The Week in Public Finance: Latest Repeal and Replace Proposal Still Damaging for States, Pennsylvania’s Downgrade and More

Sept. 22--Health-Care Reform, Take ...

Just like that, the Republican effort to repeal and replace the Affordable Care Act is back. And this time, the proposal is even more damaging for state and local finances.

The new repeal bill, popularly known as Graham-Cassidy, would end cost-sharing under Medicaid by 2020, instead providing $1.18 trillion in per-capita funding to states. This would allow states to waive many regulations under the current law and, bascially, design their own health-care systems.

The proposal, like previous ones, block grants Medicaid, allowing the feds to shift the risks for higher costs, whether due to new treatment regimes, health emergencies or other events, to states, providers and enrollees, notes a Fitch Ratings analysis. Under Graham-Cassidy, Medicaid expansion states would see less funding while nonexpansion states would likely see more money in the short term.

But every state will see significantly less money starting in 2027. The Center on Budget and Policy Priorities (CBPP) estimates that in 2027 alone, the bill would cut federal health-care funding by $299 billion relative to the current law. That's more than the CBPP expects in total federal Medicaid cuts over the preceding 10 years combined.

The Takeaway: The legislation still faces many procedural hurdles. Republicans are trying to pass the bill using budget reconciliation, which lets them bypass a Democratic filibuster. But that means it has to be called for a vote by Sept. 30. That's a rush job, which was one of the criticisms of the last repeal and replace effort.

Nevertheless, Democrats and health-care advocacy groups such as the AARP are taking the effort very seriously. That's because the bill's outcome will likely be decided by one vote, as was the case with the GOP's last health-care effort. With two Republican senators already voicing opposition, the focus has turned to Sens. John McCain of Arizona and Lisa Murkowski of Alaska. Both opposed the previous repeal and neither are reportedly sold on the proposal. McCain's vote, however, could be influenced by Arizona Gov. Doug Ducey, who supports the bill. That leaves Murkowski. According to the CBPP, Alaska would be one of the hardest-hit states from the bill.

Hidden Debt Exposed

The debt transparency organization Truth in Accounting (TIA) released its annual Financial State of the States report, which features the usual bad actors and teacher's pets.

Starting with the bad actors, the state with the highest total debt-per-capita is New Jersey with a whopping $67,200 per taxpayer. Rounding out the top five burdened states are Illinois, Connecticut, Kentucky and Massachusetts, which range from owing $50,000 to $33,000 per taxpayer.

On the other end of the spectrum, nine state wind up in the positive on their balance sheets. The five states with the biggest surpluses are Alaska, North Dakota, Wyoming, Utah and Nebraska with taxpayer surpluses between $38,200 in Alaska and $2,600 in Nebraska.

TIA considers all kinds of state debt in its calculations, including bond debt, outstanding bills, and pension and retiree health-care debt. This year's report found that just nine states are in the positive on their final balance sheets.

The Takeaway: Simply having debt isn't a bad thing. You could easily argue that a certain amount of debt is healthy because -- depending on what it's for -- it shows that a government is making investments in its future.

Still, the overall picture is crucial for an accurate perspective on a state's financial health. "Because government financial statements do not report all liabilities, elected officials and citizens are making financial decisions without knowing the true financial condition of their government," the report's authors write. "The lack of accuracy and transparency in government accounting prevents even an experienced user of government financial documents from understanding and evaluating a public-sector entity's financial health."

Maryland, for example, is a AAA-rated state but is ranked 38th by TIA for its $17,100 per-taxpayer burden. In its analysis, TIA notes that "despite reporting most of its pension debt, the state continues to hide most of its retiree health-care debt," which accounts for more than one-fifth of its nearly $54 billion debt load.

Pennsylvania Downgraded

There's no such thing as partial credit for finishing half a budget. That's why S&P Global Ratings slapped Pennsylvania with a downgrade to A+ this week. Lawmakers have agreed on a spending plan for the year, but have been arguing for months over where the money to pay for it will come from. "Stalemated budget negotiations have reached a point that their consequences extend beyond policy considerations to credit quality," S&P wrote.

The agency also noted the stalemate is the product of the commonwealth's "chronic structural imbalance dating back nearly a decade," as well as its "history of late budget adoption."

The downgrade came after Treasurer Joe Torsella and Auditor General Eugene DePasquale last week refused to yet-again loan money from the Treasury's short-term investment pool to Pennsylvania's general fund to cover expenses. As a result, the commonwealth delayed $1.17 billion in Medicaid reimbursement payments and $581 million in pension payments to school districts.

The Takeaway: When he declined to make the loan, Torsella said he was tired of enabling state lawmakers, and that "continual lending of the taxpayers' money without an underlying balanced budget in place permits policymakers to continue to avoid resolving Pennsylvania's long-term fiscal challenges."

It's questionable whether the downgrade will spur lawmakers into any sustainable solution. Their spending plan, signed into law back in July despite a balanced budget requirement, creates a $2.3 billion budget gap. So far, S&P noted, it appears as if the revenue plans being debated rely on one-time fixes which would land them all in the same negative position for next year's budget.

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Liz Farmer -- lfarmer@governing.com -- @LizFarmerTweets

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