Category Archives: Entitlements

The Push for EITC Cash Grants Accelerates

A useful EITC example from the Commonwealth Institute’s website. Whether anybody “earns” a credit is debatable, but that claim will appeal to those who benefit.

With the 2019 General Assembly now a handful of weeks away, the main advocacy group for a new cash welfare entitlement in Virginia is ramping up its efforts with various appeals, perhaps testing themes for later use.

On Wednesday on its website the Commonwealth Institute for Fiscal Analysis was arguing that the state Earned Income Tax Credit (EITC) should be converted to a “refundable” cash grant because of how it would help “communities of color,” who pay a larger percentage of their income in state and local taxes.

A few weeks back, the focus was on how “veterans and their families deserve full credit.”  And, of course, they have broken down their data by legislative district, conflating the number of people who claim the EITC already with the number who would benefit from their idea.  Not everybody who now claims the state EITC would qualify for a grant.

The first to advocate for converting the tax credit into a cash payment was Governor Ralph Northam, who mentioned it last summer as his favored use for the windfall state income tax dollars generated by conformity.  It has nothing to do with that windfall.  In order to benefit from this idea, you already must be paying zero state income tax.

In recognition of that, the argument now is people need to get the balance returned in cash because they are still paying sales, excise and other taxes, just not income taxes.  It’s not good enough to zero out their income tax, advocates claim.

As previously explored, the Earned Income Tax Credit is a program with conservative credentials and has succeeded in improving the finances of low-income working families.  At the federal level, if your income and family size qualify you for a credit which is larger than your tax bill, the difference is sent to you in cash.  To call it a “refund” is political fiction, because it is not cash you paid in taxes to start with.  It just comes at the same time the rest of us are getting refunds.

The federal version has grown into a major income transfer program, about $60 billion annually, and as always with these programs the push to expand them is constant.  A Democratic House of Representatives will be more attentive.

In an earlier tax reform effort, Virginia added its own version of the program, allowing a credit against state taxes equal to 20 percent of the federal EITC.  But Virginia did not take the second step of paying cash grants from state revenue to people who had larger credits than tax bills.  That is what Northam and the Commonwealth Institute are talking about doing now.

The cost impact is about $250 million, based on an earlier legislative proposal which failed, but a full analysis is lacking.  The cost to taxpayers – and it is a cost to taxpayers, not a refund and not tax reform – will need to be more carefully spelled out when a bill finally appears.  Advocates have developed a calculator for individuals and for some the grants would be substantial.

While this proposal is not tax reform, but instead is a way to share the windfall revenue with low-income working families, the idea is not incompatible with tax reform.  It would be possible to couple it with an increase in the standard deduction or some other change in personal income taxes that actually aligns with to the conformity windfall.  It is only a question of how much revenue with which the legislature is willing to part (for some, the answer is none).

The proposal to expand the standard deduction would reach far more Virginians – more in “communities of color,” more veterans, more in every legislative district – than would turning EITC into a cash grant.  The problem for some on the left is they would not all be poor or working-class and might even be well-off.

What they would not be is the same people.  As noted before, to qualify for the cash grant Northam and the Commonwealth Institute are talking about, you already must be paying zero state income tax.  If the EITC credit has already wiped out your state tax bill, an additional standard deduction is of no value.

But there is this, which should appeal to the Commonwealth Institute:  The additional standard deduction would add to the number of people who pay zero income tax.  An EITC cash grant would go to those already paying zero but would not grow their ranks.

And this:  The additional standard deduction would stay with you as your income grew.  EITC – whether a credit or both a credit and grant — shrinks as your income grows, and that is what people really want, growing income.

If the General Assembly must choose, it should choose tax reform and increase the standard deduction.  If its willing to do both, well, this is why the legislative process is great theater.  It cannot be predicted.

Medicaid Expansion’s Achilles Heel: the Doctor Shortage

Source: “Virginia Physician Workforce Shortage” presentation to the Joint Commission on Health Care, Sept. 2013.

The Northam administration sold Medicaid expansion to the public in part by claiming that the net cost to Virginia taxpayers would be minimal. Uncle Sam would pay for 90% of the cost of extending medical coverage to up to 400,000 Virginians, and the state’s 10% share would be offset by savings in prisons, mental health, and other areas. What no one talked about, except in the fine print, was the necessity of increasing reimbursements to physicians.

The Richmond Times-Dispatch editorial page explains today why higher reimbursements for physicians are an integral and unavoidable part of Medicaid expansion:

Medicaid underpays its physicians, reimbursing them at only 71 percent of the rate they get paid by Medicare, and an even smaller percentage of what private insurers pay. As a consequence, only 63 percent of physicians accept Medicaid patients, and only 71 percent of those are taking new patients. So, when Medicaid expands eligibility to as many as 400,000 near-poor Virginians this year, many will find it difficult to find a primary care physician, and they’ll wind up seeking care in the emergency room, just like they always have.

The Department of Medical Assistance Services (DMAS), which administers Virginia’s Medicaid program, now is asking for $19.1 million in the second year of the next biennial budget for Virginia’s share of the cost to lure more docs into the program. The hope is that hiking reimbursements from 71% of the Medicare benchmark to 80% of the benchmark will induce a meaningful number of physicians to take more Medicaid patients.

How likely is that?

Virginia has about 25,000 full-time-equivalent physicians, according to “Virginia Physician Workforce: 2016” published last year by the Healthcare Workforce Data Center (HWDC).

Source:  “Virginia Physician Workforce: 2016”

HWDC found that 57% of physician were accepting new patients at their primary office. Of those who are taking in more patients in their primary offices, 35% can accept no more than 50, while 23% can accept between 50 and 99 new patients. If I understand its presentation correctly (see the chart to the left) HWDC estimated a “new patient capacity” of about 14,000 at both primary and secondary locations. That’s a drop in the bucket compared to the expected influx of 400,000 new Medicaid patients.

The shortage is not likely to improve. Nearly 4,000 doctors, about 17% of the physician workforce, are over 65 years or older. Although many docs plan to work into their 70s, 8% of Virginia’s physicians plan to retire within two years, and 30% expect to do so within 10, estimates the HWDC.

If 8% of physicians retire in the next two years — about 1,000 per year — there are two ways, broadly speaking, to replace them. (1) working physicians can take in more patients, and (2) hospitals can recruit more doctors.

Female physicians work fewer hours on average than males at all ages. Source:  “Virginia Physician Workforce: 2016

While older physicians are predominantly male, the younger generation of physicians is half female. That’s great for gender equality, but it stretches the profession even thinner because female physicians tend to work fewer hours than males (presumably because, as mothers, many are juggling professional and domestic responsibilities). As male physicians age out and are replaced by females, doctors on average will tend to work fewer hours, meaning they will see fewer patients. For this and other reasons, 2,531 doctors told HWDC they were planning to decrease patient hours compared to 2,183 who said they were planning to increase their hours within the next two years — a net of 348 doctors intending to cut back.

Another way to accommodate 400,000 more Medicaid patients is to train and recruit new doctors. According to HWDC data, Virginia medical schools granted 1,322 residencies over the past five years. That’s a pipeline of barely 600 per year. Assuming every Virginia resident stayed in Virginia (which they don’t), the number fall significantly short of the 1,000 or so doctors expected to retire. That means the gap must be filled by recruiting doctors from outside the state. How likely is that to occur? Who knows. That’s a big uncertainty.

Some regions of Virginia will be able to absorb the influx of Medicaid patients better than others. The major metropolitan areas have higher doctor-population ratios than the non-metros. Indeed, as shown in the map at atop of this post, a 2013 presentation to the Joint Commission on Health Care designated much of the state as “primary care shortage areas.” That presentation cited a shortage of 126 primary care physicians in those areas. Continue reading

Medicaid: the Program that Ate the Budget

Budget forecasters have under-estimated the cost of the Medicaid program by $202 million this year and $260.3 million next year, a total of $462.5 million in the biennial budget, reports the Richmond Times-Dispatch.

Finance Secretary Aubrey Layne was at pains to explain that the added costs were not related to Medicaid expansion covering an estimated 400,000 near-poor Virginians beginning in the new year. “This isn’t about expansion. This is about the base Medicaid forecast.”

Medicaid is growing by 6.2% compared to an estimate of 2.5%. For years, the $11 billion healthcare program for the poor has been crowding out spending for K-12 education, higher education, mental health, the environment, and other priorities. In rough numbers, the program now accounts for $5 billion of state spending in a $21 billion General Fund budget.

State officials had hoped that herding Medicaid patients into managed care programs might slow the rate of spending increases. They blamed a forecast based upon assumptions generated by an actuary, who has since been canned. The actuarial analysis overestimated the savings gained by switching from traditional fee-for-service to Commonwealth Coordinated Care Plus, a program that relies upon private insurance companies to provide managed care for 215,000 elderly and disabled Virginians. 

Doug Gray, executive director of the Virginia Association of Health Plans, said it’s not unusual for states to make mistakes in their forecasts when they move from a system based on provider billing to managed care. “When you first start a program like this, you’re guessing based on coming from fee-for-serve experience,” he said.

But officials also cited an unforeseen jump in the number of children enrolled in Medicaid ($52.8 million), delayed payments to hospitals for uncompensated care ($26 million), and updated hospital rates for serving children under the Medallion managed care program ($25.5 million).

If it’s any consolation, Layne says that Medicaid expansion actually will save the state money. How’s that possible? First, because the federal government will pick up 90% of the tab for the expanded program, as opposed to the 50% for the legacy program. Second, because expanded Medicaid will cover populations for which the state spends money in other programs.

That’s assuming, of course, the actuaries guess right on what the expanded program costs.

Caution: These Links Will Ruin Your Sleep

A campaign pitch for an incumbent member of Congress you will not hear:  You are getting $4 worth of government for every $3 you pay in taxes and fees, and the other buck is piled on as debt for your kids and grand kids to pay! You should vote me back in!

The Treasury Department’s own news release Monday, flagged by The Republican Standard,  attempted the spin that this is not the fault of President Donald Trump and the halcyon days coming thanks to his wise policies will soon begin to reverse this.  Hang with us!  Reading through the actual reports on income and spending, however, it is impossible to build up any hope.

This is another one of those cases where I indulged my own morbid curiosity and am now sharing the results.  I do not spend much time with the federal reports, compared to the state spreadsheets, but from time to time everybody should dig into the depressing details.  Stop reading my observations and dive into the actual reports – I won’t be offended.

The federal budget is broken into two big categories:  on budget and off budget.  This in no way correlates to the state’s system of splitting things into general fund and non-general fund.  The federal off-budget component is mainly Social Security pension and disability payments.   Other situations where specific taxes or fees pay for specific programs, including Medicare and the Post Office, are lumped into the on-budget categories.

When Social Security was collecting healthy receipts exceeding its annual outlays, it was producing surpluses.  These off-budget surpluses provided a nice way to hide the true size of the deficit in the on-budget category.  Well, for federal fiscal year 2018 (which ended September 30) that was a very small fig leaf indeed – about $6 billion, compared to $49 billion the year before.  Will the current fiscal year 2019 produce the first cash flow deficit for Social Security?  Will that wake up anybody?

When you back out that small off-budget surplus, the on-budget deficit was $785 billion, just under 25 percent of the $3.26 trillion in on-budget spending.  That on-budget deficit grew $70 billion, almost ten percent in a single year.  You can choose whether to blame higher spending or tax cuts.  Machts nichts.

The big federal tax cut went into effect three months into this past fiscal year and was in play for nine months, but individual income tax receipts grew 6 percent for that year.  Perhaps it’s too soon to judge the impact until people file next year.  But the impact of the corporate income tax changes did show up last year, with a $92 billion (31 percent) drop in CIT revenue.  There was a healthy boost in customs duties and that will really take off for 2019. (Is that the plan? Make tariffs the main source of federal income for the first time since President Polk?)

The federal officials quoted in the official release make much of slight decreases in a couple of social benefit programs, such as SNAP (a.k.a. food stamps), but reviewing the spending sheets really reveals the depth and breadth of income-based transfer programs, plus the political genius of sprinkling them through so many difference parts of the budget.

SNAP and other food programs are in the Agriculture Department ($91 billion).  Federal student aid ($46 billion) is in Education.  Medicaid ($389 billion), Temporary Assistance for Needy Families ($21 billion) and Children’s Health Insurance Program ($17 billion) are in Health and Human Services.

Housing gets its own programs for the economically challenged ($48 billion).  The Earned Income Tax Credit ($59 billion) is buried under the Treasury Department and the Social Security Administration handles the Supplemental Security Income payments of cash ($55 billion) that are not part of the regular disability coverage, which is (of course) off budget.  I’m sure I missed some.  I think the Veteran’s Administration still makes some pension payments based on poverty (maybe not.)

A single Department of Federal Need-Based Assistance which puts all those programs in one basket would approach $800 billion and would be larger than defense spending or the payments on the debt ($521 billion).  Which of course is why no politician of either party will ever, ever do that and make things that clear.

What is the choice on November 6?  There really is no reason to differentiate the parties on this issue any more, or to believe any candidate promising something else.  A bipartisan deal on Fiscal Year 2019 explodes spending and the projected deficit this year approaches $1 trillion. We are in this condition in a strong economy and looking at the deficits run coming out of the last recession indicates the deficits in the next one (inevitable) will approach $2 trillion.

The Hidden Costs of Medicaid Expansion

This column, originally published by the Chesterfield Observer back in June, is a bit dated. I neglected to re-post it on Bacon’s Rebellion at the time. But, what the heck, with the new debate about how to dish out Virginia’s windfall from federal tax reform, it never hurts to remind middle-class taxpayers how they continue to get the shaft.

After years of debate Virginia has enacted Medicaid expansion. Backers of the new entitlement proclaim the legislation a humanitarian triumph, providing health insurance to as many as 400,000 Virginians above the poverty line and injecting some 2 billion federal dollars into Virginia’s health care system. Miraculously, the state will deliver this new benefit at seemingly no expense to Virginia taxpayers. The federal government will pay 90 percent of the cost, while the balance will be recouped through reduced expenditures on prisons, mental health and other state programs, plus a tax on hospital revenue.

As the old political saying goes, if something sounds too good to be true, it probably is. It always pays to dig deeper to uncover what the politicians aren’t telling you. And in the case of Medicaid-expansion funding, there’s a lot they are glossing over.

First, Virginia’s 69 private, acute-care hospitals will pay a $281 million provider “assessment” in the first two-year budget. Second, legislators need to find a comparably large sum to bolster Medicaid payments to physicians. By the time it all shakes out, taxpayers and paying patients could end up paying, by my estimate, on the order of $250 million a year in higher taxes and/or insurance fees – although, to be honest, no one really knows.

What, you didn’t read that in the newspaper? Gov. Ralph Northam and GOP lawmakers didn’t tout these costs among their list of legislative accomplishments? Welcome to Virginia government in the 21st century. The political class has perfected the art of picking your pockets so quietly you don’t even notice.

According to the Virginia Hospital and Healthcare Association, Virginia’s health care program for the poor at present reimburses providers only 71 percent of the cost of treating Medicaid patients – well below the 78 percent rate that state code declares to be an acceptable level. Virginia hospitals also provide hundreds of millions of dollars’ worth of charity care – free or discounted health care provided to low-income patients – and write off hundreds of millions more on bad debts. On top of that, the Medicare program for retirees is squeezing hospital payments, too, although not to the same degree. The VHHA claims that the Medicare shortfall reached $909 million in 2016.

Under those circumstances, hospitals have been reluctant to absorb the cost of a provider “assessment” to pay for Medicaid expansion. But in negotiations with legislators this year, hospital lobbyists folded. They backed the provider assessment knowing they’d gain roughly $2 billion in extra federal dollars.

Where will hospitals find $241 million for the assessment? That’s not at all clear. Collectively, Chesterfield hospitals generated almost $1 billion in revenue in fiscal 2016, according to Virginia Health Information data. They paid about $100 million in charity care, wrote off roughly $75 million in bad debt, and ran profits of about $80 million. In the first year the assessment will be 1.1 percent of net patient revenues, or about $10.8 million based on 2016 revenues; the second year the tax will be 2.3 percent, or about $23.6 million.

In theory, the influx of Medicaid dollars will reimburse hospitals for most of the cost of treating near-poor patients who account for the bulk of that charity care and bad debt, offsetting the tax assessment. No one has projected how it will impact finances on a hospital-by-hospital basis across the state. And no one has provided any guarantee that hospitals won’t pass on the cost to their privately insured patients. We don’t know what will happen. The hospitals probably don’t know yet either.

A related problem is that Medicaid’s reimbursements are so chintzy that many physicians don’t accept Medicaid patients. When there’s a physician shortage to begin with, the result is that many Medicaid recipients won’t be able to find a doctor. They’ll continue seeking treatment episodically in hospital emergency rooms, as they always have, undercutting a key rationale of expanding Medicaid in the first place.

Legislators have discussed raising the reimbursement rate for physicians from 71 percent of cost to 88 percent of cost, enough to induce most doctors to take on Medicaid patients. But that will require tens of millions of dollars more each year. A report by the Richmond Times-Dispatch mentioned a figure of $47 million, but that would average out to about $27 per Medicaid patient per year, which seems absurdly low. To boost physician reimbursements to a meaningful level, lawmakers likely will have to ask for a much larger sum in a future session.

Hospitals and doctors are following these developments closely and protecting their interests. Most Virginians aren’t. My prognostication: They’ll come out OK – and you’ll get stuck with a big Medicaid bill.

Seven Years and Counting…

Medicare’s Hospital Insurance Trust Fund (HI) will be depleted in seven years — three years sooner than forecast previously, according to the 2018 Annual Report of the Medicare Boards of Trustees. By 2026, Medicare Part A, which covers hospital payments, will be running a $52 billion annual deficit, a gap that will increase rapidly in successive years.

The forecast is based upon implementation of current policy and makes a variety of assumptions regarding employment, growth of payroll tax receipts, and hospital costs that may or may not be on target. However, the trustees note, shorter-term projections are more likely to be accurate than longer-term projects — and seven years is not that far away.

The trustees’ report triggers a formal Medicare funding warning. President Trump must submit to Congress proposed legislation to respond to the warning within 15 days after submission of the FY 2020 budget. Congress is then required to consider the legislation on an expedited basis.

The political problem is that successive Congresses and presidential administrations have kicked the can down the road for so long that any fix will be politically painful. Rather than phasing in remedies over time, allowing a smoother glide path to solvency and making it easier for affected parties to adapt, Congress will have to enact dramatic remedies…. unless it decides to kick the can down the road again, perhaps by funding the Medicare HI  gap with general revenues.

According to the Congressional Budget Office’s most recent forecast, the federal government is on track to be running a $1.076 trillion budget deficit by 2026. Maybe Congress will say, what the heck, what’s another $52 billion, let’s fund the HI deficit with borrowed dollars. But maybe it won’t. If there’s another recession between now and then, the fiscal outlook could be a lot more alarming than it is today.

Winter is coming. Reforming the federal government is hopeless. Virginia’s only hope is maintaining a fiscally robust state and local government.

The Service-Dog Thing Is Out of Control

Attorney General Mark Herring has taken action against a problem that is fast becoming a social crisis: that is, the runaway enthusiasm for “service dogs.” The AG’s office has filed a lawsuit against Service Dogs by Warren Retrievers, Inc., a Madison County dog breeder that trains Labrador and G0lden retrievers to be “diabetic alert dogs” and sells them for $25,000 a pop… er, pup.

While making grandiose claims about the dogs, Service Dogs by Warren Retrievers often delivered “poorly trained puppies with significant behavioral issues and inadequate skills or training to notify a customer of a potentially life-threatening high or low blood sugar situation,” the AG’s office said in a press release. The business also allegedly misled customers about certain aspects of its payment structure and lied about the principal’s service in the armed forces.

“Our investigation shows that, in many instances, Service Dogs was simply selling a $25,000 pet, leaving customers with a huge bill and no protection,” Herring said. “Customers have a right to rely on the accuracy of a business’s claims, especially when it involves a person’s health and well-being.”

The company says it is committed to changing the lives of those living with “invisible disabilities such as Autism, Diabetes, PTSD, and Seizure Disorders.” The website provides heart-warming video testimonials of happy employees, satisfied customers, even former Governor Terry McAuliffe, and, of course, lovable pooches. You truly have to have a heart of steel to watch these dogs and not go, “Awwwwwww.”

I don’t know if the AG’s charges against Service Dogs are warranted or not. But I will say this: The service-dog thing is out of control.

Service dogs have long been a staple of society as companions for the blind. Blind people need help navigating streets and sidewalks, and and everyone accepts the idea that the dogs can give them mobility and autonomy. Because the blind are few in number, everyone is willing to make minor accommodations for them and their dogs.

But the concept of a “service dog” is morphing. Service Dogs by Warren Retrievers is a perfect example: It helps people with “invisible disabilities” such as autism, diabetes, PTSD and seizures. That stretches the definition to encompass, I’d guess, 10% of the population. But the concept is even more elastic. Now people have “emotional support dogs.” And they want to take these dogs onto airplanes and into the workplace. If we include people who need “emotional support” among the protected category of “the disabled,” we’re probably talking about half the population!

Because the “disabled” enjoy legal protections, and because anyone who utters inappropriate sentiments might find him/herself tarred as an “ablist” and a bigot, people are scared to resist the trend. Americans always push the boundaries as far as they can, and there are no discernible criteria in our culture of victimization that people can draw upon to say, “That’s enough!”

What if you’re allergic to dogs? What if the dog sniffs your crotch? What if seeing a dog triggers post-traumatic stress because a neighborhood dog mauled your kid? Do you have rights? Not now.

Herring’s lawsuit does draw a line of a sort — the service dog must be capable of providing the advertised service, in this case, detect swings in blood sugar. That’s a start.

Can Medicaid Expansion Address the Doctor Shortage?

Teresa Gardner Tyson, executive director of Health Wagon. Photo credit: Virginia Business

With Virginia on the cusp of Medicaid expansion, it is heartening to see someone asking the obvious question: What good is Medicaid coverage if you can’t find a doctor? Bob Burke at Virginia Business states the obvious:

Getting a Medicaid card doesn’t necessarily mean you have a doctor at hand. Plenty of places in Virginia — especially rural areas — already are short of health-care providers. Oftentimes, people there depend on nonprofit community health centers or free clinics (both of which are chronically underfunded) scattered around the state, or they just go without. This is the true access challenge.

Virginia has a network of clinics, health wagons and other services that provides basic care to poor Virginians, but the system operates on a shoestring, and thousands of people fall between the cracks. An important question is what happens to the existing medical infrastructure for the poor, as inadequate as it is, when Medicaid comes along?

Teresa Gardner Tyson runs The Health Wagon, a mobile clinic that delivers care to people in Southwest Virginia. Medicaid expansion would be favorable to the people she treats, she says, but it’s not a panacea. Some of Health Wagon’s patients are already Medicaid patients — and they can’t find any other health provider.

About five years ago, Health Wagon hired a consultant to run the numbers on how best to take advantage of Medicaid dollars if they started flowing. “We’d have to go back and look at those numbers again” and see whether becoming a Medicaid provider makes sense, Tyson says. “We’re sustained by donations and grants, and at the end of the day, though, we do give free care, [but] the care that we give is not free.”

Here is my question: What happens to those donations and grants if Medicaid expansion is enacted? Will Health Wagon still have a purpose? Perhaps it will, if nothing is done to address the shortage of health care practitioners in Southwest Virginia and there’s nowhere else to go. But if that shortage isn’t addressed and patients still can’t find doctors, is anyone better off?

The Virginia Community Healthcare Association (VCHA), which has 29 member organizations at 147 sites, serves about 100,000 uninsured people every year. CEO Neal Graham estimates that of that number, about 70,000 would be eligible for Medicaid after expansion. He also estimates that expansion will bring an additional 100,000 patients into the clinics and community centers. But it’s not clear at all from Burke’s article that the clinics will have the resources to staff up to meet the extra demand.

There are two problems in rural Virginia: a lack of health coverage and a shortage of health care practitioners. Medicaid expansion fixes the first problem. But as long as the program pays less than Medicare and private insurance — typically forcing medical providers to operate at a loss — Medicaid expansion will do nothing to recruit new practitioners to under-served areas. If lawmakers want the expansion to work, they must address the shortage of doctors, nurses, and technicians. Otherwise, they’re just perpetrating a cruel hoax on Virginia’s poor.

Virginia’s Hidden Deficit: the Unemployment Trust Fund

Virginia Trust Fund Solvency. Graphic credit: “Trust Fund Solvency Report 2018.”

There are many measures for gauging a state’s fiscal condition. The most commonly cited is the condition of its General Fund: Is the state balancing its budget? Digging deeper, one can examine the degree to which a state is funding (and falling short of) its pension obligations. And one can track the extent to which a state is neglecting repairs of  highways, transit systems, buildings, water-sewer facilities, and other public infrastructure, thus building up future maintenance obligations.

Then there’s the Unemployment Insurance Trust Fund. This is the fund, financed through employer payments, from which states draw to pay benefits to Virginians laid off from their jobs. State funds are designed to build up reserves during good times so they can maintain benefits during bad times when payments spike. If states run dry, they can borrow money from the federal government, which they then are required to repay. States are not directly on the hook for unemployment insurance. But restoring solvency to a fund by hiking employer contributions is the functional equivalent of a business tax increase. Lower business contributions make for a better business climate; higher contributions do the opposite.

So, it’s worth asking what kind of shape Virginia’s unemployment insurance reserves are in. And the answer is… not very good. Not the worst — we’re not in the same abysmal condition of California, Ohio or Texas, but we fall below the recommended minimum adequate solvency level. We probably could ride out a weak recession, but are ill prepared for a severe one.

The U.S. Department of Labor publishes an annual “State Unemployment Insurance Trust Fund Solvency Report.” Twenty-nine states, including Virginia, are beneath the recommended solvency standards. The Old Dominion’s relative position compared to other states is shown in the chart above. We’re in the middle of the pack. While we’re not far from the recommended level of solvency, we’re still below it — and we certainly haven’t built up large reserves like Wyoming and Oregon.

(For those tracking the 50 states’ progression toward Boomergeddon, note that several states noted for their fiscal profligacy — Illinois, Connecticut, Kentucky and New Jersey — have among the least adequately financed trust funds.)

As of Jan. 1, 2018, Virginia has $1,148,000,000 in its unemployment insurance trust fund. That may seem like a lot, but the number is meaningless without comparing it to the number of workers it is meant to cover. The chart atop this post gets to the adequacy of that number. Unfortunately, it is far from self explanatory.

The key numbers are associated with the four blue arrows.

The reserve ratio is derived by taking the trust fund balance and dividing by the state’s total wages paid for the year.

The 2017 benefit cost rate is calculated by expressing the level of uninsurance benefits as a percentage of yearly wages. A smaller number — Virginia’s is 0.19% — is good. It reflects Virginia’s low unemployment rate and low unemployment insurance payments.

But low unemployment is expected during periods of economic expansion. The acid test is how well the trust fund holds up in a recession. So, the Labor Department benchmarks against two measures: (1) the highest benefit cost rate ever, and (2) the average of the highest three highest years over the past 20 years.

The Labor Department then calculates the Average High Cost Multiple, which is the Reserve Ratio divided by the Average Benefit Cost rate. “Values greater than one,” states the report, “are considered the minimum level for adequate state solvency going into a recession.”

Virginia’s value is 0.92, meaning (as I understand it) that its trust fund has 92% of the reserves deemed adequate to make it through a recession without resort to extraordinary measures.

Working Longer Versus Saving More

One of the big decisions Americans must make as they plant their retirement is when to start collecting Social Security benefits. The popular wisdom is that each year you delay collecting Social Security translates into an 8% increase in annual benefits. The Social Security Administration can afford to goose the payout because (1) it pays you one year less than it would have otherwise, and (2) it collects the interest on the money.

Now comes Sita N. Slavov, a George Mason University economics professor, and four colleagues with a paper, “The Power of Working Longer,” that compares the monetary rewards of working longer versus saving. The bottom line:

Delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.

I’m not smart enough to follow their methodology, so I’ll just assume that they’re right. But they’re making one critical assumption — that Social Security payouts remain the same, even though the Social Security Trust Fund is scheduled to run out in 2033. At that point, payroll taxes will cover only 75% of promised payouts.

For readers of Bacon’s Rebellion, who from my observation are more affluent than the average American, the news gets worse. When the Social Security Trust Fund runs out of money — as seems inevitable, given the bipartisan refusal of presidents and Congress since George W. Bush to touch the issue — you won’t even get 75% of what you were promised. Too many senior Americans rely upon Social Security as their sole source of income, and a cut of 25% would prove devastating. Inevitably, Congress will tweak the program to soften the blow. Thanks to the chronic budget deficits and the massive national debt that will prevail 15 years from now, the United States will be in no position to bail out the program entirely through borrowing.

There is no way to know what a future Congress will do, but I expect it will resort to some combination of borrowing, higher payroll taxes, and redistribution of Social Security benefits from higher-income Americans to lower-income Americans. There’s no way around it: The middle-class will get hosed.

I’ll qualify for Social Security benefits next year. Even though I plan to continue working and earning income, I’m going to start cashing in on the program while I’m still entitled to 100% of my benefits. I fully expect the Trust Fund to run out by the time I’m 80, and I’m arranging my financial affairs to accommodate a 25% to 30% cut in my Social Security benefits by then. In the meantime, I’m making sure I get what I’ve been promised.

I’m also telling my Millennial kids both to start saving now and to plan to work well into their late 60s. Hopefully, modern medicine will help them remain healthy, active and vigorous a bit longer than our generation, so a few extra years of work won’t prove too burdensome.

Nobody should trust the American political class to live up to its promises — especially when the consequences are 15 years down the road.

Race, Responsibility and the Welfare State

by Vic Nicholls

What is the justification for taxing people to provide healthcare? There is no mandate for it in the Constitution. The “general welfare” was never considered to include health care. The campaign slogans of the Founding Fathers never included, “Free leech treatments for all!”

Are all men “created equal”? No. Everyone has different talents. I can’t get on a football or basketball team. They can’t do what I do in Information Technology. Is it the job or responsibility of the United States government to make me equal to them or them equal to me? No. Are we equal in the sight of God? Yes.

Should people who sacrificed to made the personal choices to earn college degrees and delay having children until they were married be penalized for making those choices by forcing them to pay for others who didn’t? Would you expect to pay higher insurance because your neighbors’ kid wrecked two of his parents cars? Is it fair to discriminate against those with bad driving records? Should the government require equal insurance premiums for everyone?

If we institute Medicare/Medicaid for all, where would personal responsibility start and end? If there is a shortage of doctors, how do we determine who gets one and who doesn’t? Since we were given the right to “life, liberty and the pursuit of happiness,” how does freedom from the tyrant’s power to tax me to fund his armies and empire translate into the power of my fellow countrymen to tax me to provide them 21st-century medical care?

Nowadays, appeals to personal responsibility and initiative are described as justifications for white privilege. If you earned a B.A. degree, got a job in your field, married, and then had kids, would you expect your children to have a better start in life than one who’s parents didn’t? Of course! Does that make you “privileged”? Not at all.

Notice that in listing the essential requirements for success in life, I didn’t mention race. That’s because I know non-white spouses who followed the formula and live as well as I do.

Many assume that all differences between the races are due to racism. But once you factor out marriage, education, in-wedlock birth, age (whites are older on average than blacks and Hispanics and have had more time to climb the income scale), and inheritance from parents who made the same responsible choices, what difference is there left?

If it’s racism that keeps people down rather than hard work and grit that allow people to rise, how do we explain the career of the noted African-American economist Dr. Walter Williams? He grew up in the projects with his mother and sister, but no father. He earned a Ph.D. in 1972, and has been teaching at George Mason University since 1980, and he publishes a nationally syndicated column. Racism was worse back then than it is now. How do we explain his success?

Explain Mae Jemison. She was born in Alabama in 1956. Her mother was an elementary English/math school teacher and her father was a maintenance supervisor. Her family moved to Chicago to give her better educational opportunities. She graduated high school in 1973 and went to Stanford at age 16, graduating 4 years later with a B.S. in chemical engineering and B.A. in African/Afro-American studies. Engineering professors would pretend she wasn’t there. Her family was always encouraging, though. She got her M.D. in 1981 at Cornell.

Explain Dr. Ben Carson, Dr. Charles Drew, or countless others less famous. Explain my African-American next-door neighbors, both of whose kids have masters’ degrees. I can explain their success: My neighbors married before the kids were born and have lived in the same house since the ’80’s. They sacrificed a ton to make sure their kids got a solid start in life. 

It’s time we asked a different question: When government takes away from those who worked for their success and gives it to those who didn’t, does it subsidize failure? When government subsidizes failure, do we get more of it?

Vic Nicholls lives in Chesapeake. For more on the topic, she recommends viewing Walter Williams’ speech, “How much can discrimination explain?” on the video above.

The Cult of Personal Fragility

Once upon a time, Americans prided themselves for being tough and resilient. They were strivers. They were survivors. They bounced back from adversity. Now they have become a nation of wimps, whiners and victims.

In writing a column about the absurd proliferation of “emotional support animals” on airplanes, George Will absolutely nailed what is happening:

A cult of personal fragility is becoming an aspect of the quest for the coveted status of victim. The cult is especially rampant in colleges and universities, which embrace the therapeutic mission of assuaging the anxieties of the emotionally brittle.

Well said! I predict that the phrases, “cult of personal fragility” and “anxieties of the emotionally brittle,” will enter the national lexicon. People are fed up with this nonsense.

Trigger warning, crybabies: Nobody cares about your anxieties. It’s time to grow up and act like big boys and girls.

Entitlements, Fiscal Limits and the Looming Age of Rage

Now that Democrats are close to parity with Republicans in the House of Delegates, there is renewed talk of Medicaid expansion in Virginia. Meanwhile, in Washington, President Trump and Republicans are pushing a tax-cut plan that would spur economic growth but, even with stronger growth, would increase deficits by $1.5 trillion over the next ten years. Nobody is talking about the $14.6 trillion national debt except as a cudgel against partisan foes. Even as Medicare, Disability, and Old Age and Survivors trust funds are projected to run out within a single generation, entitlement reform is not up for discussion.

Just a reminder… Here’s are U.S. budget deficits forecast by the Congressional Budget Office without counting proposed GOP tax cuts:

The “on-budget” deficit is what we conventionally think of the deficit. It does not include the draw-down of “off-budget” Medicare and Social Security trust funds. Data source: Congressional Budget Office.

Within eight years, the U.S. will be running $1 trillion-per-year deficits every year, pretty much forever. And the CBO forecast does not take into account the likelihood of a recession or two over the next ten years, in which case deficits will metastasize.

And here’s the off-budget forecast. Payouts for Medicare hospitalization, Social Security disability and Social Security old-age programs exceed tax revenues, but interest income on the assets will keep the respective trust funds in the black for the next couple of years. By 2020, however, the off-budget numbers shift  into deficit mode and plunge rapidly thereafter.

Barring major changes in U.S. spending programs or economic growth, here’s when the trust funds are expected to run out, according to Medicare and Social Security trust estimates:

  • 2028: Disability trust fund runs out of money.
  • 2029: Medicare hospitalization trust fund runs out of money.
  • 2035: Social Security trust fund runs out of money.

Back when the Simpson-Bowles commission tackled the deficit issue in 2010 — the last time Americans thought seriously about entitlement reform — the county had 25 years before keystone social safety net programs imploded. If Congress had acted then, it could have put the trust funds into fiscal balance with relatively minor tweaks (slightly higher payroll taxes, slightly reduced benefits, slightly older retirement ages) that had a large cumulative effect over many years. But a decade of delay will require more painful sacrifices, which means they likely never will be made.

If nothing gets done until the trust funds run out of money — what I call Boomergeddon — the programs will have to cut benefits to match revenues generated. We are only twelve years from massive dislocations to the Medicare program, and 17 years from disruptions to Social Security. Baby Boomers beware, your retirement will be a lot uglier than you realize.

As for those $1 trillion+ on-budget deficits every year, they put Virginia at special risk. Any Congressional effort to tame deficits without touching entitlements will require cuts to discretionary spending, the biggest pot of which is related to defense, intelligence and homeland security…. which happens to be Virginia’s biggest industry sector. Son of Sequester will subject the Virginia economy to chronic economic stress and fiscal pain. But instead of dealing with Virginia’s long-term structural issues, the next session of the General Assembly could well consume itself in a renewed debate over expanding Medicaid.

As Americans speak no evil, see no evil, and hear no evil, we hurtle toward an era of brutal fiscal limits, broken promises to millions of Americans, and polarization and rage that will surpass anything we see today.

How Medicaid Is Cannibalizing Virginia’s Budget

Source: JLARC

Three big trends are worth noting from the Joint Legislative Audit and Review Commission 2017 state spending update, a review of state spending over the previous 10 years.

First, General Fund spending has been constrained by limited revenue growth resulting from Virginia’s weak economy. The increase in spending has averaged 2.0% per year. Adjusted for inflation and population growth, General Fund spending actually declined 1% over the decade.

Second, the Medicaid program has crowded out spending for other priorities. Medicaid hogged 60% of all General Fund revenue growth over the decade. Medicaid’s share of the General Fund pie increased by 73%.

Third, the healthy growth in non-General Fund spending was driven in large part by tuition increases at Virginia’s colleges and universities. In other words, when faced by stagnant revenue and untouchable Medicaid spending increases, legislators cut what was cuttable. They reduced state support for higher education knowing that colleges and universities could fall back upon the expedient of raising tuition.

Cheerful thought of the day: As Virginia’s population ages, Medicaid spending will go one way — up — and it will continue to squeeze other spending categories. Here’s the spin that Republican legislators put on the JLARC report:

House Speaker William J. Howell, R-Stafford: “Once again, this annual report from JLARC shows that the increasing cost of Virginia’s current Medicaid program is crowding out needed funding for our public schools, colleges and universities, roads, and law enforcement officers. We consistently argued that Virginia can barely afford its existing Medicaid program, let alone the massive cost of expansion, and this report vindicates that position.”

Speaker-designee Kirk Cox, R-Colonial Heights: “It’s a simple proposition: if you cannot afford your mortgage payment, you don’t build a new addition to your house. Virginia’s current Medicaid program covers around 1 in every 8 Virginians, and as this report shows, the costs are staggering and continue to climb, despite ongoing reform efforts. It would be financially irresponsible to ask taxpayers to fund the massive expansion contemplated under the Affordable Care Act.”

Del. S. Chris Jones, R-Suffolk: “Even as we instituted major reforms aimed at bending the cost curve, and controlled spending growth in other areas of state government, Medicaid costs continue to increase dramatically. This growth eats into funding that could be used for our teachers, law enforcement officers, and hard working state employees.”

Bacon’s bottom line: Yeah, the Republican leaders are stingy bastards for not expanding Medicaid. But the alternative is worse. Latest news on the Boomergeddon front: The state of Illinois, which expanded its Medicaid program in 2013, incidentally, and now has to cover 10% of the expanded costs not funded by the federal government, has $16.5 billion in unpaid bills. The state also has $200 billion in total liabilities, including pension debt. Meanwhile, pundits are asking if debt-ridden Chicago will become the next Detroit. One good recession, and it will be.

To see what it’s like to operate a government bordering on insolvency, watch Puerto Rico flail as it tries to recover from Hurricane Maria. It’s not a pretty picture. It’s easy to be compassionate when you’re paying with other peoples’ money. When other peoples’ money runs out, everything goes all to hell.

Poverty and the Virginia Welfare State

Greetings from the Virginia welfare state

Greetings from the Virginia welfare state

Let’s say you’re a woman living in the City of Richmond. Let’s say you have two children, ages three and seven, but no husband. Let’s say you work 40 hours a week earning the minimum wage, or $15,080 per year. How much can you potentially receive in public benefits?

Sean Gorman, the Richmond Times-Dispatch PolitiFact reporter, added up the numbers based on a report by the Virginia Department of Social Services:

  • Welfare — $3,840
  • Food stamps — $2,268
  • Women, Infants and Children food basket — $600
  • Child care assistance — $12,468
  • School lunch — $1,296
  • Housing voucher –$10,692
  • Family Access to Medical Insurance Security Plan — estimated $9,807 (based on comparison to Medicaid)
  • Total — $40,971

Add that $40,971 to the wages the woman earns, and we’re talking $56,000 a year. Then consider that the $40,971 in benefits are not taxable income. To earn the same amount in take-home pay– accounting for social security, Medicare, federal income taxes and state income taxes — the same woman would have to earn $5,000 to $10,000 more, depending on what assumptions you make. (That is a back-of-the-envelope calculation derived from running numbers through a federal tax calculator.)

Thus, under the Virginia welfare state, a woman with two young children working for minimum wage enjoys roughly the same standard of living as a woman with two young children earning $60,000 to $65,000 a year. Then consider that the 2015 median household income in Richmond was $60,700, and consider the fact that the median household income includes many two-income families.

Discussion questions:

  • Income inequality. What do these numbers imply for the debate over income inequality in the United States? Does it make any sense to decry the disparity in income without taking into account benefits that low-income households receive from the welfare state?
  • Upward mobility. What do these numbers imply for social mobility? If a woman cannot better her material condition by working diligently and acquiring the skills needed to earn more pay, do welfare benefits act as a deterrent to self-improvement?
  • Poverty and marriage. Given the incentives of the welfare state, what reason do poor women have to get married and to raise their children in a stable partnership with their father? To what extent do welfare benefits render low- and working-class men economically peripheral and irrelevant for any role other than as sexual partners?
  • The nature of poverty. To what extent is the scourge of poverty in Virginia — substance abuse, domestic violence, child neglect, ill disciplined behavior, crime, dropping out of high school, out-of-wedlock births, and associated dysfunctional behaviors — the result of material deprivation or the consequence of welfare-induced family breakdown?

I would guess that the $40,000 tally of welfare benefits is a high number — not all similarly situated women apply for and receive the full gamut of benefits. Even so, the number is extraordinary. It is a testimony to the upward-striving nature of American society that anyone makes an effort to improve themselves at all.