Guest writer

Under the radar

Unfunded liabilities lost in debate

By GREG KAZA SPECIAL TO THE DEMOCRAT-GAZETTE
This article was published today at 3:32 a.m.

LITTLE ROCK — A vibrant policy debate is occurring in Arkansas between liberal proponents of Medicaid expansion and conservative opponents of nationalized medical insurance. Medicaid expansion proponents argue the federal government has promised to pay 100 percent of costs for three years. Opponents counter it would be fiscally imprudent to add such a large group, nearly 250,000 low-income Arkansans, to the state’s Medicaid rolls in a weak economy.
Disputants to date have overlooked the potential effect Medicaid expansion could have on another large group: nearly 200,000 active and vested police, firefighters, teachers, judges and other public employees in various Arkansas public retirement systems. Retirement benefits have been promised to these retirees and future beneficiaries by previous Arkansas legislatures.
Unfunded liabilities are highly relevant to the Medicaid expansion debate. Households, at the microeconomic level, accrue multiyear unfunded liabilities including mortgages, credit-card debt and motor-vehicle payments. Unfunded liabilities represent the fiscal cost of future commitments. Retirement benefits are one example at the macro level, and recent Medicaid expansion has created another beneficiary group and additional liabilities.
Unfunded liabilities are routinely reported by the trustees of federal programs, including Social Security and Medicare. State retirement systems, to their credit, also calculate unfunded liabilities. The Arkansas Teacher Retirement System listed an “unfunded liability of $3.9 billion” as of June 30, 2010, according to its 2010 Comprehensive Annual Report. An actuarial analysis shows the Arkansas Public Employees Retirement System listed $1.9 billion in liabilities in mid-2010.
The Legislature appropriates money for retirement systems, and knows their liabilities. But Arkansas legislators don’t know Medicaid’s unfunded liabilities. The state Department of Human Services, which administers Medicaid, considers components like ARKids First as “a pay-as-you go program for which budgets and appropriations are done each year,” according to a July 11 department communication.
States including Arkansas adjust their Medicaid programs to fit their budgets on an annual, not long-term basis.
“Calculations that we’ve done,” the Human Services communication states, “comparing expected spending and the programs’ FY 2013 appropriation show a clear funding gap that will need to be addressed.
“[The department] has been very open about this funding gap and is engaged in a comprehensive effort to transform the program and significantly reduce the projected funding gap over the long term,” the communication explains.
Yet a back-of-the-envelope estimate of Medicaid unfunded liabilities can be calculated. ARKids has the largest number of Arkansas Medicaid enrollees. A recent Arkansas Democrat-Gazette article notes there were 280,988 in the ARKids ‘A’ program, and 75,027 in the ‘B’ version last year. Annual health care is $3,826 for the average ‘A’ program enrollee, and $1,266 in the ‘B’ program. Both enroll youth to age 19.
These liabilities are offset by federal Medicaid reimbursements if Washington is able to maintain promised Arkansas match levels through 2032 when today’s infants no longer qualify for ARKids. Federal reimbursement rates are 70 percent for the ‘A’ program, and 79.5 percent for ‘B’ enrollees, Human Services reports.
A conservative estimate is that ARKids’ unfunded liabilities total$3.5 billion if federal reimbursements are maintained at current levels and medical inflation does not occur. This estimate of ARKids’ unfunded liabilities does not include the Medicaid expansion currently being debated.
Arkansans are intelligent. They understand that paychecks, savings and other household assets are offset long-term by mortgages, credit-card debt, motor-vehicle payments and other liabilities. The same holds true for Medicaid programs like ARKids: Assets are offset by liabilities. Surpluses accrue to the state, deficits to taxpayers.
Scarcity is a foundation of economics. Retirement benefits and Medicaid social spending could both expand infinitely if scarcity did not exist in an imaginary economy without limits. Arkansans, however, live in a real economy whose broad measures (employment, income, production) are weak at best.
Police, firefighters, teachers, judges, other public employees and taxpayers would all benefit if unfunded liabilities were reduced. Ignoring or increasing Medicaid unfunded liabilities overlooks their interests and creates the potential for future fiscal conflict.
———◊-———
Economist Greg Kaza is executive director of the Arkansas Policy Foundation, (arkansaspolicyfoundation.org) a Little Rock think tank founded in 1995.
Editorial, Pages 11 on 08/20/2012