A bill filed Friday would raise weekly Delaware unemployment payments from $400 to $450 and, for one year only, save state companies $50 million in 2023 by using state funds to pay unemployment tax increases.
House Bill 49 filed by Rep. Ed Osienski, D-Newark, said Delaware already is paying less in unemployment than neighboring states and that the maximum amount of the payments has not been changed since 2019.
Rep. Mike Ramone, R-Pike Creek, said he hadn’t seen the bill, but he found it interesting that the idea is being floated now.
“At this time, many businesses are significantly understaffed,” said the House Minority leader. “Why would we motivate people more to stay out of a work force? There are plenty of jobs.”
The Delaware State Chamber of Commerce is opposed to the bill and will testify against it at Tuesday’s hearing, said Tyler Micik, director of Public Policy and Government Relations for the chamber.
The bill said it would make sure that employer payments don’t change by using funds from the Unemployment Trust Fund.
That fund was depleted by the surge of pandemic related unemployment claims, but Gov. John Carney used federal pandemic funds to replace them, the bill summary said.
There is enough money in the trust fund to offer unemployment tax relief measures to Delaware employers by reducing new employer tax rates, reducing or holding constant overall employer tax rates, and reducing the maximum earned rate during the calendar year 2023, the bill says.
The bill will also temporarily simplify the tax rate schedules that are used to calculate unemployment assessments paid by employers.
The state Department of Labor has estimated that the tax assessment changes will reduce the tax obligation of employers an estimated $50 million in 2023, the bill summary said.
If the bill passes and is signed into law by Carney, it will be in effect retroactively to Jan. 1, 2023, and expire Dec. 31. 2023, the bill says.
Medicaid enrollment in the United States is expected to top 100 million in the coming months, a new study shows.
The Foundation for Government Accountability says more than 98 million Americans are enrolled in the federal health care program. Delaware accounts for 307,756 of that figure, as of Oct. 31.
Medicaid, according to the release, provides health care coverage to low-income residents, including adults, children, pregnant women, elderly adults, and people with disabilities.
“For years, FGA has been warning about the rising number of people on government welfare programs,” Hayden Dublois, the organization’s Data and Analytics director, said in a release. “Now, we’re nearing a grim milestone – nearly one-third of the country will be on Medicaid.”
The group’s research shows that as welfare enrollment increases workforce participation decreases and is urging the federal government to take action.
“We’re in the midst of a nationwide workforce crisis, yet the Biden administration is pushing policies to entice people into government dependency at record levels while limiting opportunities to achieve the American Dream,” Dublois said in a release.
According to the release, the organization points to rising enrollment in the program primarily due to the federal government extending the public health emergency related to COVID-19.
The group said that while those emergency measures are in place states will receive additional funding for the program with the caveat that those enrolled remain in the program.
Under the emergency, the group said, 21 million Americans are enrolled in the program who would not have qualified under nonpandemic conditions due to earning too much income or are ineligible.
“The pandemic-era policy keeping more than 21 million ineligible enrollees on Medicaid is costing taxpayers more than $16 billion per month,” Dublois said in the release. “Despite the recently enacted legislation allowing states to redetermine eligibility beginning in April, the Biden administration is slow walking the process and hoping states will be sluggish to act.”
Meanwhile, the dashboard shows, Maryland has 1,749,423 residents enrolled in Medicaid as of Oct. 31; Pennsylvania has 3,625,047 enrolled as of Nov. 30; and New Jersey has 2,206,895 enrolled as of Nov. 30.
Over the past decade — during which University of Delaware officials have requested more than a billion dollars in taxpayer funds from the General Assembly to support in-state scholarships, construction projects, and even general operations — the state’s flagship university has quietly shifted hundreds of millions of dollars to investments overseas, according to a review of the university’s tax returns and other financial documents by Delaware Call.
With the university’s offshore investments growing from $14 million in 2010 to a peak of $413 million in 2016, according to UD’s tax records, the university is likely avoided paying millions of dollars in federal taxes using an accounting scheme The New York Times described as “tax wizardry” and which is often out of reach for all but the largest nonprofits. The majority of those investments were and continue to be located in one or more Central American and Caribbean nations.
Since 2016, UD’s offshore investments have slowly declined to $334 million in 2018 and $266 million by June 2020, the most current year for which the university’s tax information is available.
While UD invested hundreds of millions of dollars overseas, it also increased tuition every year between 2009 and 2019, according to reports in the Newark Post, sometimes by 7% or more, resulting in the price of annual in-state undergraduate tuition rising more than 50% — from approximately $9,000 to $14,000 — over the course of a decade.
In an attempt to discern the origins of the dollars that UD has invested overseas, Delaware Call filed a Freedom of Information Act request asking university officials for more details regarding the school’s overseas investments. UD denied the FOIA request, claiming that it is not obligated to share any documentation regarding its offshore investments because these investments do not include state-allocated funds.
“Pursuant to Delaware’s FOIA, only university documents that relate to the expenditure of public funds are public records subject to disclosure under the Act,” wrote UD Deputy General Counsel Jennifer Becnel-Guzzo, “Your request does not relate to the expenditure of public funds. The University, therefore, has no public records responsive to your request.”
When asked by Delaware Call if any federal funds in the form of Pell grants or student loans were diverted to offshore investments, UD initially declined to comment. After multiple follow-up emails, UD’s media relations manager, Peter Bothum, replied, “No state or federally funded resources are applied to offshore investments,” but provided no evidence that substantiated the claim.
When shown UD’s tax returns, outgoing state Rep. John Kowalko (Newark) said that he was unaware of the university’s offshore holdings but not surprised, calling it “outrageous behavior” for a public institution and slammed the university’s special exemption from open records requests that shield information about these investments from public scrutiny.
“You can’t call yourself a public institution on Thursday when you want taxpayer money and a private institution on Friday when we want to look at your books,” Kowalko said, adding that even state legislators don’t have special access to UD’s finances. “I don’t think for one minute that UD has been a proper steward of taxpayer money. I think they’ve been manipulative.”
How offshore investments help universities avoid tax liability
UD first reported offshore investments on Schedule F of its 2010 tax returns under former president Patrick T. Harker and chief investment officer Mark Stalnecker. Over the following decade, UD’s offshore investments skyrocketed in an apparent attempt to supercharge capital gains through investments that would otherwise carry a tax penalty if traded by a nonprofit inside the United States.
By 2013, UD’s offshore investments had swelled to $136 million while the university’s total investment income grew to nearly $100 million annually and tuition increased by 4%. The next year, UD’s offshore investments ballooned yet again to $398 million while investment income reported on UD’s federal tax form topped $220 million.
The investment returns were a windfall for the university, which was in the middle of a construction boom that included the purchase and demolition of a former Chrysler assembly plant and its transformation into an entirely new campus with manufacturing facilities, modern glass towers, and a $165 million biopharmaceutical center.
In 2016, UD explained that its asset allocations had shifted “dramatically” since 2000 to reduce “the endowment’s investments in domestic stocks and bonds by reallocating to international and nontraditional asset classes.” At the turn of the millennium, UD invested the majority of its assets in US stocks and bonds and virtually none in hedge funds and private equity. By 2016, domestic investments had fallen to 40% of the university’s asset allocations while hedge funds and private equity swelled to 19% and 21%, respectively, according to archived versions of the university’s website.“These funds have been redeployed into the international equity markets and alternative assets such as hedge funds and private equity funds which should not only provide higher returns in a greater variety of investment environments but also help to control overall risk,” reads the current version of UD’s asset allocation page.
Figure 1: UD Endowment Asset Allocations vs Target Allocations as of 6/30/22 (Source: University of Delaware)
Among the nation’s most prestigious colleges and universities, it is not unusual to keep hundreds of millions, or even billions of dollars invested outside the United States. Just last year, Swarthmore College and Villanova University reported $375 million and $249 million, respectively, in offshore investments, and University of Pennsylvania reported more than $5.3 billion, almost entirely in Central America and the Caribbean. It’s all perfectly legal.
Why have UD and so many other major universities diversified their investments to include significant offshore holdings?
The reason likely lies in a section of the tax code known as the Unrelated Business Income Tax, or UBIT, which is basically a special tax on nonprofit revenue derived from sources unrelated to any tax-exempt purpose. For example, if a nonprofit decided to start a business that generated a profit, then profit from that company would qualify as unrelated business income because it’s not a charitable activity, according to Zac Kester, CEO and managing attorney at Charitable Allies. Nonprofits do this all the time to bolster their impact on a community, like an organization that supports formerly incarcerated people re-entering society and wants to start a landscaping company to help its clients find work.
“The overall concept is that when a nonprofit organization has passive income — things like dividends, interest, rent — it’s not taxed,” says Kester. “But if revenue is not related to the exempt purpose of the organization, then that is taxable under the UBIT rules.”
Unrelated business income also includes many kinds of debt-financed and high-risk investments.
What does this mean? If a university were to profit from certain types of investments traded inside the United States — such as hedge funds, leveraged securities, or many types of private equity — then that university would be obligated to pay the 21% flat federal corporate income tax rate stipulated by UBIT. However, according to The New York Times, by establishing overseas companies known as “blocker corporations,” which often take the form of limited partnerships or limited liability corporations in offshore tax havens, universities can avoid paying federal taxes on leveraged and risky — but also potentially lucrative — investments.
In other words, rather than a university buying and selling investments and paying a flat tax, a company located outside the United States executes those trades in the supposed best interest of the university and pays out a dividend over time, which is untaxed when transferred back inside the country because the school did not, legally speaking, trade any securities, and dividends are treated as passive income, a tax-exempt form of revenue for nonprofits.
How risky are UD’s offshore investments? Because of UD’s exemption from FOIA, there’s almost no way to know for sure. Even state legislators do not have access to that information.
“I’ve made requests that have been declined,” Kowalko said. “We can’t verify anything they say, and I think UD has acted unethically in its refusals to allow a more open accounting of its finances.”
What little we do know can be found in UD’s annual financial audits. UD’s eye-popping returns came crashing down during the first three months of the coronavirus pandemic, with hedge funds being one of the worst-performing asset types, losing tens of millions of dollars in value between June 2019 and June 2020. The following year, UD appears to have almost entirely divested from certain types of hedge funds.
Where are these offshore investments located? That too is unclear. UD’s tax returns only report investment activity by region along with the corresponding amount of investments held in that region. However, according to the Offshore Leaks database managed by the International Consortium of Investigative Journalists, as of 2016 the University of Delaware was apparently connected to at least one apparent blocker corporation, Bermuda-based Dover Street Blocker LP, which itself was connected to Dover Street V Limited Partnership, which was connected to other higher ed institutions, including the University of Vermont and Texas Christian University, both of which report extensive offshore investments in “Central America and the Caribbean,” just like UD.
Another offshore corporation, University of Delaware Dover Inc., was incorporated in the British Virgin Islands in January 2007 by Portcullis TrustNet in the town of Tortola. Both Bermuda and the British Virgin Islands are among the world’s most popular and secretive tax havens, according to the Corporate Tax Haven Index developed by the Tax Justice Network.
During his time in the General Assembly, outgoing Rep. John Kowalko filed numerous bills designed to increase transparency at the University of Delaware. Back in 2014, he sponsored House Bill 331, the first of three consecutive bills to amend the Delaware Code relating to the Freedom of Information Act. That bill added language expanding the university’s FOIA obligations to competitive bids and passed unanimously in both the state House and Senate and signed into law by Gov. John Carney.
“When you’re putting an enormous amount of money into a public institution — and it is a public institution — as Delaware taxpayers are, then there is no right to a FOIA exemption,” Kowalko said in an interview with Delaware Call.
UD’s exemption from the state’s sunshine laws is unusual. Delaware and Pennsylvania are the only states that shield their public universities from most freedom of information requests. Delaware State University also enjoys a FOIA exemption, although Delaware Technical & Community College, which also receives state funds, is not exempt.
Kowalko’s two transparency bills, however, did not draw as much support. In 2015, Kowalko introduced House Bill 42, which removed the state’s FOIA exemption for UD and DSU; however, the bill languished in the House Administration Committee over concerns there should be exemptions for the intellectual property and proprietary information of faculty and students. Kowalko attempted to address those concerns in 2017 with House Bill 72, but that too died in committee.
Blaming the “Delaware Way,” Kowalko said, “Leadership never allowed my bills out of committee.”
Now, on his way out of office, Kowalko says repealing UD’s “rigged FOIA exemption,” as he put it, would be “good public policy,” and he hopes that his efforts to increase transparency and oversight at UD will be carried on by the rising generation of progressive lawmakers in the General Assembly.
Eleven states will reduce their individual income tax rates on Jan. 1.
Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, and North Carolina will cut the individual income tax rate on New Year’s Day, according to the Tax Foundation. Over the past two years, more than 20 states have cut individual income tax rates.
Three of these states – Arizona, Idaho, and Mississippi –will also move away from a graduated-rate income tax to a flat tax where all income is taxed at the same rate regardless of income level, the Tax Foundation reported.
Only one state, Massachusetts, is increasing its individual income tax, according to the Tax Foundation. The state will change from a flat to a graduated-rate tax of 9% on any household income over $1 million.
Two states, Hawaii and Illinois, expanded their tax credit programs, which reduce the final dollar amount on the tax bill rather than reducing taxable income, according to the Tax Foundation.
States with low or no personal income tax rates are among the fastest-growing populations in the country, according to data from the U.S. Census. Among those states are Florida, Idaho, and North Carolina.
Florida has no income tax, while both Idaho and North Carolina have a flat tax on income, according to data from the Tax Foundation.
Alabama, Delaware, Iowa, Rhode Island, and Nebraska enacted exemptions for a portion to all of retirement income or military pension, according to the Tax Foundation.
Hillsdale College Professor of Economics Gary Wolfram told The Center Square that states with lower income taxes often attract more businesses and economic activity to their economies.
“States with lower income taxes attract economic activity,” Wolfram said. “The latest census data on state population growth is evidence of the fact. This results in job opportunities and increases in property values that particularly benefit the median income earners.”
States like New York, Hawaii, California, and Oregon with high income taxes have shrinking populations, data from the U.S. Census shows. These states are also among the top ten states with the highest income tax with California having the highest tax rate in the country at 13.3%.
The unexpectedly bright revenue prospects of Wisconsin’s state government represent both an opportunity and a danger. A year from now, how will we know which one it is? By whether the state’s $6.6 billion in surplus revenue was used for epoch-marking reform.
Such reform is the opportunity — the chance to turn Wisconsin away from stagnant mediocrity and toward opportunity and justice.
The danger comes from the use of such money to fund the status quo.
As the Badger Institute illustrates in its new “Mandate for Madison,” the status quo means settling for Wisconsin’s economic output per person, which was once growing apace with our neighbors but has lagged during the recovery and now is second-worst among our Midwestern peers. Likewise, our population is growing at a pace that’s middling even when measured against our slow-growth Midwest neighbors. Projections of our working-age population show much slower growth than that of the United States overall. Nationally recognized measures of Wisconsin’s economic freedom, once growing, have flatlined.
This is why it is dismaying to learn that state agencies’ budget requests would snap up at least half the surplus, all so that Madison can go on doing the same as it is now, only at a price that’s 10.6% higher over the biennium. “More of the same but costlier” will not improve Wisconsin’s trajectory, which now involves seeing the receding taillights of more prosperous neighbors.
Instead, that surplus can fund change that will put Wisconsin at the front of the pack. The Badger Institute this fall published “Mandate for Madison,” a collection of ready-to-deploy policy recommendations for a more prosperous Wisconsin from some of the best thinkers in and about our state. Consult the book at our website for details, but these are reforms that we think will make the greatest change for Wisconsin:
Reform our income tax from being punitive to being fair and competitive:
While Wisconsin has lowered income taxes for some in recent years, the top rate remains high, at 7.65%. That’s a higher top rate than all but eight states, and one of those, Iowa, is moving to a flat rate of 3.9% in 2026. Twenty-five states have lower top rates than they did in a decade ago. Standing still, we’re falling behind.
People can choose where they live, and even as Wisconsin employers find it hard to attract workers, Wisconsin’s tax system not only charges high rates, it increases those rates on people as they earn higher pay.
High rates also are taxes on employers. About 95% of Wisconsin businesses are structured as “pass-throughs,” such as partnerships or LLCs, where the tax on business income is levied on the owner’s individual tax return. About two-thirds of pass-through business income in Wisconsin is exposed to the 7.65% top rate — meaning less earnings to be reinvested in the business, less hiring, less groundwork for growth. The more successful a growing business is, the less affordable Wisconsin remains as a place to do business.
The way to change that is to adopt a fairer structure, one that charges the same rate of all taxpayers. This immediately removes the sharp jump in tax rate that now wallops a successful business or a high-talent employee rising in her career when these taxpayers move from the second-highest bracket to the highest.
In “Mandate for Madison,” the Tax Foundation’s Katherine Loughead lays out options for such a flat-rate tax, with a single rate ranging from 4.15% to 5.1%, depending on what other tax changes are included and how much Wisconsin gives back to taxpayers of what it took unnecessarily. Every taxpayer now in the top two of Wisconsin’s four tax brackets would see a tax cut. That’s about half of all households. Then, by using Wisconsin’s income-linked sliding-scale standard deduction — increasing the deduction and raising phase-out points — our proposal protects taxpayers in the lower two brackets, ensuring that they, who saw tax cuts in recent years, now would see no increase.
It is literally a no-downside proposition. The upside is not just that at least half the state’s taxpayers keep more of their money. It’s that our tax system stops being something that employers flee and, instead, contributes to our competitiveness. Even the option that goes to a 5.1% flat income tax and makes no change to the corporate tax rate moves Wisconsin from being 27th-best among state business climates to ninth-best.
For every Wisconsinite needing a job or hoping her children someday can make a livelihood here without having to move away, that’s a win.
Bring justice to the funding of Wisconsin families’ educational options:
A core American value from our country’s earliest days is that parents can choose the education they think best suits their children. Wisconsin has long respected families’ power to choose the right school by offering open enrollment, public charter schools and, for three decades, the right to take a child’s state educational aid to an independent private school via our parental choice programs.
Families have embraced these choices. Wisconsin’s four parental school choice programs now serve about 52,000 students, a number 6.7% higher than in 2021 and 43% higher than five years ago, even as the number of school-age children in Wisconsin remains flat.
Yet families’ ability to access these choices is stymied by systemic inequality on two fronts.
First, children whose parents choose an independent private school are valued much less in state-aid terms than children whose parents choose district schools. The average per-pupil funding in Wisconsin’s incumbent district schools is just over $15,000 a year per child, all in, with individual districts spending from $11,000 to $22,000 per pupil. Children whose parents opt to take state aid to a private school via parental choice get only $8,399 for K-8 students and $9,045 for high schoolers. Since schools must accept this voucher as full payment in nearly all cases, this radically limits the ability of independent schools to serve Wisconsin children.
It also treats families unequally. As the head of a network of nonprofit schools in Green Bay put it, “A child is a child is a child,” yet the state is saying some children are worth about 40% less. “I’m not really sure what goes into the state deciding how much a child is worth in private education versus public education,” she said. “I just know that it’s unjust.”
Second, while the state offers aid to cover the cost of schooling to families of all income levels so long as parents use a traditional district school or independent charter schools, it excludes families from the parental choice programs if their income is as little as 220% of the poverty line — $58,300 for a family of four in Green Bay, for instance. This blocks working- and middle-class families from choosing an independent school if they cannot swing the cost of tuition or find philanthropic help — even as the state’s highest income families, who can afford to move to a better school district, are fully subsidized, so long as they choose traditional district schools or an independent charter.
Wisconsin’s revenue situation gives us a chance to permanently repair this injustice — first, by parity in funding for Wisconsin children, based on the principle that students all have an equal value in the eyes of the law and that where a child receives a publicly funded education should not determine the amount of that funding.
Second, as justice in funding permits independent schools to serve more Wisconsin families, a uniform eligibility for publicly funded education options can be extended to all families. Every Wisconsin family now lives under Wisconsin’s mandatory attendance laws and is obliged to pay taxes. All should be eligible for the choice that has for decades been a principle of Wisconsin education.
Many needed reforms don’t require a lot of money:
Our “Mandate for Madison” includes many other reform ideas. Few of them require much additional state spending. For example:
On health care, enabling market innovation is first a matter of not impeding the emergence of direct primary care, improving transparency and getting out of the way of professionals practicing their skills.
On our safety net, we should consolidate existing ample funding streams and restructure them, re-establishing work and education requirements, so we no longer discourage work and marriage.
Reforming Wisconsin’s onerous occupational licensing doesn’t require more spending, just an honest look at what barriers unfairly impede work.
We could go on, but the point is clear: Most of Wisconsin’s problems can be addressed by government performing better rather than growing larger.
Justly funding Wisconsin’s commitment to empowering families’ educational choice will take some money — spending that will enable more access to the superior results already seen in independent schools.
But this means there is an ample surplus that’s been taken from taxpayers available to return to them through tax reform, reform that will put Wisconsin on a path of greater prosperity for all. We should take that path.
Using billions of emergency pandemic bill dollars to plug gaping holes in their budgets, local governments across Wisconsin and the country are setting themselves up to ask for tax increases or slash services as basic as police and fire protection when the federal funding runs out.
Just how steep this fiscal cliff will be is only beginning to be realized. Early research indicates that at least half of the more than $350 billion in State and Local Fiscal Recovery Funds (SLFRF) allocated in the American Rescue Plan Act is eligible to be used to provide government services, award salary increases or even pay down employee pension debt.
A review of the few progress reports available through the U.S. Department of the Treasury shows that six of the seven Wisconsin cities and counties reporting, including Milwaukee, made SLFRF money available for use in propping up their budgets, more than $700 million of it.
Milwaukee expects to use $245 million of its $394 million SLFRF grant to close gaps in the 2022-24 budgets. After that, without help from the state, city Budget and Management Director Nik Kovac told the Badger Institute, the city will have little choice but to lay off perhaps hundreds of employees “across all departments.”
“This fiscal cliff, precipice, whatever you want to call it, we want to put it front and center,” Kovac said in an interview. “Using ARPA funds for this purpose is not a best practice, but the alternative is worse.”
In an issue paper released in April, Beverly Bunch, a public management and policy professor at the University of Illinois-Springfield, said poor documentation of the ground-level spending was obscuring what could be a significant problem for local governments.
“The fiscal cliff is real,” Bunch told the Badger Institute. “State officials need to be concerned about it.”
Local governments are coming to this pass, as is often the case with big government programs, because of the good intentions of the benefactors. As the Badger Institute reported more than a year ago, communities that had never seen sums like those from the $1.9 trillion Rescue Plan Act were having a difficult time trying to spend the money within the federal guidelines. Many were forced to spend valuable ARPA funding just to administer their ARPA funding.
Since Congress passed ARPA on March 11, 2021, Wisconsin governments of all sizes have managed to spend just $813 million, or 32%, of the $2.53 billion allocated to them, according to a document provided to the Badger Institute by the state Department of Administration. The state is due to receive another $2.5 billion, which must be spent by the end of 2026.
Just months into the allocation of this federal windfall, the U.S. Treasury Department quietly changed the spending rules for states, counties and cities. Governments could appeal to ARPA officials for revenue replacement, or an estimate of revenue lost because of the pandemic.
The wrinkle in revenue replacement was that counties and cities did not have to document their revenue loss. The Treasury Department’s new and relaxed formula for claiming lost revenue allowed governments large and small to divert huge portions of their SLFRF allocations away from the programs prescribed in ARPA guidelines and into the day-to-day operation of their governments.
The SLFRF guidelines already allowed for spending that was tied tenuously at best to emergency COVID relief. Gov. Tony Evers’ administration, for example, committed $100 million to a statewide broadband expansion program that will end up costing $3,225 for each of the roughly 31,000 residential and business locations to be served.
Revenue replacement now allows huge sums of SLFRF money to be tucked into local budgets, an accountability and transparency problem that concerns Bunch.
“Allowing ARPA money to be added to general funds concerns me because it’s harder to find and it loses its character as a federal emergency measure,” she said.
Of the more than 1,900 government entities in Wisconsin that received at least some ARPA money, the Treasury Department has just seven progress reports on its website.
They include a state performance report dated July 31 and reports for the first part of 2022 for the cities of Milwaukee and Madison and for Milwaukee, Dane, Brown and Waukesha counties.
A review of those reports offers a glimpse into how local governments are now relying on revenue replacement to augment their budgets.
The City of Milwaukee, for example, added $20.8 million to the Fire Department’s Emergency Response program and another $6.7 million for emergency medical services training in 2022. The city hired 20 new sanitation workers as part of a $2.3 million Clean City program.
In its report, Milwaukee County says it committed $115.7 million in revenue replacement funds in 2022 to provide government services. There is no outline of what those services are or will be in the report.
Dane County committed $21.2 million to maintain government services. Its seven-page report does not mention what the county intends to do in 2023 and beyond. The phrase “revenue replacement” does not appear in the report.
Of the $47.2 million in SLFRF funding allocated to Madison, the city chose to use $24.4 million “on wages for emergency workers, as well as to balance the general fund budget and avoid the use of fund balance in 2022,” according to its report.
The reports, however, also show cities like Madison and Milwaukee using SLFRF funds outside of revenue replacement for the creation of new programs and the hiring of employees to staff them — positions that will either have to be supported with local tax money or ended when the federal funding is exhausted.
Far from one-time expenses, Madison in the past year committed $3.5 million in SLFRF funds for unsheltered homeless support, $2 million in seed money for a homeless services project and $2 million for a youth housing project.
David Schmiedicke, Madison’s finance director, acknowledged that the city council will have decisions to make in 2025 and 2026. “All of the ARPA funding was recognized as one-time,” Schmiedicke told the Badger Institute. “Continuation of any ARPA-funded programs will be considered on a case-by-case basis in future budgets.”
As welcome as the ARPA funding has been, the depth of the coming fiscal cliff will bring into sharp relief longstanding fiscal troubles, particularly for the more populous cities and counties in the state, Schmiedicke said.
“Since 2012, the city has faced structural deficits in funding for current service levels compared with anticipated revenues under strict state limits on allowable growth in property taxes, declining state aid, and state limits on general revenue options for Wisconsin cities,” he said.
ARPA has temporarily changed the arc of local government debt, which already reached a record $11 billion at the end of 2020, when Wisconsin was fully engaged in combating COVID-19.
Local government debt in that year nearly doubled over the previous year, according to a report released at the end of November by the Wisconsin Policy Forum. Of that debt, $1.13 billion is Milwaukee’s alone, and more than a quarter of the debt is shared by the state’s five biggest cities, the report says.
But the fastest growth in debt, according to the report, occurred in the state’s smaller communities, in whose budgets SLFRF funding has had an outsized impact. As the Badger Institute reported over the summer, despite being flush with ARPA money, some cities are asking their voters to approve property tax increases.
Kovac isn’t waiting for Milwaukee to reach the cliff. In a memo to the city’s Finance and Personnel Committee in late October, he warned that SLFRF funding would be gone by the end of 2024, leaving shortfalls of at least $100 million in the 2025 and 2026 budget projections.
The city poured $68 million in revenue replacement money into its general fund freeing up $40 million to add to its pension reserve fund in 2022, Kovac said.
“Unless new revenue at that scale is acquired, significant budget cuts — forcing hundreds of layoffs across all departments — will be inevitable,” Kovac said in the memo.
Kovac’s warning was directed at state officials. No local government in the state has been as buffeted over the last decade by state aid cuts and curbs on property tax increases as Milwaukee, he says.
While the State of Wisconsin took advantage of Treasury’s revenue replacement plan to the tune of nearly $1.5 billion, the fiscal outlook for the state has never been better.
A Wisconsin Policy Forum report released this week called a projected revenue surplus of $6.8 billion over the July 2023 to June 2025 budget cycle “astounding.”
Kovac said he’s optimistic the Legislature will see fit to channel some of that surplus to Milwaukee for three reasons: Mayor Cavalier Johnson has established better relationships with Republican state legislators than his predecessor, Tom Barrett; the Republican majority in the Assembly and Senate would not want to see government services cut in 2024 when the city is hosting the Republican National Convention; and no state government body would countenance deep cuts in police and fire protection for the state’s biggest city.
“We’ve been very honest about it from Day One,” Kovac said. “We don’t want to do it, but what other choice will we have?”
South Dakota has some of the nation’s least burdensome occupational licensing requirements, a new report suggests.
The Institute of Justice recently released its third edition of License to Work: A National Study of Burdens from Occupational Licensing, providing an updated look at the effects of occupational licensing requirements and changes in America since 2017.
The report, which analyzes the impact occupational licensing has on workers in more than 100 low-income professions – ranked South Dakota as the 3rd “least widely and onerously licensed state” in the U.S.
Wyoming and Vermont were the only two states to rank higher than South Dakota in the study that evaluated all 50 states and the District of Columbia based on the burden they place on workers to get licensed.
These burdens include the cost it takes to obtain or maintain a certification or license, the average amount of “days lost” to education and experience, and the percentage of occupations that require a license.
South Dakota’s burden on workers is well below all of the major national average licensing metrics measured by the IOJ, the study finds.
Of the 102 surveyed occupations, South Dakota requires licensure for only 32 of the professions, equaling an estimated 31% of the studied fields. Nationally, the average was about 53%, which means that on average, other states are requiring licensure for 19 more professions than South Dakota.
The average cost and the amount of learning time required to get licensed in South Dakota are lower than that seen nationally, too. Despite having seen fee increases since 2017 for most licensed professions, South Dakotans can expect to pay an average of $244 in fees to get licensed, whereas the national average is $40 more at $284.
Additionally, The average amount of days spent on learning skills to obtain licensure in the Mount Rushmore State is 69 days fewer than the national average. According to IOJ, South Dakotans spend an average of 281 days on education and experience. The national average of “days lost” for educational purposes is 350.
South Dakota’s positive scoring was largely attributed to its net reductions in education and experience burdens since 2017, the study states. Four professions saw a decrease in the amount of time it takes to get certified, including barbers, cosmetologists, midwives and shampooers. Only three professions saw an increase in educational time requirements, including high school head sports coaches, pharmacy technicians and school bus drivers.
Trends for South Dakota’s licensing processes – with overall fees rising and education requirements shrinking since 2017 – are fairly on point with national trends.
“Across all the licenses present in both the second and third editions of License to Work, average fees rose 3.5% from 2017 to 2022, but average days lost fell by nearly 6%, by far the largest change across our five burden categories,” the study states. “Occupational licensing burdens remain widespread and burdensome, albeit a little less so than a few years ago.”
Twenty states recorded annual shortfalls in fiscal year 2020, when the coronavirus pandemic triggered a public health crisis, a two-month recession, and substantial volatility in states’ balance sheets. States can withstand periodic deficits, but long-running imbalances—such as those carried by nine states—can create an unsustainable fiscal situation by pushing off some past costs for operating government and providing services onto future taxpayers.
States are expected to balance their budgets every year. But that’s only part of the picture of how well revenue—composed predominantly of tax dollars and federal funds—matches spending across all state activities. A look beyond states’ budgets at their own financial reports provides a more comprehensive view of how public dollars are managed. In fiscal 2020, a historic plunge in tax revenue collections and a spike in spending demands were met with an initial influx of federal aid to combat the pandemic. The typical state’s total expenses and revenues grew faster than at any time since at least fiscal 2002, largely thanks to the unprecedented federal aid. But spending growth outpaced revenue growth in all but five states (Idaho, Maryland, Missouri, South Dakota, and Virginia). And 20 states recorded annual shortfalls—the most since 2010 and four times more than in fiscal 2019.
Despite the sudden increase in annual deficits, most states collected more than enough aggregate revenue to cover aggregate expenses over the long-term. But the nine states that had a 15-year deficit (New Jersey, Illinois, Connecticut, Hawaii, Massachusetts, Maryland, Kentucky, New York, and Delaware) —or a negative fiscal balance—carried forward deferred costs of past services, including debt and unfunded public employee retirement liabilities. Between 2006 and 2020, New Jersey accumulated the largest gap between its revenue and annual bills, taking in enough to cover just 91.9% of its expenses—the smallest percentage of any state. Meanwhile, Alaska collected 130.5%, yielding the largest surplus. The typical state’s revenue totaled 102.7% of its annual bills over the past 15 years.
Zooming out from a narrow focus on annual or biennial budgets—which may mask deficits as they allow for shifting the timing of when states receive cash or pay off bills to reach a balance—offers a big-picture look at whether state governments have lived within their means, or whether higher revenue or lower expenses may be necessary to bring a state into fiscal balance.
State highlights
States’ performance is analyzed from two perspectives: First, the 15-year lump sum of revenue relative to expenses, to uncover states’ ability to bring in sufficient funds to cover costs over the long term; and second, the year-by-year record for each state, to identify how often it experienced shortfalls.
Comparing states’ revenue—comprising much more than tax dollars—and expenses, in aggregate and year-by-year totals from fiscal 2006 to 2020, shows:
After New Jersey, Illinois had the largest deficit with aggregate revenue able to cover only 93.9% of aggregate expenses. They were the only two states with total shortfalls exceeding 5% of total expenses, and the only ones with annual deficits in each of the 15 years.
Additional states with symptoms of structural deficits were Connecticut (95.5%), Hawaii (96.4%), Massachusetts (96.5%), Maryland (98.7%), Kentucky (98.8%), New York (99.3%), and Delaware (99.7%). All but Delaware experienced deficits in at least 10 of the 15 years.
Alaska accumulated the largest 15-year surplus (130.5%). Although Alaska’s balance is high, revenue has been lower and the state has pulled back on spending compared with earlier in the decade.
Other states with the largest accumulated surpluses since fiscal 2006 were North Dakota (123.4%), Wyoming (122.1%), Utah (110.5%), and Montana (108.9%). Resource-rich states tend to acquire large surpluses in boom years that can help cushion shortfalls when oil or mining revenue decline.
Aside from Montana, which was the only state to end each year with a surplus, 10 recorded just one deficit over the 15 years examined: Idaho, Iowa, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia.
Year-by-year trends
Changes in the economy can move a state’s annual revenue and expenses out of balance, as can policy decisions such as tax or spending changes.
Looking at states’ balances year by year, shortfalls mainly occurred during and immediately after the Great Recession, suggesting that most states’ challenges were temporary. As the nation’s economic recovery took hold, a majority of states balanced their books and have kept them in the black. Still, 15 states in fiscal 2016 and 2017 failed to amass enough revenue to cover their annual expenses, as many slogged through the weakest two years of tax revenue growth—outside of a recession—in at least 30 years. (See the “State trends” tab.)
Only five states recorded annual shortfalls in fiscal 2019, the last full year before the COVID-19 recession, following seven states with deficits in fiscal 2018. In both years, nearly every state experienced tax revenue gains that drove widespread budget surpluses. However, it is unclear whether more states’ books achieved balance strictly because of stronger fiscal performance; accounting rules effective in 2018 changed how states estimated their unfunded retiree health care costs, lowering expenses for some, at least on paper. So fiscal 2018 and 2019 results are not directly comparable with those for previous years.
Following the volatile fiscal year 2020 that threw 20 states’ finances out of balance, states reaped the benefits of a strong tax revenue rebound and unprecedented levels of federal aid in fiscal 2021 and 2022. Although state spending also continued to grow at a rapid pace, widespread surpluses and record reserves suggest that annual balances strengthened. But looking ahead, high levels of uncertainty remain, as economic conditions weaken and the temporary impacts of federal stimulus fade.
Why fiscal balance matters
This fuller picture of states’ financial activities—capturing all but those for legally separate auxiliary organizations, such as economic development authorities or some universities—is drawn from their audited annual comprehensive financial reports. These reports attribute revenue to the year it is earned, regardless of when it is received, and expenses to the year incurred, even if some bills are deferred or left partially unpaid. This system of “accrual accounting” offers a different perspective of state finances than budgets, which generally track cash as it is received and paid out. Accrual accounting captures deficits that can be papered over in the state budget process, even when balance requirements are met, such as by accelerating certain tax collections or postponing payments to balance the books.
Accounting for funds as the financial reports do is like a family reconciling whether it earned enough income over 12 months not just to cover costs paid with cash but also to pay off credit card bills and stay current on car or home loan repayments, rather than pushing some charges off to the future.
A state whose annual income falls short generally turns to a mix of reserves, debt, and deferred payments on its obligations to get by.Conversely,when a state’s annual income surpasses expenses, the surplus can be directed toward nonrecurring purposes, including paying down obligations or bolstering reserves—or new or expanded services that create recurring bills.
Like families, states can withstand periodic deficits without endangering their fiscal health over the long run. In fact, all but one state (Montana) had one or more years in the red. But chronic shortfalls—as with New Jersey and Illinois each year since at least fiscal 2002—are one indication of a more serious structural deficit in which revenue will continue to fall short of spending absent policy changes. Without offsetting surpluses, long-running imbalances can create an unsustainable fiscal situation.
Annual Comprehensive Financial Reports broaden the scope of financial reporting beyond state budgets to capture all funds under control of the state government, including revenue and spending from related units, such as utilities and state lotteries. This produces a more comparable set of state-to-state data. All primary government operations were included in this analysis. “Component units,” such as economic development authorities or public universities, were excluded when states classified them separately.
Although all states file audited and nationally standardized financial reports, they are mostly used by credit rating agencies and other public finance analysts, while most state finance discussions center on budgets.
Examining aggregate revenue as a share of aggregate expenses—that is, all revenue and all expenses from fiscal 2006 to 2020, each adjusted for inflation—provides a long-term perspective that transcends temporary ups and downs. This approach allows surplus funds collected in flush years to balance out shortfalls in others.
Importantly, just because a state raised enough revenue over time to cover total expenses does not necessarily mean that it paid each bill. For example, a state might have brought in surpluses nearly every year while falling behind on annual contributions to its pension system and electing to use the money for other purposes. So this measure gauges states’ wherewithal but does not reconcile whether revenue was used to cover specific expenses. Collecting more revenue than expenses over the long term is a necessary but insufficient condition of fiscal balance. Further insights can be gleaned from examining states’ debt and long-term obligations.
A negative fiscal balance can be one indication of a structural deficit in a state, but there is no consensus on how to measure a circumstance in which revenue will continue to fall short of spending absent policy changes. Some states, for example, diagnose the existence of a structural deficit by comparing cash-based recurring general fund revenue to recurring expenditures under normal economic conditions. However, such data are not available on a 50-state basis.
Download the data to see individual states’ inflation-adjusted revenue and expenses for each fiscal year from 2006 to 2020. Visit Pew’s interactive resource Fiscal 50: State Trends and Analysis to sort and analyze data for other indicators of states’ fiscal health.
Delmarva Power’s proposed rate increase will not sail through Public Service Commission proceedings if the Office of Public Advocate has its say.The office represents customers in Public Service Commission rate cases.
“As customers are struggling to pay bills, Delmarva Power is seeking one of the largest electric distribution rate increases we have ever seen,” said Delaware Public Advocate Andrew Slater. “Simply put, reliability is extremely important but so, too, is affordability. No customer should have to choose between paying for their utility service or paying for other essential needs. It’s long past time costs are reined in just as many of their customers are trying to do.”
In past rate cases, regulators have been skeptical about further upgrades, citing costs that lead to only a minimal increase in reliability. A less favorable regulatory environment was a factor in Delmarva’s parent company PEPCO merging with the nation’s largest utility Exelon.
Delmarva has argued that upgrades are necessary since the need for more reliable service has grown for businesses and residential customers. Also, underground and above-ground utilities that were installed decades ago during previous building booms in the state are beginning to need more maintenance and upgrades. Also a factor is the growth of solar power, which is fed into the grid when customer use declines.
Under state law, the increase will become effective on a temporary basis on July 15, 2023, subject to refund, pending a final decision by the Delaware Public Service Commission.
Delmarva Power’s request for an increase in electric distribution rates comes after a $16.7 million increase approved by the Public Service Commission on August 5, 2021.
If approved as requested, Delmarva Power residential and residential electric space heating customers will experience an additional increase of 8.35 percent and 13.2 percent, respectively, in their electric distribution charges. A typical residential non-space heating customer using 844 kWh per month would see an additional increase of $10.41 per month to their total bill, and a residential space heating customer would see an additional increase of more than $11 per month to their total bill.
“As customers are struggling to pay bills, Delmarva Power is seeking one of the largest electric distribution rate increases we have ever seen,” said Delaware Public Advocate Andrew Slater. “Simply put, reliability is extremely important but so, too, is affordability. No customer should have to choose between paying for their utility service or paying for other essential needs. Its long past time costs are reined in just as many of their customers are trying to do.”
This requested distribution rate increase of roughly 25 percent follows a nearly 60 percent increase in natural gas supply rates over the past two years.
Delmarva Power’s reliability is in the top tier among utilities. Even so, Delmarva Power intends to spend $430 million on plant over the next three years. This represents an increase of 155% over Delmarva’s 2019 plant spending.
The Public Service Commission will hold a public comment session once a procedural schedule is established. Written comments may be sent by mail to Delaware Public Service Commission, Docket No. 22-0897, 861 Silver Lake Boulevard, Suite 100, Dover, DE 19904, or by e-mail to psc@delaware.gov, Attn: Docket No. 22-0897.
Introduction Alaska is one of 35 states still subject to health care certificate of need (CON) laws. These regulations require that certain proposed health care facilities or expansions receive permission from the Alaska Department of Health to begin operating. However, contrary to normal licensing procedures, approval is based not on the qualifications of the facility or its workers, but on the judgment of the government that the new or expanded facility is needed in the proposed area.
To make this decision, the Department of Health relies on input from existing local health care entities — the new or expanding organization’s competitors — rather than potential patients’ desire for another option.
Unsurprisingly, many health care facilities, such as hospitals, in Alaska are shuttered before they can even begin caring for patients. Just as Alaskans’ might doubt the prospects for a new Carl’s Jr. if the company required the approval of a nearby Burger King, new health care facilities struggle to convince existing facilities that they are needed.
The first legislators to enact CON laws in the country did so with the intent to save patients money and provide greater access to health care, but the policy failed by these metrics almost as soon as it was implemented. Subsequent enactment in most other states, including Alaska, was then compelled by the federal government. States that are now subject to CON laws suffer an average of five percent higher spending for physician care. Alaska, itself, holds the dubious distinction of having the highest health care spending in the country. Which is no wonder, as its health care costs are about double the national average
Alaska ranks 33rd on the list of states for hospital beds per capita, with 2.17 beds per 1,000 residents (see Figure 1). In contrast, South Dakota, which does not have CON laws, is at the top of the list, with 4.82 beds per 1,000 residents.
Alaska ranks number one among all 50 states in health care expenditures and 12th for the number of CON regulations. Alaska’s CON code book is 28 pages long. Although many factors contribute to the health care price dilemma, implementing CONs has only made the problem worse. The goal of increasing access to health care in Alaska has not been achieved, and health care prices have not decreased.
Many initial supporters have realized that CON laws have not produced the intended outcomes. Numerous medical professionals and government policymakers across the political spectrum have sought to reverse them, but these opponents have thus far had little success in Alaska. The Alaska Department of Health continues to insist that its oversight is necessary to ensure health care facilities are “planned properly.”
This report examines the initial justification given for CON laws and explores the inherent flaws in the logic behind them. It also provides some of the statistics and stories reinforcing the conclusion that the laws have, indeed, proven counterproductive. CON laws have neither decreased health care prices nor increased access to care. The report explains some reasons CON laws have not yet been repealed in Alaska despite the great toll they have taken. Finally, the text provides a path toward the reversal of what the American Medical Association (AMA) calls “a failed public policy.”
History and Initial Reasoning In 1964, officials in the state of New York expressed concern about rising hospital costs, and they postulated that the increase was caused by the over-proliferation of hospitals themselves. Their rationale was that, if not enough patients needed health care services to fill the beds, the facilities would distribute the high cost of overhead with inflated prices for each patient. These hefty charges would, in turn, price some patients out of access to health care. To combat the problem of health care costs and control access to hospitals, New York officials passed the Metcalf-McCloskey Act, which required anyone desiring to build a new hospital in the state to receive government permission.
As a New York Times article explained at the time of the act’s passage, “Anyone who could raise or borrow enough money was entitled to construct new hospital facilities without having to justify the public need for them. To correct and control this situation the Metcalf-McCloskey Act provided for review of proposed new hospital facilities by a state council and its affiliated regional agencies.”
A decade later, the Timesreported that New York City’s health care budget had actually increased by three and a half times since the passage of the law. That same year, the U.S. Congress inexplicably strong-armed all other states into adopting similar laws. The sweeping National Health Planning and Resources Development Act (NHPRD) of 1974 mandated states to implement their own CON laws as a condition of receiving federal Medicaid or Medicare funds. As in most other states (excluding Louisiana), the desire for federal funding compelled Alaska to implement its own CON legislation. And along with the rest of the country, Alaska saw its health care expenditures grow even more quickly (see Figure 2).
A Glaring Error The most glaring attribute of the CON “solution” to the problem of excess costs and decreased supply is its overt rejection of the principle of supply and demand. Standard economics observes that when the supply of a product or service increases, the cost decreases and vice versa.
Ideally, with numerous comparable options, customers needing non-emergency care choose the least-expensive option that meets their needs. This inevitability forces businesses — such as hospitals or doctors’ offices — to lower prices to competitive levels. So, if Hospital A charges significantly more than Hospital B, Hospital A must either lower its costs or go out of business.
If the latter occurs, Hospital B becomes a monopoly, leading to higher costs and lower access for everyone. As the Mercatus Center at George Mason University notes, “Economic theory holds that if supply shrinks and demand remains steady, prices will increase.” This equation renders the local health care industry more lucrative, with customers exceeding the capacity of providers, which attracts competitors to fill the needs of the most underserved areas, which competition, in turn, drives prices back down.
But prices only decrease — and access only increases — if competitors are allowed to operate. Unfortunately, in Alaska, due in part because of CON laws, citizens do not have numerous comparable care options and care facilities have few incentives to lower their prices.
The Original CON Flaw Despite the obvious faults in the logic, proponents of CON laws justify government interference by insisting that health care was too important to entrust to basic economic principles. “The vital need for healthcare services requires that such services always be available to the community, and not be subject to the typical ebb and flow of a free market,” insists one trio of advocates. However, the architects of CON laws have never explained why hospital proprietors would, uniquely among enterprises, mis-invest, why consumers would inexplicably pay higher prices if they did, or why competitors would fail to seize the opportunity and fill the void in a sparse (and lucrative) marketplace.
Perhaps the lack of explanation indicates that none of these outcomes is likely. Although CON laws themselves are relatively obscure, an even lesser-known fact exists hidden in their history, and it shows errant logic right from the beginning: The reasoning behind CON laws was based not on the principles of a free market, but on the imperative for a market controlled by the government.
Because hospitals were built and funded largely with tax dollars, the health care administrators responsible for allocating that money predictably spent more freely than they would have were they business owners risking their own resources. With a virtual blank check and no personal stake in the business, they had no incentive to spend wisely.
The NHPRD of 1974 even states, “The massive infusion of Federal funds into the existing health care system has contributed to inflationary increases in the cost of health care and failed to produce an adequate supply or distribution of health resources, and consequently has not made possible equal access for everyone to such resources.”
As former Federal Trade Commissioner (FTC) Maureen K. Ohlhausen put it, “Proponents viewed state intervention as a necessary check on a perceived market failure created by the existing reimbursement structure.”
In other words, the impetus for CON laws derived from a problematic situation that government caused, and the legislators’ solution was more government involvement. Again, the distance between their actions and any personal risk allowed the laws’ drafters to base the policy on concepts that economist Dr. Matthew Mitchell stated, “wouldn’t pass muster in Econ 101 class.”
Repeal By 1982, less than a decade after enacting the NHPRD, the federal government was already concerned that it had made a mistake. Legislators from all sides agreed it should be repealed, and in 1986, a bipartisan majority of Congress decided to abolish the CON mandate. Rep. Roy Roland (D-Ga.), himself a physician, recommended that Congress go further, saying, “It’s now time to abolish it throughout the nation.”
The AMA, an early proponent of the law, also withdrew its support, and a 2004 joint study by the FTC and Department of Justice (DOJ) likewise found that “such programs are not successful in containing health care costs, and they pose serious anticompetitive risks that usually outweigh their purported economic benefits.” The National Conference for State Legislators (NCSL) created a comprehensive summary of CON laws’ history and concluded that “highly concentrated hospitals and other health care facilities may charge more for health services, leading to an overall increase in health care spending.”
Despite the complete reversal of both experts and the federal government itself, the legislatures of 35 states — including Alaska — have thus far declined to take their advice, as shown in the number of states with CON laws in Figure 3.
Statistics Although the rationale behind CON laws was enough for analysts to doubt their effectiveness, their actual results leave little doubt that they have had a negative effect. Consider just a few relevant numbers comparing the remaining 35 CON states to the 15 that have permanently withdrawn them:
Even after controlling for other factors, states with any CON laws have almost 100 fewer hospital beds per 100,000 residents.
States with CON laws that specifically target hospital bed numbers fare even worse, with 131 fewer hospital beds per 100,000 residents.
CON states have approximately half of the number of magnetic resonance imaging (MRI) machines per resident.
CON areas have an average of 14% fewer total ambulatory surgical centers.
States with CON rules have lower numbers of hospice care facilities, dialysis clinics, and ambulatory surgery centers (ASCs) per capita.
Cost per service is higher in CON states, with any lower overall cost per capita attributable to lower access to care and the resulting reluctance of the population to seek medical help.
CON laws increase overall health care spending by 3.1% and Medicare spending by 6.9%.
When states repeal CON laws, they see a 4% drop in health expenditures over five years.
Of the 10 states with the lowest life expectancies, all but one have CON laws, and many have some of the most restrictive ones in the country.
Of the 15 states that have repealed their CON regulations, all have seen a reduction in health care costs and hospital readmissions, with no decrease in charitable care.
Real Consequences A deeper look at the situation reveals the human toll behind the numbers:
A premature infant died at a hospital in Salem, Virginia, after the hospital was prevented from adding a neonatal intensive care unit (NICU) due to competition objections from another neonatal hospital. (This tragedy did not result in any change.)
CON laws in Michigan limited cancer patients’ access to lifesaving chimeric antigen receptor (CAR) T-cell therapy, based on resistance from an existing health company that did not want the competition.
In Kentucky, new home health agencies are allowed in only six of the state’s 120 counties because of the lobbying efforts of $2 billion Baptist Health, which has its own home health agency.
Med Center in Kentucky, which has a monopoly on emergency medical services (EMS), has prevented any new ambulance companies from opening, despite a life-threatening shortage.
In Nebraska, aides who can take patients to the grocery store for food cannot legally take them to the pharmacy within the very same store because of ambulatory CON laws.
CON laws prevented Jay Singleton, a North Carolina ophthalmologist, from opening a reasonably priced outpatient surgery facility, forcing him to perform surgeries at the drastically inflated hospital cost.
Hope Women’s Cancer Center in North Carolina was forbidden from purchasing its own MRI scanner because it was deemed unnecessary.
Alaska’s Unique Need One justification for Alaska’s CON laws focuses on the need for better health care access and prices in rural and disadvantaged communities, which is particularly relevant in this unique state. However, for the reasons discussed above, the legislation has rendered care even less available to and more expensive for these very communities.
Writing about health care for The Atlantic, Vann Newkirk notes that Alaskans are “more likely to live in remote areas and more likely to be people of color than those in the continental United States. … Alaska is a unique state, and its combination of naturally high costs, rurality, and remoteness is not replicated anywhere in the continental United States.”
Alaska is geographically more than twice the size of Texas, yet Texas has 83 times more people per square mile. Even under ideal circumstances, Alaskans are naturally going to suffer unusual burdens to reach health care facilities. When those challenges are compounded with the fact that they have fewer than half the number of hospital beds per capita than some other states, the deficit and the danger increase dramatically.
Alaska also has a far higher cost of living than most other states, meaning that each dollar earned must stretch more. Per-person health care expenditures in the state are already more than $2,000 above the national average. The need to lower prices and harness market forces is therefore even more desperate.
A Note About COVID Many states with CON laws have been rethinking their position since the COVID-19 pandemic. Not only did CON states already have fewer resources at the start of the emergency, but increased red tape prevented them from opening and stocking facilities quickly enough to adjust to the patient influx. Dr. Anne Zink, Alaska’s chief medical officer, admitted, “Our hospitals have been and continue to be incredibly stressed. There is not capacity in the hospitals to care for both COVID and non-COVID patients on a regular basis.”
In a clear admission of the root of the problem, 24 CON states — including Alaska — temporarilylifted some of these mandates during the height of the pandemic. One study estimates that states with high hospital bed utilization saved 100 lives per 100,000 residents, for all causes of death, just by lifting CON regulations.
The provisional move gave rise to some hope that Alaska would finally move to a full repeal, but despite the apparent shift during the COVID-19 pandemic, Alaska’s official law has not changed. COVID-19 provided a stark lesson in the deadliness of these rules, and Alaska policymakers would be remiss if they swept this experience under the rug and returned to business as usual.
The Potential Effect of CON Repeal in Alaska What would happen if Alaska abolished its entire CON code? The Mercatus Center has calculated some of the likely effects:
The average Alaskan would save $294 per year on overall health care spending.
MRI services would increase by 2,137, from 5,880 to 8,017.
The need to travel lengthy distances for MRIs would decrease by 5.5%.
Computerized tomography (CT) scans would increase by 4,201, from 6,160 to 10,361.
The need to travel lengthy distances for CT scans would decrease by 3.6%.
Post-surgery complications would decrease by 5.2%.
The number of hospitals could increase from 25 to 35.
The number of rural hospitals could increase from 17 to 24.
Why the Resistance Continues Despite the noticeably increased pressure of the past several years, incumbent health care companies continue to resist the idea of abolishing CON laws. Owners and administrators of existing companies reap the financial benefits of these laws without facing the chaos they cause. The people profiting most by admitting as many patients as possible are rarely the floor workers rushing to save those patients’ lives.
Just as health care planners working for hospitals initially applauded the introduction of CON laws, those in the industry are zealous to keep them in place. A brief look at the opponents of Alaska’s 2019 SB 1, which would have repealed Alaska’s CON statutes, reveals the prevention of competition to be a blatant motivation:
Alaska Radiology Associates worried that it would not recoup a $10 million technology investment if new imaging centers were allowed to open.
The Alaska Nurses’ Association feared that new facilities would “siphon off the revenue-generating services.”
Imaging Associates complained that the removal of CON laws would force the organization to compete with facilities it considered inferior.
Providence Health and Services lamented that “boutique facilities will work to increase their customer base” — in other words, that they would lure away Providence’s customers.
Even more shocking is that a CON, itself, is so valuable. Businesses sometimes sell them off as assets during such processes as bankruptcy. A successfully acquired CON is money in the pocket of the bearer.
A Word of Caution Although hostility to CON laws seems to be increasing as more people become aware of their existence, opponents should exercise prudence when deciding on a different path forward. Policymakers must remember that a government program began the cost problem and a government program seeking to solve the first problem made it worse.
Health care as an issue elicits strong emotions, and with health care prices skyrocketing, the understandable impulse is often to do something. Human beings tend to feel that doing anything is better than doing nothing. But as even this truncated history of CON laws has shown, wrong-headed or short-sighted policies can always make a situation worse.
A Path Forward What, then, are some judicious ways Alaska can repeal its CON laws without creating more chaos? Some states have chosen to “sunset” these laws by designating future dates at which they expire, allowing the system to prepare for the new legislative landscape over time. Pennsylvania is an example of a state that has accomplished this transition by giving all facilities and treatments previously covered by CONs time to adjust to a new landscape.
Another variation of this idea involves phasing out aspects of a state’s laws one at a time, as states such as Florida and Georgia have done. Alaska has 19 health care products and facilities, from MRI scanners to neonatal intensive care units, that require certificates of need. If removing all of them at once would prove problematic for facilities, removing a few at a time from the list may allow an easier transition.
On the other hand, states have the option of simply repealing their CON laws all at once, remembering that patients have suffered and even died from the lack of care they have caused. When it comes to repeal in Alaska, faster may be better. Eleven states abolished all CON mandates by 1990, and the sky did not fall in any of them.
Whichever path Alaska chooses the rollback of this “failed experiment” can only be an improvement. Certificate of need laws have continually proven to serve the needs of corporations rather than communities, yet Alaskan policymakers have carried on for 40 years with detrimental laws that are no longer mandated — or even recommended — by the federal government. Policymakers have had ample evidence and opportunity to move forward, and it is high time they do so.
