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Local conservative group wildly over-inflates actual costs of NCAE’s policy priorities

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Last week, the John Locke Foundation attempted to tar the NCAE’s 2019 policy priorities [2] by claiming [3] they would cost $6 billion. The analysis, such as it is, betrays a fundamental misunderstanding of some of the biggest issues faced by North Carolina policymakers.

A more accurate estimate would put the NCAE’s policy priorities at about $1.2 billion per year.

The discrepancies mostly come down to John Locke’s estimates of three items:

  1. Expanding Medicaid to improve the health of our students and families
  2. Providing a five percent raise for all public school personnel
  3. Providing a five percent cost of living adjustment (COLA) for retirees

Expanding Medicaid to improve the health of our students and families

JLF estimates that expanding Medicaid will cost $219 million in FY 19-20 and $431 million in FY 20-21. These are indeed the approximate state share of costs for expanding Medicaid. But, under existing proposals, none of the costs will be borne by taxpayers.

The state share of the costs associated with Medicaid expansion would be funded through a combination of hospital assessments and taxes levied on Prepaid Health Plans (PHPs). The state would also benefit from substantial budget savings in state agency budgets.

Hospital assessments would generate nearly $216 million in FY 19-20 and $356 million in FY 20-21. These assessments are not likely to raise net costs for hospitals because the hospitals will benefit by serving more people and receiving reimbursement for those services from Medicaid. Medicaid expansion is predicted to be a net positive for hospitals because hospitals will be compensated for a greater proportion of care they provide.

Taxes on PHPs, the insurance companies contracted to manage the care of Medicaid recipients, would generate $3 million in revenue in FY 19-20 and $75 million in FY 20-21. Unlike health plans on the private insurance market, Medicaid PHPs cannot pass these costs along to patients by raising rates, as the rates they are paid are set by the state. Even then – similar to hospital assessments –the additional revenue that PHPs will gain from gaining new enrollees under Medicaid expansion would mitigate the costs of the tax.

Together, hospital assessments, and taxes on PHPs would cover the entire state share of Medicaid expansion.

In addition, state agencies would experience savings as a result of there being fewer uninsured individuals and more reimbursable services. These savings are estimated to total $31 million in FY 19-20 and $69 million in FY 20-21. The ultimate cost savings will likely be even higher, as these savings estimates do not include the benefits that would accrue from a healthier population with greater financial security.

On net, Medicaid expansion is anticipated to save the state almost $31 million in FY 19-20 and $69 million in FY 20-21, a far cry from the large costs estimated by JLF.

(For more information on this topic, please refer to the BTC Report Financing Health Care for North Carolinians in the Coverage Gap [4])

Providing a five percent raise for all public school personnel

JLF estimates that a five percent raise for public school personnel will cost $415 million per year. The estimate is based off of a document produced annually by the Department of Public Instruction (DPI) showing the cost of raising school employee salaries by one percent per year. The JLF analyst multiplies this estimate by five to reach his figure. This approach seems logical and straightforward, but it makes two fatal mistakes.

First, the estimate is double-counting the cost related to noncertified personnel. If their salaries were raised to $15 per hour, there’s no need to also raise their salaries by five percent.

Second, the JLF analyst is apparently not familiar with the intricacies of how the state funds raises for teachers. The estimates provided by DPI assume that all teachers will return to the classroom in the following year. But every year there is turnover. Experienced (more expensive) teachers are replaced by less-experienced (less expensive) teachers. The general rule of thumb relied upon by budget writers is that annual turnover reduces teacher costs by about the same amount of a one percent pay increase. Therefore, DPI’s estimated cost for increasing pay by one percent should be multiplied by four instead of five.

By correcting for these two errors, the estimated cost of a five percent raise for all public school personnel is closer to $280 million rather than $415 million.

Providing a five percent cost of living adjustment (COLA) for retirees

Here is where the biggest problem with the JLF estimate lies.

When the state provides a COLA to retirees, actuaries estimate the additional lifetime costs of providing the COLA. This is known as the unfunded liability. As explained on the State Treasurer’s website [5], the unfunded liability is amortized to be paid off in 12 equal installments over 12 years.

A five percent COLA creates an unfunded liability of $2.5 billion. Paying down this debt would require the General Assembly to appropriate $240 million per year over the next 12 years.

The JLF incorrectly adds the unfunded liability to the two years of payments the state would have to make to pay down that liability, saying (incorrectly) that the COLA would cost nearly $3 billion.

Debt can be confusing, so an example might help clarify things.

Imagine taking out a 12-year loan of $300,000 to buy a house and that paying off that loan will require payments of $25,000 per year. How much does that house cost? A reasonable person would say $300,000, or they might say that it costs $25,000 per year.

JLF would describe that house as costing $350,000: the lifetime cost of the debt, plus the first two years of debt payments. That is clearly wrong.

[6]Summing up

To reach a $6 billion estimate, JLF sums their estimated costs for FY 19-20 and FY 20-21, then – totally inappropriately – adds on the $2.5 billion unfunded liability associated with a five percent COLA for retirees.

With an annual cost of about $1.2 billion per year, the NCAE’s policy priorities are completely affordable. Tax cuts since 2013 – which have overwhelmingly benefited corporations and the wealthy – have drained $3.6 billion from state coffers. North Carolina’s funding effort – the amount it spends on schools relative to the size of the state’s economy – has fallen to 48th in the nation [7]. If North Carolina made just the average school funding effort of other states, school funding would be $3.6 billion higher than it is now.

NCAE and the thousands of teachers who marched in Raleigh on May 1 have presented a serious set of policy priorities that would strengthen our schools and materially improve the lives of our state’s children. A careful accounting of the costs shows that the policies are entirely affordable. To the extent that some might disagree with the NCAE’s policy agenda, let’s hope it’s not on the basis of misleading sources that overestimate the costs.

Kris Nordstrom is a senior policy analyst at the North Carolina Justice Center’s Education & Law Project.