Pensions, Medicaid and State Budgets: Is a Solution in Sight?

State and local leaders say that in order to fix their budgets, they'll need to view citizens and government employees and partners.
by | September 19, 2012

Donald Boyd is researching an area where there isn't much optimism: the financial challenges facing state governments.

The growing costs of Medicaid, he said, seem “almost inexorable.” The growing cost of pensions have the potential for “dramatically negative” effects. And both those challenges come at a time when the federal governments may soon take steps to reduce its deficit – a plan that could have enormous consequences for states that rely on the feds for more than $600 billion in federal grants annually, according to Boyd.

It’s a challenging time, and it will require states to reexamine their entire approach to government, said he and other panelists at Governing’s Cost of Government Summit Tuesday.

“We are in a transformational time,” said David Adkins, executive director of the Council of State Governments.

Adkins said his members face “fundamental change” and will have to consider how to adapt to what increasingly appears to be a new normal for state governments. But their biggest challenge may be themselves.

As Adkins and others explained, state officials tend to write budgets on an annual or biennial basis. Many state lawmakers also face strict term-limits. Those factors conspire to create a situation that encourages state leaders to make short-term fixes rather than long-term solutions. Political rhetoric, Adkins said, “is very much reflective of the here and now.” State officials will have to resist that temptation as they restructure their governments in the wake of the recession.

He highlighted potential cost-savings systems like new models of health care deliver and a focus on evidence-based solutions budgeting ensure states get the best outcomes when using their limited funds, said Adkins.

Others also said governments at both the state and local need to do a better job engaging citizens as they seek solutions to budget challenges. “We’ve got to a better job of talking to people and speaking in a language they understand,” said Mike Eglinski, city auditor of Lawrence, Kan.

Robert Bobb, a former emergency financial manager of the Detroit school system, also called for state and local leaders to do a “deep dive” into their budgets to examine how they are assembled and what tools are in place to control costs.

One of the biggest challenges is rising cost of employee pensions and retiree health care benefits. There are no laws regulating how stated fund their pensions, and many are using systems that are essentially 100 years old, said Diane Oakley, executive director of the National Institute on Retirement Security. In the wake of the recession, the value of those pensions plummeted, leaving many states with sizable unfunded obligations to retirees.

Most states have taken steps of varying degrees to address those rising pensions costs. John Nixon, Michigan’s budget director, praised his state's efforts, which he said have reduced the state's unfunded pension liability by $20 billion. But he admits it will be a tough slog for others confronting the problem.

“The key is that, we need to look at and make sure we have all the facts and all the data,” said Nixon. “The current employees – it’s not much more lucrative than the private sector.”

 “There’s just no easy solution,” he added. “We’re talking millions of people’s lives.”

While the costs associated with employees – including salaries and their pensions and health obligations – are a serious problem for both state and local governments, Adkins called for elected officials to avoid demonizing workers and instead view them as a resource.

Those workers, Adkins said, could be knowledgeable about areas where governments could achieve savings. “They’re actually smart, passionate, committed people,” Adkins said, arguing that state employees will be one of the “first lines of innovation.”


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