Thursday, May 29, 2014

All in a Day's Work? Budget Follies

What’s In a Day’s Work… and the Budget?

During the debate on the minimum wage this spring, I shared my belief that there is something wrong with the economics in our society if a full week’s work doesn’t pay enough to keep a family out of poverty.

Raising the minimum wage isn’t necessarily the answer to this dilemma. Economics is more complex than a governmentally-imposed wage solution. But straight-out subsidies certainly are not the best way to support families, and I often hear complaints that we are too generous in that regard.

Legislators received an excellent graphic this spring that illustrated the earnings and net income inclusive of all wages and benefits for a hypothetical single parent with one child. The dynamics change with every family make-up, but it gives at least one portrait.

What it shows is that in our efforts to help, we often shoot ourselves in the foot. Beyond that, the efforts my committee made to try to increase work incentives reveal some disturbing trends about how we squeeze budgets out each year.

We never actually pass balanced budgets in the long term. They just start out appearing to be balanced. We hide the imbalance and pay for it the next year. Both Reach Up and our opioid addiction investments (explained later) provide excellent examples.

Here is what happened with Reach Up:

The color-coded chart we saw for the two-person family showed that if the parent is earning an annualized rate of $6 per hour – about $13,700 – he or she is not eligible for a Reach Up grant, although still earning below the federal poverty line ( $15,730). The family does net about $3,000 from the federal earned income tax credit, and another $1,000 from the Vermont EIC.

The two largest benefits are subsidies for health care insurance (about $9,000) and child care ($7,000), followed by food stamps ($3,500), renter’s rebate ($1,500) and $1,000 each in the child tax credit and fuel assistance.

When all is said and done, a two-person family moves from a net of $31,000 in benefits with no earnings to just under $40,000 at the $6 per hour annualized income. That increases only very gradually to $44,000 once making $9.62 an hour ($20,000 per year), because earnings only slightly outpace benefits being lost.

Between $9.62 and $16.83 per hour, every increase in wages represents a loss in family net income until it drops back down to $42,000. That is what we call the “benefits cliff”: working to do better for oneself actually creates a loss in income.

Not until reaching $20.43 per hour does the family equal the net income that was coming in at $9.62 per hour. After that point, the climb becomes relatively steady, except for one blip when Dr. Dynasaur is lost for the child at the $30/hour earnings level.

What about someone earning below $13,700 per year? Since $6 per hour is below minimum wage, this means they are not employed full time. If a person is only working enough to earn $5,000 a year, the Reach Up grant is $3,000, for a net of $9,000. (At zero earnings, the grant is a little over $6,000.)

Between earnings of $5,000 and $9,500, as the Reach Up grant declines, actual net income only climbs from $9,000 to $10,500. In other words, increasing work hours by almost double only increases cash income by about 11.5%. That’s not exactly a work incentive.

This is the issue my committee’s Reach Up bill attempted to address this spring.

The challenge in addressing the benefits cliff is that it costs a lot more money if we try to help people keep more of their earnings until they are higher up on the pay scale. Our solution was to transfer money instead: to take a tiny bit from all Reach-Up grants, about $4 per week, in order to increase the initial income disregard from $200 to $300 per month, and extend the “slope” to keep 50% instead of 25% of further earnings for those who work, until leaving Reach Up.

The income disregard is the amount that is not counted against a reduction in the Reach Up grant. So it would have helped poverty-level families keep a little bit more of the income earned before losing Reach Up.

The Senate, however, could not tolerate the $4 per week reduction (barely more than $200 for a full year) in the Reach Up cash benefit. It also wanted to see the increase in benefits go into a higher child care subsidy, to be provided further up the income scale.

The bill as finally passed does increase the income disregard starting a year from this July, but only by $50 with no increase in the additional percentage retained. The rest of the new incentive goes to families already earning more than that, and for child care, not cash in the pocket.

The bigger problem, in my estimation, is where the money will come from. All of a sudden, instead of the trade-off in where the support was targeted, the Senate took it all from future “savings” in the Reach Up program.

As the economy improves, the Reach Up caseload has been going down. Fewer families are seeking assistance. When it goes down faster than we project, we have savings in the budget that were not anticipated: “extra” money.

The Senate made the benefit contingent. If we have savings in the year ahead, that will be invested in these enhanced benefits next year. That sounds pretty innocent, from a budget-neutral point of view.

But here’s the catch. Assuming those savings do emerge, and assuming we had not created this new benefit, that money would be budgeted somewhere else that it was needed. If it goes to the new benefit, that “somewhere else” will still have to be paid for.

Precisely because we budget every year based upon money that is not part of our anticipated revenues, we start each new budget year in a big hole in order to maintain the same level of (increased) spending.

As of the budget passed in May, we will begin our next budget year $72 million in the red. This is the “structural gap” that our Joint Fiscal Office reminds us of every fall. We spend more in the budget than our revenues, and then desperately look for band-aids every year. The new, one-time spending becomes part of the base budget for that next year.

When we say we need to raise a certain amount of revenue “just to stay even,” that is what we mean. Often, a part of that new revenue comes from squeezing some new federal money out of match rates. It works in the short term, but is high-risk revenue. Every time the federal budget is cut, or our match rate decreases, we have another big hole “just to stay even.”

This year, we passed a budget that was a 3.8 percent increase over what we project that we will spend by the end of this year, which is above the rate of economic growth – and above the rate the governor told school boards they should stay within.

Unanticipated expenses that arise and are paid for in the mid-year budget adjustment act are sometimes just another way of adding onto the budget bottom line. Administration officials sometimes slip up in testimony when asked about a probable funding need that isn’t in the budget, and admit the plan is to pay for it in the budget adjustment. That’s not exactly “unanticipated” need, but it avoids counting it in the budget being presented.

The projected Reach Up savings make for an excellent case-in-point regarding our budget. If we gain those Reach Up savings in the next year, they ought to be going towards that hole, instead of funding a new benefit – even as positive as that benefit may be.

But it has already gone well beyond that. In the midst of the crisis in our Child and Family Services Division, with two toddlers dead in the past six months, the governor has announced the creation of 16 new social work positions out of “extra money.” This extra comes only a month after we passed the budget, including the increase in some taxes to balance it!

The governor says it won’t cost anything in the budget, because it will come from unanticipated savings in… Reach Up. Not next year’s (which is targeted for the new benefits), but a greater caseload reduction than even already expected for the current year when the administration was building the budget.

I gave another example of budget games in my main session wrap-up this week, and I’ll go into a bit more detail in this analysis on the artificial investment into treatment for opioid addiction. That’s the $7 million into new treatment resources the governor committed to in his state-of-the-state address, and which the news media all reported as being achieved in the budget we passed.

The $7 million is in the budget, but where does it come from?

Almost $5 million comes from projected savings that it is hoped will result from more efficient delivery of services. Using money more efficiently rather than spending new money is a very good thing, of course.

However, it is deceptive to suggest that we are creating new resources, and those savings that are being projected are very tenuous. The administration took a small pilot in Burlington and found some significant savings over the course of a few months that came from better coordination of addiction treatment.

It extrapolated those savings statewide and year-round. The transferred money will go to the “Care Alliance for Opioid Addiction,” which has qualified as a “health home” (not to be confused as a “medical home”) under the federal Affordable Care Act.

The reductions include almost $1 million in residential treatment, $1m plus in physician services, and $2.8 in other outpatient services. (Another $3.6 in savings is projected to come in changing the independent lab used for drug monitoring.)

The House and Senate Appropriations Committees were skeptical that there was a sound basis to project this level of savings to fund the new services, but didn’t go so far as dismissing them. They added budget language demanding accounting to show the money trail:

“… the Secretary of Administration and the Chief of Health Care Reform are authorized to transfer Global Commitment funds from the Department of Vermont Health Access (DVHA) to the Office of Alcohol and Drug Abuse Programs for the Care Alliance for Opioid Addiction. A written notification shall be submitted to the Joint Fiscal Committee for funds transferred under this subdivision and shall include a description of the specific use of funds within the Care Alliance for Opioid Addiction … Anticipated or identified savings in DVHA or other departments of the Agency of Human Services identified as a result of the increase expenditures through the Care Alliance for Opioid Addiction shall be included in the notification set forth in subdivision (1) of this subsection.”

What happens if the savings in the Medicaid program do not match the increased spending in the new program? That “unexpected expense” will likely show up as an increase that needs to be funded in the mid-year budget adjustment next January.

So in fact, we may well end up spending new money instead of simply using money more efficiently, and the investment description won’t have been deceptive. However, that means that the budget we just passed won’t have actually been a balanced budget.

This is what sometimes gets called “smoke and mirrors.” More charitably, it might be called budgeting on “a wing and a prayer.”

Either way, it is another example of the structural problem that our Joint Fiscal experts keep warning us about. Our annual deficits will not go away. That means that in each new budget year, it does become impossible to avoid budget increases beyond the rate of economic growth without serious cuts. However, the reason is that the actual budget increases came in hidden places the year before, when we didn’t actually pass a balanced budget.

The other behind-the-scenes piece that will bite us in the future is the fact that the Alliance is an Affordable Care Act health home. This means it has been approved for a highly enhanced federal match rate (90/10) for three years. In theory, the new model will be so efficient that after three years, when the match rate goes back to the 50-50 range, the state won’t be paying any greater amount for those same services.

And I have a bridge in Brooklyn to sell you, for cheap…

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