Finance

The Week in Public Finance: Repealing Obamacare, How a California Ruling Threatens Pensions and More

A roundup of money (and other) news governments can use.
by | January 6, 2017

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How Much Will Dismantling Obamacare Cost?

As leaders in Congress kick off the 115th session by assuring the public they will repeal the Affordable Care Act (ACA) in full by the end of this year, a newly released estimate puts the cost of a total repeal at roughly $350 billion through 2027.

According to the nonpartisan Committee for a Responsible Federal Budget, repealing the law's Medicare-related cuts and its tax increases -- such as the "Cadillac tax" on high-cost insurance plans -- could cost the government more than if it left the ACA in place.

But the report found that lawmakers could save money if they just repeal parts of the law. For example, if Congress only does away with the ACA's coverage provisions (mainly the Medicaid expansion), it could save $1.55 trillion through 2027.

The Takeaway: If Congress decides to go that route and just repeal the Medicaid expansion, then states will have to determine whether to cover the cost of expansion themselves or roll it back. A rollback could boot as many as 30 million Americans off the program, by some estimates.

It’s unlikely states would choose to pick up the tab. Medicaid is one of the fastest-growing expenses for states -- even with the federal government covering the majority of the cost of expansion. In most states, Medicaid accounts for at least one-fifth of all spending. And in some places, such as Illinois and Pennsylvania, twice as much is spent on Medicaid as on K-12 education.

A Threat to Pensions

For the second time in a year, a California appeals court has ruled that governments can reduce vested pension benefits.

In a decision that came down late last month, a three-member panel in San Francisco affirmed a state pension reform law that prevents pension spiking tactics such as cashing out unused vacation and sick days. In its ruling, the panel said that benefits could only be reduced as long as employees still receive a pension that is “substantial” and “reasonable.”

The ruling is similar to another appellate ruling last year which found that an employee’s constitutional right “is only to a ‘reasonable’ pension -- not an immutable entitlement to the most optimal formula of calculating the pension.”

Both rulings significantly weaken the so-called California Rule, which basically says public employees are guaranteed the pension in place the day they were hired. Twelve other states have similar protections, which some believe are now endangered as a result of the California rulings.

The Takeaway: We’ve heard these threats before. When Central Falls, R.I., negotiated massive pension cuts as part of its bankruptcy exit in 2011, many applauded the decision as tough but necessary in order for the small town to gain access more quickly to the bond market. The judge presiding over that case called it a model for others to follow and Central Falls’ credit rating was restored to investment grade just one month after its bankruptcy exit.

But no bankrupt city has followed that model since, despite being given more legal leeway to do so. Detroit made modest cuts to pensions and deeper ones to bondholders, and Stockton, Calif., chose to slash retiree health care instead.

A more likely outcome from these rulings is what’s already happening around the country: Governments are taking a hard look at what are their most expensive retiree obligations and negotiating a solution that requires sacrifices from both sides.

State Governments Slimming Down Again?

More than half of states have decreased their payrolls over the past year, according to data compiled by the financial firm Janney Montgomery Scott.

While it’s unclear how much of the reductions are through attrition as opposed to layoffs, the downward trend comes as more states are grappling with budget shortfalls.

Of the 27 states that saw staffing decreases, Connecticut saw the highest, with 4.4 percent fewer full-time employees in 2016 than the year before. Most of the reductions were smaller, with 11 states showing a less than 1 percent reduction in staff.

The Takeaway: While the slimdown in employees and in tax revenue aren’t necessarily related, they both indicate storm clouds on the horizon.

As Janney credit analyst Eric Kazatsky noted in his analysis, the post-recession years saw significant reductions in staffing levels as such cuts were politically easier than decreasing funding to education or Medicaid (although certainly, states have made cuts to education).

If the current trends continue and budgets once again come under pressure, state legislators will look for more expenditures to cut. But now, there are even harder choices to make.

“As staffing levels continue to come down and states operate in the new model of efficiency,” warned Kazatsky, “these areas of low hanging fruit will be harder to come by.”

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