The Palmetto Insider

The blog of the South Carolina Policy Council

No, We’re not joking. Senate fails to repeal 1099 Tax. Again.

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In what is consistently becoming a tragic, comedy of errors, the Senate failed once again to repeal the 1099 provision of Obamacare.

In case you missed it, this little snafu in the legislation will require all businesses to file a 1099 form for anyone paid $600 or more. So if you’re a self-employed individual and you purchase a $900 macbook for work, you’ll be filing a 1099 to Apple and the government.

This is despite the fact that small business communities have strongly voiced their opposition to 1099 provision and that Democrats have acknowledged three weeks ago that the provision would curb jobs creation.

But thankfully (sort of), this measure has been widely criticized by members of both sides of the aisle. President Obama has even called for this provision’s removal. But still, rhetoric itself is not enough. Actions should prove louder than words.

Again, did anybody read the legislation? Shouldn’t this have been the kind of thing that was caught before the bill was passed in a measure of pomp-and-circumstance? If legislators had caught it before passing the legislation, it could have been stricken from the bill as easily as a student erases a mistake on his history test.

But now, we’re stuck having to trust the political establishment that is notorious for failing to act – even when there is consensus approval.

Proof in point was Monday’s vote – which actually passed 61-35, but needed 67 votes to become part of an unrelated food bill.

If you listen to senators discuss the matter, they’d have us put all our trust and faith in them to fix it before the measure takes effect in 2012. “We have plenty of time,” said Senate Finance Chair Max Baucus.

The 1099 measure will supposedly raise $17 billion over 10 years to help pay for Obamacare.

The fact that Democrats felt the need to use this measure as a way to drum up revenue for the healthcare bill is proof that they were really scraping at the bottom of the barrel to find funding for their massive, trillion dollar expansion of government control over healthcare. Perhaps, they think tax revenue is more important than jobs.

Written by Geoff Pallay

December 1, 2010 at 12:12 pm

Posted in Taxes

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S.C. State Budget: $182.188 Billion and Counting

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South Carolina’s FY10-2011 state budget is the largest in state history. At more than $21.149 billion, the state’s budget has increased about 44 percent over the last 10 fiscal years. Spending has been growing rapidly and has also consistently increased 9 out of the last 10 fiscal years.

Cumulatively, the state has spent $182.188 billion since FY2001. Here is the breakdown:

  • $57.087 billion in General Funds (31.34 percent)
  • $62.318 billion from Federal Funds (34.21 percent)
  • $62.782 billion in Other Funds (34.46 percent)

These numbers are fascinating for us budget geeks – in particular, the fact that offline fines/fees revenue that makes up Other Funds spending is the largest revenue source in the state budget. (For more on that, read this report.)

This year’s huge budget comes with a price: a $1 billion deficit for this upcoming year.

These cuts are going to have to be made, owing to a constitutional requirement (article 10, §7(a)) to balance the budget. But what is really needed is long-term reform.

Some of the necessary changes are not novel – such as implementing a budgetary cap (also known as a tax and expenditure limitation or TAL), redesigning the budget process through zero-based budgeting, scrutinizing governmental waste and abuse, and identifying governmental activities that could be outsourced to the private sector. We discuss many of these reforms in both the 2009 and 2010 Best/Worst guides.

Federal stimulus spending arising from the American Recovery and Reinvestment Act of 2009 (ARRA) is another concern – especially insofar as these federal dollars were used to balance a budget bloated by too much spending.

According to the S.C. Comptroller General ‘s Office, the state has an obligated total of $2.319 billion in stimulus funding, of which it has received $1.160 billion as of September 2010.

This means there is an additional $1.159 billion in obligated stimulus funding for the rest of 2010 and 2011. But with the majority of ARRA funds expected to end on Dec. 31st of 2010, much of the awarded, but as of yet unobligated, funding might not be realized coming into FY2011. (Funds that are awarded to states do not become obligated until they can provide a contract or promise to perform.) We’ll look more at this issue in a future blog.

The stimulus spending mentioned above also excludes money for local entities and direct funding to private sector firms. Build America Bonds (BABs), a federal subsidized loan program, is also part of the stimulus. As of September 30th 2010, 26 South Carolina local governmental entities and private companies had issued $753 million of bonds through BABs.   This program is also expected to end on December 31st of 2010.

No doubt, losing billions in federal stimulus funding is going to fuel a lot of complaints from lawmakers fearful of making targeted budget cuts. We’ll likely hear calls for tax increases as well. But amidst all this handwringing, remember that lawmakers have been overspending for the last decade. Cutting a billion from next year’s total budget won’t reverse this trend, but it’s a first step toward addressing the real problem of systemic high spending.

Written by Simon Wong

November 30, 2010 at 10:56 am

Posted in Budget

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Let Us be Thankful for Transparency

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There are a lot of things that we should be thankful for today.  So let’s give thanks for the transparency tools that we do have. More and more resources are being created to hold government accountable on the state and federal levels.

On the state level:

On the national level:

When it comes to holding government accountable, what sites or services are you thankful for this year?

Written by Chip

November 25, 2010 at 1:00 pm

Posted in Transparency

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Health Care Law Already Hitting Home for HSA Consumers

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Even as foes of Obamacare celebrate their recent victories at the polls, more and more of the regulations mandated by the federal health care takeover (otherwise known as the Patient Protection and Affordable Care Act) are hitting their start date, and the reality is setting in quickly – we are all going to be affected by this law, and most of us for the worse.

Take HSAs, for example, which we have previously extolled as a tool to bring down health care costs. HSAs provide greater cost-saving incentives to consumers, who may roll over unused health care dollars from year-to-year and even use remaining dollars for retirement. But Health Savings Accounts are being marginalized by the new healthcare law.

The way HSAs work is like this. Imagine if you had insurance with which to buy a new car – much like we have health insurance to cover health-related expenditures. Well, if the new car is covered by insurance – and you pay a hefty premium to have this insurance – you will likely want to maximize the “benefits” you receive. So does everyone else in the insurance program.  Eventually, your choice and the collective choice under this plan will eventually jack up the cost and the price of your “car purchase insurance”. So when the next insurance bill comes in, everyone is complaining that their “car purchase insurance” is ridiculously expensive.

In short, you’ll buy the most expensive new car your plan allows and it is not secret that there is a price hike. But if instead you have a “car HSA” plan, you might think to yourself: “Should I spend all of my allotted car dollars on this one purchase? Or should I save some of that money in case I want to buy a second car later – or if this first car breaks and I need a new one?”

Based on these incentives, consumers with HSAs tend to only use the health care they need. Instead of over-consuming health care (which sometimes happens with regular insurance plans), HSA consumers weigh the costs and benefits of their health care decisions.

Unfortunately, the utility of HSAs is quickly deteriorating. As of January 1, 2011, over-the-counter purchases will no longer be HSA eligible. Consumers who don’t want to pay out-of-pocket for these items (about 15,000 in total, according to Fox News) will need a doctor’s note.

As Max Borders writes in the Washington Examiner, we have lobbyists to thank for this stomach punch to consumers:

First, Big Pharma (drugs) and the AMA (doctors) were both mixed up with writing Obamacare. This was clear from the start, but the progressives looked the other way. So, an army of lobbyists made sure that if a bunch of people were going to be forced by the feds to buy health insurance, they’d want to get some goodies out of all these newly minted HSA holders. How could all those lobbyists find a way to divert all those new customers into more expensive drugs and make them to go to the doctor more? Take them out of the driver’s seat. It has nothing to do with primary care paternalism. This is good old fashioned rent-seeking at its finest.

Additionally, this is another one of the ways the government has proposed paying for Obamacare. Which in essence, makes it a tax increase.

Other mandates are also making HSAs less affordable.

  • Covering children: Several major health insurers have dropped child-only policies because of the intense mandates that have gone into effect.
  • HSAs must cover 60 percent of actuarial benefit: According to the Heritage Foundation, only the Health and Human Services Department Secretary Kathleen Sebelius can know whether HSAs are viable under this plan. Will contributions count? If not, then HSAs will “no longer be viable.” Why is that? Because the HSAs revenue/expense system functions in exactly the opposite manner of traditional health insurance products. In traditional health insurance plans, premiums are the major revenue stream and deductible and co/pay are supplementary to cover the medical expense. In HSAs, contribution from members (function similar as deductible) is the major revenue stream while premium serves as a supplementary to cover the cost.
  • Medical loss ratio (MLR): Obamacare has mandated the health insurance companies spend at least 80 percent (85 for bigger companies) on “your health care.” What this does is limit choice in the market, by forcing some companies out of business who don’t meet this 80 percent level. It will also discourage spending on fraud prevention, because that will not be counted in the 80 percent. So every dollar spent on fraud prevention hurts an insurance company’s ability to hit the 80 percent level. Fewer choices in the market means fewer HSA plans. Fewer HSA plans means more expensive HSA plans. Either way, it’s bad for consumers.

HSAs are still a viable option for state-based reform. The South Carolina General Assembly could create a better tax environment for consumers who choose these health plans.

One example of a bill that was already introduced is S 998 from last session, which never made it out of committee. This bill – sponsored by Sen. Mike Rose and Sen. Shane Martin — would have allowed a 100 percent tax deduction or HSA premiums and created a fast-track approval process for new HSA plans that have already been approved by other states. Both of these items would add up to more choices for consumers.

Another way the state could counteract federal burdens on HSAs would be to create state-level exemptions. For example, the federal government removed tax-exemption from over-the-counter purchases. But there’s nothing stopping the state legislature from enacting a state-level exemption for South Carolinians.

South Carolina has at times been at the forefront of HSA legislation. The damage done to HSA plans by Obamacare opens the door for more state-based reform.

Written by SCPC

November 24, 2010 at 12:47 pm

All Five South Carolina Retirement Funds Are Not Created Equal

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We have recently published a fact-sheet on 10 different ways to reform the S.C. Retirement Systems. The South Carolina Retirement Systems, with more than $12.052 billion unfunded liability reported by the state’s Budget and Control Board, has become one of the hot issues for the policymakers.

Note that the S.C. Retirement Systems consists of five major defined benefit pension systems:

  1. S.C. Retirement System (SCRS) – It is the most prominent pension plan. It accounts for about $10.964 billion out of the $12.052 billion unfunded liabilities.  Almost all state employees, such as teachers, state and municipal employees, fall under this category.
  2. The Police Officers Retirement System (PORS) – This accounts for about $955.819 million of unfunded liabilities.  Membership includes police officers, peace officers, firefighters, and magistrates. Probate judges and coroners may also elect to participate in PORS.
  3. Judges and Solicitors Retirement System (JSRS) – The JSRS system accounts for $75.083 million of unfunded liabilities. It covers all justices, almost all judges, circuit public defenders and all solicitors.
  4. National Guard Retirement System (NGRS) – There are $36.108 million of unfunded liabilities in the NGRS. The plan consists of all members of South Carolina National Guard.
  5. General Assembly Retirement System (GARS) – Members of the House and Senate are covered by this plan, which has $21.933 million of unfunded liabilities.

Neither all defined benefits pension plans are created with similar benefit packages nor do all plans have the same funded ratio, which ideally is 100 percent.

Not all funds are funded equal.

NGRS, in particular, is funded only at 32.6 percent (or 67.4 percent underfunded). In contrast, PORS is funded at 77.9 percent (22.1 percent underfunded).  SCRS, the largest of five pension plans, is funded at 69.3 percent (30.7 underfunded).

Historically, NGRS hasn’t been funded at a reasonable actuarial model. But that’s just one of the major reasons why NGRS is highly underfunded.

Another reason is that NGRS is the only plan that does not have any member contribution. As a result, the only way to get the plan fully funded is through employer contributions and governmental funding. Indeed, since FY2006, the General Assembly has given a cumulative $22.875 million of General Fund revenue to supplement the NGRS’s regular pension benefit expenses and administrative expenses.

Not all funds’ benefits are equally calculated

JSRS has the highest average unfunded liability per member ($229,612 per member). The second highest, GARS, is at $37,816 per member. SCRS, PORS and NGRS are at $24,236, $19,366 and $1,901 per member respectively.

There is a likely explanation for JSRS’s and GARS’s high unfunded liability per member. Both plans have more generous benefit packages than PORS and SCRS.

For example, retirees at JSRS are granted an allowance of 71.3 percent of the current active salary of the member’s position. In comparison, retirees at SCRS earn    1.82 percent of Average Final Compensation times years of credited services.

So in order for a SCRS retiree to earn comparable pension benefit as retiree from JSRS, the retiree at SCRS would have to work at least about 39 years of service (based on the calculation of 71.3 / 1.82).

Yet, judges and solicitors can earn the 71.3 percent pension payment with as low as only 15 years of service to a maximum of 25 years. If they work more than 25 years, then their pension benefit increase by another 2.67 percent for each additional year and can earn up to a maximum of 90 percent of the current active salary.

Similar could be said about pension benefits for the House of Representatives and Senators. Their benefit payment is 4.82 percent of earnable compensation times years of credited service. So this means House and Senate members can earn a pension benefit that is 2.64 times more than members of SCRS if both earn the same salary.

Next steps

As the state is deliberating the budget and spending crisis, perhaps one of the opportunities is to implement detailed and long-term solution reforms for the South Carolina Retirement Systems. The 10 reform proposals are good start.

One of them is the defined contribution plan.

Defined contribution plans give employees more control about their investment options, greater portability with their pension fund, option to make additional contributions out of their salary to the plan to capture the compound interest return and thus greater fund.

With greater control over their accounts, and more personal investment, the state will likely cut down on its massive unfunded liability. It’s at least a start.

Budget Crisis Long in Coming

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Despite all the rhetoric about budget cuts and employee furloughs, South Carolina’s FY10-2011 budget was the largest in state history. The total state budget was $21.149 billion. This includes: $8.268 billion in Federal Funds; $7.766 billion in Other Funds; and $5.115 billion in General Funds. That’s an increase of $500 million or 2.19 percent over last year. The increase comes mostly from increased fine and fee revenue and one-time federal stimulus dollars.

But this year’s budget increases are not an isolated phenomenon. Over the past 10 years:

  • The total state budget increased by 44.49 percent (FY2002 to FY2011).
  • The budget increased by 4.14 percent annually.
  • The budget increased every year, except one (FY2010).
  • In the five-year period (FY2003-FY2008) prior to the beginning of the current recession, the total budget increased 34.56 percent, going up by more than $5 billion.

According to the Mercatus Center, South Carolina’s state and local government spending relative to personal income is 26 percent – 5th highest in the country. In other words, local and state government spends 26 cents of every dollar earned by South Carolina’s people. Similarly, government spending accounts for 23 cents of every dollar of Gross State Product (GSP) – 4th highest in the country.

Debt is another serious problem. South Carolina government is carrying $40 billion in debt, including state, local, and school district debt, as well as unfunded liabilities on public employee pensions and post-retirement health benefits. State and local governmental outstanding debt accounts for 22 percent of GSP – again, 4th highest in the nation.

So we have high spending and high debt relative to income and GSP. What does that get us?

An unemployment rate of 11 percent – 6th highest in the nation (as of September 2010) and a median household income of $42,442, which is 42nd lowest in the nation (as of 2009). Our surrounding neighbors have unemployment rates of 9.6 percent (North Carolina), 8.9 percent (Alabama), 10 percent (Georgia), and 9.4 percent (Tennessee). A pretty uncompetitive situation for the Palmetto State.

It goes without saying that South Carolina is suffering from a budget and spending crisis – and it’s good to know governor-elect Haley recognizes this. But the crisis is not new. It comes from years of fiscal mismanagement and poor budgetary practices. None of these problems were addressed during the 2010 session. It’ll be interesting to see how legislators respond in 2011.

Written by SCPC

November 22, 2010 at 10:15 am

Federal Health Care Legislation: We Really Don’t Know What’s In It

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Everyone already knows the Patient Protection and Affordable Care Act, also known as Obamacare, is more than 2,000 pages long. (2,562 pages and 511,520 words when

both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act are combined, notes Michael Tanner.)

But what isn’t publicized much is that through July 31, 2010, there were already 3,833 new pages of regulations added to the Federal Register directly relating to the new law’s implementation.

That means that a bill that was signed into law on March 30, 2010, generated almost 4,000 pages of new regulations in four months. 1,000 pages a month – and counting.

Here are some examples:

1)      Medicare: Updated rules regarding Medicare payments to hospitals. This 95-page section pertains to the policies and price levels for hospitals seeking reimbursement for Medicare patients. So instead of focusing on providing high quality of care to patients, hospitals must devote significant resources to reading and understanding these new rules.

2)      Hospice care: This rule, among other things, updates payment rates and capitalization requirements for hospice and home health agencies. The rule is 106 pages long.

3)      Electronic medical records (EMR): Most doctors will likely tell you that EMR improves patient care. It cuts down on paperwork, and reduces the likelihood of errors (ever heard of a doctor with good handwriting?). But this rule adopts standards, specifications, and certification criteria for health care facilities to implement EMR in their facilities. In other words, 153 pages of new regulations and rules to facilitate a process that is supposed to reduce compliance costs and paperwork. Huh? On top of that, the rule adds new regulations and requirements for offices that already have EMR. These early adapters now need to obtain government certification in order to receive reimbursements for Medicare/Medicaid. But what if the EMR system they have is already working fine? Why force them to switch? This rule could also stifle market innovation in this area by locking in all health care facilities to the module that the government requires.

No doubt, this is just the start of literally entire libraries of rules that are going to dictate everything from how much health care providers charge to how many x-ray machines are found in each hospital.

And we wonder why lawyers love Obamacare.

Written by Geoff Pallay

November 19, 2010 at 7:47 am