well. As a result, state pension systems took a sizable hit, and massive unfunded liabilities emerged.

The silver lining is that for the first time in five years, many legislators will be working with sizable budget surpluses. States including Tennessee, Washington and West Virginia will consider investing part of their surpluses into their pensions. In December, Montana Governor Brian Schweitzer called lawmakers into a special session to tackle the issue. The surplus cash available is a pittance compared with the unfunded liabilities, but since the pension bills are due over the course of decades, an immediate infusion of cash could be enough to bring some states back onto solid financial footing--at least temporarily.

Other states will seek to cut into unfunded liabilities by reducing their pension spending for future state employees. In this regard, the most controversial approach will be switching from defined-benefit pensions to 401(k)-style defined-contribution plans. Alaska shifted to a defined-contribution system last year and legislators in other states such as New Jersey may contemplate a similar change this year.

Public employee unions will fight any move away from defined benefits. They argue that defined-contribution systems are less efficient and that legislators should do what in some cases they did not do in the 1990s: make adequate funding of state pension systems a priority. Due to the pushback from unions, legislatures will also contemplate less dramatic changes to state retirement systems, such as requiring employees to contribute more money to their pensions or having benefits start at a later age. Legislators in Colorado, New Jersey and New Mexico will be looking at those options.

MEDICARE PART D

With the Medicare prescription drug benefit having gone into effect the first of January, state lawmakers are watching closely to see how well it works and whether new legislation might be needed. "There is some concern that problems will surface that nobody has anticipated," says Ed Dale, senior legislative representative for AARP's State Affairs Department. Congress passed the Medicare Modernization Act in 2003, which included the "Part D" drug benefit, but states have much of the responsibility for implementing the program.

In particular, legislators will be listening for complaints from beneficiaries that they are confused by their plans or are not eligible for the drugs they need. If that occurs, at least two ideas may gain traction in more statehouses. One is for states to simplify the daunting array of choices available to Part D participants by designating a few preferred plans and then allowing beneficiaries to opt into other plans if they so choose. The federal Centers for Medicare & Medicaid Services (CMS) must sign off on these proposals and, according to AARP's Dale, may be increasingly willing to do so in order to get more people enrolled in Part D. Last year, CMS signed off on preferred-plan proposals in Massachusetts, Pennsylvania and Vermont. Other states have passed legislation but have not yet won approval from CMS.

If beneficiaries find Part D inadequate, another option is to supplement it with additional assistance. Many states have already moved in this direction, passing "wrap-around" legislation to merge State Pharmaceutical Assistance Programs (SPAPs) with the Medicare drug program. As a result, participants can continue to enjoy the often-superior benefits offered by SPAPs, even as they sign up for Part D. Last year, at least 17 states passed wrap-around legislation. At least four of those did not have existing SPAPs and instead created new programs to supplement Part D. States such as California and North Carolina are likely to consider wrap-around bills this year.

Another issue that's likely to cause plenty of consternation is the "clawback" provision of Part D. Under the clawback, states must make monthly payments to the federal government that are intended to compensate the feds for taking on prescription drug costs previously borne by the states. But lawmakers have argued that states will lose money overall and some, such as Kentucky, New York and Texas, may pursue legal action. Legislators, however, cannot do much for now, except perhaps to take a stance similar to what New Hampshire adopted last year: refusing to make clawback payments while litigation is pending.

EMERGENCY PLANNING

Driven by Hurricane Katrina and fears of avian flu, not to mention ongoing homeland security concerns, legislatures will consider a variety of measures related to emergency planning. "Katrina clearly propelled us in a broader, new direction," says Maine state Senator Ethan Strimling, co-chairman of the state's homeland security task force.

Improving communication among local governments and between state and local governments will be a top area of concern. In Maine, the legislature will consider upgrading the state's communications technology. New Hampshire lawmakers will attend an educational meeting on emergency preparedness. The goal is for the state's 424 legislators to serve as liaisons to their local communities. "Most reaction has to come at the local level," says state Representative Peter Batula. Along the same lines, Tennessee will consider a bill that would require state emergency management officials to provide annual disaster-preparedness training to legislators and to every member of a municipal legislative body.

Utah will debate legislation to make it easier for the state to quarantine large groups of people. Elsewhere, notably in Hawaii and California, infrastructure is the priority. Governor Arnold Schwarzenegger will push the California legislature to authorize billions of dollars in bonds for infrastructure improvements, including a major upgrade of the state's levees, which became a concern after the catastrophic flooding in New Orleans.

Last year's hurricane season is reframing discussions of emergency planning, even in places where new legislation is not imminent. For example, after observing the strain Katrina's evacuees placed on governments throughout a broad geographic area, legislators in states bordering large metropolitan areas are mulling how they can be prepared if victims flee to their states. "Another person's disaster could be our disaster," says Nevada state Senator Bob Coffin.

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com

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