Medicaid, Pensions Kneecapping State Budgets

Graphic credit: Wall Street Journal

Take heed Governor Ralph Northam! Take heed Virginia House and Senate budget negotiators!

One in five tax dollars collected by state and local governments across the United States go to Medicaid and public-employee health and retirement costs. Of the $136 billion growth in inflation-adjusted taxes collected by state and local governments between 2008 and 2016, two-thirds went to funding Medicaid and pensions, according to the Wall Street Journal:

The picture will get worse as Medicaid expenditures metastasize and pension backlogs build. Medicaid’s annual cost, which was $595 billion in 2017, will exceed $1 trillion in 2026. States pay about 38% of that tab, although the percentage varies from state to state. A relatively affluent state, Virginia pays a higher percentage than average.

As Medicaid and pensions crowd out other spending, states have cut back on higher education, infrastructure, and aid to localities. Across the country, state cuts in support for higher education have prompted public colleges and universities to jack up tuition and fees, thus transferring costs to students and their families.

“The more we stare at the data, the more we realize all roads lead back to Medicaid and pensions,” says Dan White, a director at Moody’s Analytics, of the top three credit rating agencies.

Many localities are just one recession away from bankruptcy. The finances of Illinois, Connecticut, and New Jersey are in particularly perilous condition. Connecticut’s state capital, Hartford, narrowly averted bankruptcy last year. These high-tax states are caught between a rock and a hard place. Increasing state income taxes raises only a fraction of the anticipated revenue because they encourage wealthy taxpayers to leave for lower-tax climes.

States and localities shouldn’t expect much of a bail-out from Uncle Sam. As a different Wall Street Journal article today notes, interest payments on the national debt are doing to the federal government what Medicaid and pensions are doing to state governments.

To be sure, the U.S. federal government enjoys an unparalleled capability to borrow more money. And borrow it will. Interest payments swallowed 8% of federal revenue last year, the highest share of any AAA-rated country. Moody’s thinks that figure will triple to 21.4% by 2027.

“As interest is rising, that crowds out other spending,” says William Foster, a Moody’s analyst.

Many observers point to Japan as a nation with a national debt burden per capita twice that of the U.S. as a reason to be sanguine about the national debt. Japan may have lost its AAA rating, but it still has no problem borrowing. That analysis overlooks something that Japan has that the U.S. does not — a high personal savings rate. The U.S. personal savings rate was 2.4% in 2017. The savings rate in Japan fluctuates wildly from month to month but averaged out to 18% last year. In December, Japan’s personal savings hit the insane rate of 50%. Accordingly, as a percentage of tax revenue, Japan’s interest payments were only 5.3% — lower than the U.S. rate of 8.3%. Also, thanks to massive domestic savings, Japan does not rely upon fickle foreign creditors like the U.S. does.

Regardless, Republicans have pushed through a tax cut that, despite punching up the economic growth rate, will reduce revenues. Meanwhile, Republicans and Democrats have joined to enact a budget that boosts both defense spending (a Republican priority) and non-defense spending (a Democratic priority), while refusing to touch entitlements.

“We’re in a full-blown era of free-lunch economics where no one says no to anyone anymore,” Maya MacGuineas, president of the Committee a Responsible Federal Budget, told the Journal.

Virginia’s economic and tax revenues seem manageable for the next year or two, but budgets can unravel with horrifying speed. Very few foresaw the 2008 recession, much less its severity. Very few will see the next recession. Even fewer will be prepared. Will Virginia?

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10 responses to “Medicaid, Pensions Kneecapping State Budgets”

  1. LarrytheG Avatar

    Every major industrialized country provides universal health care – and it actually does that by taxing everyone to pay for it.

    Are those countries running deficits to pay for their health care?

    should we run deficits to pay for health care?

    that would be a resounding NO!

    but once again – the narrative is disingenuous when it comes to HOW we DO pay already for some things – like Social Security AND highways, AND Medicare Part A AND Obamacare AND airports AND Federal Pensions AND …. not the least , the Medicaid Expansion.

    And that funding source is earmarked taxes… not general fund taxes.

    Yes.. there are issues with many of them as to whether they can sustain themselves over time without increasing the earmarked taxes and/or cutting benefits.

    But you do have that option with things that are paid for with earmarked taxes. If no new taxes are added – then you cut benefits.

    Yes.. cutting benefits is a political issue also

    but it’s NOT ALL ALL the same as – for instance Medicare Part B and original MedicAid which are NOT earmarked trust funds AND do get funded from general revenues –

    … and here’s the worst part – both Medicare Part B and original MedicAid have no built-in restrains to ensure they do not pay out more than they have revenues for. Instead – both programs – by law pay out on a per beneficiary basis – which means the more beneficiaries you have – the more funding you need – and you get it from the General Fund.

    What that means is – deficits… and funding Medicare Part B and original Medicaid from deficit spending.

    That’s NOT the case with the Medicaid Expansion. It’s self funded from earmarked taxes just like Social Security is.

    Is money fungible? Of course it is … but there’s a huge difference between autopilot funding for Medicare Part B and original Medicaid and the caps that are on Social Security, Medicare Part A and the Medicaid Expansion.

  2. TooManyTaxes Avatar

    It’s not just the Commonwealth that is struggling under unsustainable unfunded pension debt. For FY2017, Fairfax County’s unfunded pension debt, including its piece of the VRS liability (for County teachers) is well over $5 billion dollars and growing rapidly. Meanwhile the supervisors are taking violin lessons while fiscal stability is burning.

  3. Steve Haner Avatar
    Steve Haner

    It will be hard to get people excited as long as Virginia maintains its AAA rating. Right now that seems to be under pressure, but the solution being sought is to boost the general reserves, not to address the pension system. The VRS pension plan my wife worked under is no longer available to new hires and it won’t be long before future new hires move to a defined contribution plan with a match.

    Pension reform isn’t always well received:

    You make bankruptcy sound like a bad thing but a couple of high profile examples might wake up some people. Virginia won’t go first. I think Medicaid will be more likely to cause that, but it is also easier to deal with because it doesn’t have the same legal (and sometimes constitutional) protection given to pensions.

  4. LarrytheG Avatar

    In terms of unfunded pensions for Virginia and Fairfax – I guess I would have thought that -that kind of thing would jeopardize their AAA rating.

    Medicaid would CREATE more than 15,000 jobs. Medicaid.. in terms of dollars coming to Virginia to create jobs – that money is no different than DOD money or any other “flavor” of money… that create jobs and many of the MedicAid jobs would be in the economically depressed areas of the state.

    People who work who get health care – keep their jobs and keep on working if they get sick. People without insurance, get sick .. then quit and go on disability…and other entitlements.

    It boggles my mind that folks who KNOW the VALUE of education don’t also see the VALUE of health care! The two of them of what provides opportunity for people to become self-reliant – and to not burden tax payers with other entitlements.

    1. TooManyTaxes Avatar

      Larry, Fairfax County officials are scared to death they will lose the AAA rating. It was at risk several years ago. The County has built up reserves as demanded by the rating agencies but except for a few tweaks at the edges, our officials have ignored the pension threat. They are like drug addicts. They cannot say “no” to employees wanting no changes.

      There is no growth in higher paid jobs. Lower paid service jobs are being added, such that the average weekly wage paid in Fairfax County feel again. The County will always keep the very wealthy. But it is losing the middle and upper middle classes, especially as they retire.

      I get the arguments on Medicaid expansion but I don’t trust the government to reign in costs and pressure providers for better results at lower cost. That’s what happens in the private sector all the time.

  5. Please note the similarities to the federal situation, EXCEPT that Virginia has not set out to make the problem much worse, growing the federal debt by at least $1.5 trillion, with tax cuts for the very rich. Mr. Bacon, has “trickle down” ever worked anywhere; have tax cuts EVER paid for themselves as Republicans — who used to claim fiscal conservatism — continue to claim? Not during the Reagan Administration, notpresently in Kansas, not in North Carolina?

    1. The problem not is that tax cuts never work, it’s that Republicans often seem to say that tax cuts always work. As you have observed, history has often proven otherwise. But sometimes tax cuts do worked when they reverse the effects of punitively high taxes.

      I suspect that the U.S., through trial and error, has managed to find the sweet spot on the Laffer Curve. That is, if we cut taxes, we’ll suffer a modest loss in revenue, even after accounting for higher economic growth. Likewise, if we raise taxes, we’ll probably suffer a modest loss of revenue due to increased tax avoidance behavior.

  6. LarrytheG Avatar

    Well the REAL problem with tax cuts is the pretty much sole reliance on them instead of true fiscal conservatism. And true fiscal conservatism is NOT mindless Alice-in-wonderland cutting of entitlements ostensibly to reduce the deficit and debt – which in the US and Virginia , is a Alice-in-wonderland triumph of ideology over fiscal realities.

    Most all industrialized countries actually DO PAY for health care by taxation… as opposed to funding them with ever growing deficit/debts. Everyone pays taxes for health care in those other industrialized countries AND that’s essentially how the 90% Medicaid Expansion is actually funded – from an existing variety of new Federal taxes – already in place AND that’s how Northam is proposing to pay for the 10% share of Medicaid in Virginia – with taxes. One can disagree with the taxes – but the reality is those taxes ARE fiscally responsible in terms of not adding to the deficit and debt.

    Taxes do not go into a black financial hole as many GOP and “conservatives” imply. It’s actually a choice about where put that money. Yes.. it’s nice to let folks spend it as they please rather than the govt taking it to spend it on MedicAid… but the reality is that when it comes to health care – it’s always been a pay-me-now or pay-me-later proposition and Conservatives insist on living in LA LA Land on health care entitlements.

    People who do not get regular medical care – very much DO get diseases that could have been detected and treated earlier and cheaper but if they don’t get that earlier primary care and instead the later stage diseases – we STILL PAY… but Conservatives PRETEND we don’t!

    Right now we have the dumb policy of denying people basic care ostensibly because they do not “deserve” it as a handout – but when someone shows up LATER at an ER with a late stage disease like cancer or cardiovascular disease or organ damage from untreated diabetes – we admit them to the hospital as a charity case and we then deliver high dollar CHARITY care in an effort to keep them alive… heart bypasses, kidney dialysis, transplants, etc. ALL on the public dime that Conservatives pretend we do not do… the reality is we do… and we pay for it.

    This is one of the reasons WHY the US spends twice as much on health care than other countries – and at he same time we rank last in life expectancy.

    It’s truly an ignorant and REALLY… fiscally irresponsible policy.

    Now.. if we were REALLY going to deny health care to those who don’t “deserve” and we TRULY were going to follow through with that – then we’d deny the primary care but we’d ALSO DENY the later stage uber expensive care … and just let them die “quickly and cheaply” … but we don’t do that … so we continue playing this really mindless game where we deny them basic primary care – i.e the Medicaid Expansion.. then PRETEND we’re not going to spend enormous amounts of later care of untreated disease.

    In other words – the opponents of the expansion are living in LA LA Land … denial of primary care early on – then denial of later, downstream consequences of that.

    In other words we talk about how we cannot “afford” the Medicaid Expansion!

    I’d only say – if you REALLY want to DENY care on a cost basis – be CONSISTENT – from early on primary to late stage “heroic” care … don’t be a hypocrite! Hold that philosophy from start to finish!

    Every other industrialized country on the planet – actually does accept these realities and actually does deal with them… in a much more fiscally responsible manner .. and the proof is undeniable – half the health care costs and longer life expectancies… despite all the Conservative boogeymen “horrors” of … endless “wait” times and “rationed” care. What is more “rationed” than denial of basic primary care that then leads to earlier deaths from untreated disease?

    In this country – we call that a “Conservative” approach to health care… i.e. we cannot “afford” the MedicAid Expansion….

  7. Larry doesn’t seem to get that spend spend spend isn’t going to get us anywhere. Just because another country does it, does that mean we should? We are already killing our middle class because of taxes. We have a larger growing lower class. Why are we rewarding those who do not pay for a benefit get to participate in a benefit? How many want to move to the Scandanavian countries and how many to the USA? Why is that? Why did Gerard Depardieu move from France (taxes). So how many do you want to stop buying new things, opening up new businesses, due to TAX TAX TAX you want to do to pay for things that people used to pay for themselves? No we can’t afford Medicaid expansion. We have way too many give a way programs now. When the ACA came out, many groups made out like bandits, for all the crying about being penniless and needing illegal (by the constitution) payouts & for the billions of tax dollars they got, they are making money hand over fist. You saw consolidation to the huge companies that then jacked up prices. The reason why the Russians who lived thru the Soviet years look at us like we’re crazy is we’re going in the same direction they were in and it did NOT work.

    I think what would be easier is to allow Larry and the rest like him to contribute of their own money they earn to hospitals, insurances, and when the millions are redirected into lobbying efforts (ie or CEO pay ( given the CEO to employee pay ratio (, or for large screen TV’s/baby grand pianos in the entry rooms, let us know how it works out for you.

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