The Week in Public Finance: Paying for Repeal and Replace, SEC's New Disclosure Rule and the Online Sales Tax Fight

A roundup of money (and other) news governments can use.
by | March 10, 2017

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The Cost of 'RepubliCare'

Congressional Republicans this week revealed their replacement plan for the Affordable Care Act. Fiscally, the plan does what the GOP promised: If passed, it is expected to make health-care spending less expensive for the federal government (pending the assessment from the Congressional Budget Office.) States, on the other hand, will have some tough decisions to make regarding Medicaid.

Under the proposed plan, Medicaid allotments would be capped based on the program's per-capita enrollment in that state. Currently, Medicaid has an open-ended funding structure based on matching whatever a state spends.

While the plan doesn't repeal the Medicaid expansion, it starts to ramp down that population beginning in 2020 by discontinuing the federal subsidy for any new expansion enrollee. It also works to pare down the population by disqualifying any participant who lets their enrollment lapse and requiring states to redetermine enrollee eligibility every six months.

The Takeaway: In government, the cost of doing business rolls downhill. Once 2020 rolls around, states will have to decide whether to cover new Medicaid enrollees themselves.

What's more, the new per-capita funding structure would also mean less real money for states going forward. That's because economists do not expect it to keep pace with actual costs. The plan pins funding to grow along with consumer inflation plus 1 percentage point, which is much slower than the rate medical costs are actually growing. S&P Global Ratings notes the funding structure does not consider, for example, new and oftentimes expensive treatments.

Moody’s Investors Service further warns that the funding gap would likely force states to lower payments to safety-net hospitals and other providers, as well as reduce coverage and benefits. This fact, combined with a federal change that would raise costs for older enrollees and likely force some to lose coverage, could significantly hurt nonnprofit hospitals’ ability to provide care. “Older people have greater health-care needs, and as they lose coverage, hospitals would incur greater uncompensated care and bad-debt costs,” Moody’s wrote.

On the positive side, though, the per-capita proposal means that federal Medicaid funding would increase during recessions as more people become eligible, keeping the program's important countercyclical status.

SEC Wants Munis to Disclose Bank Loans

The Securities and Exchange Commission has proposed a rule that, among other things, would require governments to disclose direct loans from banks. The proposed rule comes after years of urging from credit rating agencies, bond investors and even the Municipal Securities Rulemaking Board.

Currently, direct loans are disclosed in annual reports, which means they don’t become public for months -- or even more than a year -- after the fact. The proposed rule says governments would now have 10 business days to disclose a material event. It's now open for comments from the industry.

The Takeaway: Direct loans from banks have become more popular in recent years with governments because such deals occasionally prove to be a cheaper and more efficient means of getting cash. In fact, S&P has estimated that as much as $50 to $60 billion in deals are made privately with banks each year. That's significant, considering that last year $450 billion in total debt was issued publicly in the municipal bond market.

Meanwhile, the treatment of bondholders in recent municipal bankruptcies has increased worries about the security of municipal bonds. After being forced to take a place in line behind pensioners, investors are now wondering if bank loans they don't know about will also take precedence in the event of a bankruptcy.

Online Sales Tax Challenge Moves Forward

A South Dakota circuit court this week found unconstitutional a law that would have allowed the state to collect sales taxes from online retailers. The law, passed a year ago, is part of a national effort among states to push the issue into the courts after more than a decade of waiting for Congress to let them collect sales taxes from online companies. By some estimates, states are collectively missing out on more than $23 billion annually in potential online sales tax revenue.

The Takeaway: So far, everything is going according to plan. State lawmakers, acknowledging the law was unconstitutional to start with, wrote it so that legal challenges would be fast-tracked through the courts. The next stop for the law is the South Dakota Supreme Court, according to the state Department of Revenue.

No one expects any court lower than the U.S. Supreme Court to rule in favor of South Dakota. The hope is that this case makes it there this fall, where it will give the justices a chance to overturn a 1992 ruling requiring sales taxes be remitted only by in-state businesses.

Interestingly, this week’s circuit court opinion hinted at such a path when it noted it was “duty bound to follow applicable precedent of the United States Supreme Court. This is true even when changing times and events clearly suggest a different outcome; it is simply not the role of a state circuit court to disregard a ruling from the United States Supreme Court.”

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