What’s New

One Program is A Quarter of Delaware’s Budget!

Delaware’s budget has some glaring issues that lawmakers continue to ignore: unfunded pension benefits, an anemic Rainy Day Fund, and the ballooning cost of Medicaid. In light of COVID-19 and the recent spike in healthcare demand it created, Medicaid may be the issue lawmakers need to tackle first.

Delaware’s Medicaid problem started before COVID: according to the Federal Bureau of Labor Statistics, the cost of healthcare has been rising at a pace 5.2% per year. This is concerning as it is higher than the 1.4% inflation increase over recent years. Delaware’s spending on healthcare for Fiscal Year 2021 has been estimated at nearly 40% of the state’s budget.

This is a dramatic increase from the historic 17% that Medicaid used to claim of Delaware’s budget. Currently, 59% of Delaware’s Medicaid program comes from the federal government, which is scheduled to decline slightly in the near future.

Since its start in 1965, Medicaid funding has been a joint state and federal effort. The federal government creates the ground rules for state participation in the program in exchange for large subsidies to the states. Before the Affordable Care Act (ACA), states received a “match rate” based on states’ per capita income, where higher-income states had a 50% match rate, and lower-income states received higher percentages. Each state then funds the difference with general state revenues and taxes on health care providers.

The ACA’s Medicaid expansion covered newly eligible adults with 100% federal funding from 2014 through 2016, but was reduced to 95% in 2017, 94% in 2018, 93% in 2019, and 90% thereafter. The ACA essentially duped states into expanding their Medicaid programs: the initial “free money” prompted 30 states, including Delaware, to take the deal.

This has wrecked state budgets.

The Associated Press says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment crushed estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. The additional enrollees equal additional costs.

Rhode Island has one-quarter of its population on Medicaid, and the program consumes roughly 30% of all state spending. To fix this growing problem, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange. Delaware’s Medicaid burden is even higher at almost 50%: so what will that mean for taxes here?

States increased their FY 2015 spending by the biggest margin in more than 20 years, due to huge leaps in Medicaid spending under the first full year of the ACA. The national cost of the $500 billion program is expected to rise to $890 billion by 2024.

Just like many other areas, more money doesn’t mean better outcomes. Around 55% of doctors in major metropolitan areas refuse to take new Medicaid patients and Medicaid enrollees who do find a way to see a doctor typically experience outcomes worse than those under private insurance: more in-hospital deaths, more complications from surgery, worse post treatment survival rates, and longer hospital stays than similar patients with private insurance. Often the only place a Medicaid enrollee currently can get healthcare is in an emergency room or hospital, both of which are very expensive to the system.

The answer that will seem the most logical to Delaware lawmakers will be to increase taxes, but this is an unsustainable model. As the cost grows, so will taxes—for as long as it continues to expand, which may be indefinite without reform.

A better answer to this problem is to repeal Delaware’s outdated and harmful Certificate-of-Need laws, also known as the Delaware Health Resource Board. This entity drives up costs and limits access to care. Without this in place, Delaware could save $270 per capita in healthcare costs and could add 5 more hospitals to serve its residents. With cheaper and more accessible healthcare, there may be another option available for some Medicaid enrollees, and some of Delaware’s budget that could instead go towards other necessary programs, or even result in lower taxes on residents who are already seeing increased taxes with a poor taxpayer return on investment.

The time is now to address our ballooning Medicaid issue.

The best budget fix? Less spending.

Delaware’s Stimulus Sugar High

The Governor’s budget kicks the can

Governor Carney announced his proposed Fiscal Year (FY) 2022 budget of $4.7 billion last week, a 3.5% increase from FY 2021. Although this meets the Delaware Economic and Financial Advisory Council (DEFAC) benchmark and replenishes reserve funds used during the pandemic, it also continues to kick the can down the road on major items.

The current budget proposal continues the trend of prioritizing spending increases, pay increases, and several massive one-time spending projects, instead of addressing long standing issues like a comparatively small Rainy Day Fund, unfunded pension obligations, and a ballooning health care budget.

Delaware’s percentage of its budget in Rainy Day Funds is less than 31 other states, resulting in only 20 days of operation on reserve funding. Delaware’s Rainy Day Fund allocations have been below the 50 state median since 2017. The COVID-19 pandemic and other recent state budget crises in 2017 and 2008 should push us to do more to build up these reserves.

Without the CARES Act federal assistance, which was drastically out of proportion to the state’s direct COVID-related expenses, our Rainy Day Funds would have only lasted us for 6% of the Governor’s State of Emergency that has been in place for over 300 days. When the next revenue crisis comes, Delaware may be forced to go back to bad practices like raising taxes to make up the difference, since our reserves are anemic.

Even more concerning is the state’s $1.9 billion in unfunded pension benefits, which have been largely ignored for years. This total is massive: for perspective, our pension debt is more than a quarter of the state’s annual budget. Our pension crisis is looming, and lawmakers have continued to turn a blind eye as they allocate surpluses to pet projects.

The responsible thing to do with any surplus at this point is put it towards paying down this debt. Last year’s surplus of $200 million would cover 10% of the state’s pension debt, and only 1.7% of the overall state debt of $12 billion.

If the legislature is forced to pay out its obligations at some point and turns to the taxpayer, each Delaware taxpayer would need to contribute $24,000 in order to fix the financial crisis. This is why Truth in Accounting’s audit of Delaware’s financial situation resulted in an F grade, because we are failing our residents and future.

Perhaps the biggest and most visible concern that we continue to kick down the road is Delaware’s unsustainable health care costs. For a long time, Medicaid was approximately 17% of the state’s budget, but in recent years has risen to over 25% of the budget.

For now, over half of Delaware’s Medicaid program comes from the federal government, but that money is expected to shrink in the future, placing the burden on the state. Delaware’s health care budget is already one of the highest per capita in the nation, and cannot sustain any more growth.

Delaware leaders must look to alternatives to our current system, especially since Delaware’s health outcomes are extremely poor compared to other states, despite the massive spending. Taking steps like eliminating the Delaware Health Resources Board, which raises costs and limits access to care, would be a step in the right direction to allow for a better system.

As we move into Delaware’s budget hearings throughout the month of February, it is critical for the Joint Finance Committee (JFC) members to stop kicking the can down the road. With the cushion of federal money and a resulting surplus, now is the time to address our budgetary concerns that could cripple us in the near future.

Minimum Wage: It’s not ‘Now or Never’

A draft of a bill to raise the minimum wage to $15 an hour by 2026—which would amount to a 61.6% increase—has been drafted and circulated for co-sponsorship. In light of a potential federal $15 minimum wage looming ahead, let’s look at the impact this would have.

A minimum wage increase of only $1 an hour can cost small businesses tens of thousands of dollars in additional payroll costs each year. This bill would force businesses let employees go if and when the minimum wage rises in their state, and prevent them from hiring new workers and expanding their business.

More than 163,000 Delaware workers have filed for unemployment assistance in the wake of the pandemic, with no sign of things returning to normal anytime soon. The minimum wage increase at this time would only drive more unemployment as Delaware businesses would be forced to lay off workers.

Less workers means less money circulated in the economy, less tax revenue, and less overall growth. Increased unemployment also contributes to domestic violence, mental health issues, obesity, and more. This should not only be seen as an economic issue, but a health concern as well.

Feel good policy isn’t always good. In this case, it hurts the very people it claims to help: low-wage and low-skill workers, disabled workers, former inmates, and more. These workers rely on low-skill and low-wage jobs that will now go to more experienced and attractive candidates as businesses will be looking to get what they are paying for in an employee.

Anyone who has studied basic economics can explain the price floor mechanism that is minimum wage, and how it directly results in increased unemployment and inflation. Prices will rise and goods will become too expensive for most, and the new “livable wage” will no longer be livable. In 5 years, will we be confronted with another government mandated market shift that will warp buying power and job security?

It doesn’t stop there. Small business cannot afford the same minimum wage increase that major corporations like McDonald’s and Amazon have already enacted internally. As big companies shift multi-billion dollar revenues around to account for the higher wages, small businesses are left scrambling.

The Delaware restaurant industry has had a particularly tough time during the pandemic, and would be crushed by a mandate like a minimum wage increase for at least a few years. It took the First State six years to recover from the 2008 recession. Despite the numbers being far worse than twelve years ago, the new minimum wage would start in just one year. Our small businesses and low-skill and low-income workers would have no chance.

It is interesting that the same people who want to stop the growth of these mega corporations also support a measure that would directly benefit them and hurt their competition. Rather than address the causes of these high living costs, proponents of $15 minimum wage want businesses to bear the cost of the problem.

Make no mistake, the very people pushing for $15 understand the consequences this mandate presents. When signing California’s $15 minimum wage into law, California Governor Jerry Brown said that “Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense.”

The unintended consequences of raising the minimum wage have already been seen in New York, San Francisco, and Illinois. In San Francisco and New York, the restaurant industry has been hit especially hard by the measure, with many businesses raising prices (and losing customers), cutting hours, reducing staff, and some even filing for bankruptcy. When New York City’s minimum wage was raised to $15 per hour, there was an overall decline in restaurant workers, despite total employment increasing by more than 163,000 workers.

Owners tried raising menu prices and adding an extra surcharge to customers’ bills, but restaurants were no longer profitable. Many industries will face the same problem and their businesses will reduce worker hours or the number of workers, scale-back production, turn to automation, or shut down. Businesses want to pay their workers more, but government-mandated increases in wages hurt employment and the overall economy.

Delaware may not have a choice in the matter if the federal mandate passes. However, if that does not happen and the bill comes forward for a vote this session, Delaware lawmakers can either look at the evidence and decide to help Delaware workers and businesses, or vote based on rhetoric and make matters worse. shouldn’t join just to feel good. Increasing the minimum wage in the midst of a pandemic that crippled the workforce and businesses alike is not in the best interest of anyone but their own re-election.