Fiscal Roundtable Final Report, Providence Meeting

This report summarizes the meeting of the Fiscal Affairs Roundtable at the 2010 CSG National Conference in Providence, Rhode Island.  Issues discussed include a fiscal outlook for 2011, unemployment insurance, public pensions, and federal financial reform.

Capitol Ideas Today:  "States Continue to Face Troubles Despite 'Vulnerable Recovery'"

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THE COUNCIL OF STATE GOVERNMENTS

2010 NATIONAL CONFERENCE
FISCAL BREAKOUT SESSION

10:00 a.m. – 11:30 a.m.
Sunday, December 5, 2010
Rhode Island Convention Center
Providence, Rhode Island

MEETING SUMMARY

Presiding
Nancy Kopp, State Treasurer, Maryland; Co-Chair Financial Services Working Group (FSWG)

Business Session

FSWG Co-Chair Nancy Kopp, Maryland, began the session by providing introductory remarks on the contents and format of the session.  She indicated that this fiscal breakout session would emphasize discussion of fiscal issues and challenges that will confront states in 2011.  While the resource experts on the selected topics would lead off with brief remarks on their issue areas, the goal of the session would be to spur discussion and dialogue on some of the strategies and solutions that have proven effective in dealing with these thorny fiscal challenges.

Sharing Capitol Ideas Roundtable: 2011  Fiscal and Economic Preview

  1. Economy: Peter Marino, Fiscal Advisor, Rhode Island Senate

Mr. Marino opened his presentation by noting that, while the economy was picking up speed in 2010, the recovery was still tenuous.  In fact, he noted, economists had moderated their forecasts for the year, particularly for the second half of 2010 on account of the uncertainty related to Europe and the housing sector in the United States.  Additional areas of concern in the United States involved the lack of clarity on the commercial real estate sector and the sluggish employment picture.  While mass layoffs were largely over, employers were still extremely hesitant about engaging in new hiring and investing in new capital projects.  He estimated that the nation’s employment picture will not begin to show significant signs of improvement until 2013.  At the state level, Mr. Marino indicated that states will continue to face budget shortfalls in 2011 and in 2012, though at a reduced rate compared to 2009 and 2010.  Such issues as public pensions, unemployment insurance, property taxes, transportation and an aging population will continue to roil many states.  On the positive side, he asserted that American household debt had declined, a favorable development compared to five years ago.  He also noted that the Federal Reserve continues to be aggressive in ensuring the growth of the economy by deploying the monetary tools at its disposal.

2.  Public Pensions: David C. Craik, Pension Administrator, Office of Pensions, Delaware

Administrator Craik opened his remarks by noting that public pensions are an expenditure category complicating the fiscal situation of almost every state in the country.  In fact, the public pension situation across the country was quite dire, to the extent that about half of the states in the country enacted benefit changes in 2010, often reducing benefits, mostly for new hires.  He noted that in three states (Colorado, Minnesota and South Dakota), these benefit reductions were extended to even include current retirees.

He added that the dismal condition of the national public pension position was amply demonstrated by a report released by the Pew Center on the States earlier this year.  The report established that there was a $1 trillion gap between what states have promised to pay retirees and the money they have set aside to cover those costs.  Delaware, Administrator Craik noted, due to the proactive efforts of both executive and legislative branch policymakers over a number of years, secured a ranking of “solid performer” in this Pew report.  Specifically, he added, the report demonstrated that the state had funded 98 percent of its accrued liabilities, its unfunded liability as a percentage of covered payroll was an impressive 7 percent and the state’s 5-year average of funding actuarially required contributions was at 94 percent.  Beyond the conclusions of the report, the latest figures for the Delaware public pension plan cited by Administrator Craik indicated that it was 96 percent fully-funded, a ranking even higher than the one recorded in the Pew report from earlier this year.

According to Administrator Craik, notwithstanding the current stellar record of the Delaware public pension plan, the state has continued to focus on enhancing the fiscal position of the plan.  In his 2010 State of the State Address, Delaware Governor Jack Markell called for reduced pension benefits for new hires.  This resulted in a series of measures this year that followed up on this call by the governor.  For instance, there is no automatic cost-of-living-allowance increase for retirees. In addition, the contribution rate of current employees towards the retirement plan was increased.  The minimum retirement age for employees also was increased and employees are now required to have worked a greater number of years to qualify for healthcare benefits during retirement.

In closing, Administrator Craik surmised that an increasing number of states will work on trimming their pension and retiree healthcare costs in the coming year with employees being forced to bear a greater portion of these overall retirement costs.

3.  Federal Financial Reforms and the States: Representative Bob Damron, Kentucky

Representative Damron noted that he had just concluded his term as president of the National Conference of Insurance Legislators (NCOIL) and that during his presidency, he, NCOIL officers, legislative members and staff had devoted a great deal of time assessing and responding to the potential impact of the federal financial reforms on states.  For a very long time, Representative Damron asserted, state officials had done an admirable job regulating the insurance industry in their states.  NCOIL and several other organizations had been very forceful in advocating that states continue this approach of regulating the industry within their borders.  He added that during the discussions NCOIL held with members of Congress and Congressional staff in the lead-up to the enactment of the new federal financial laws, NCOIL received assurances that this state oversight and scrutiny would not be diluted.  Yet, given the tremendous pressure brought to bear on Congress by insurance companies for a single, federal entity to regulate the entire insurance industry at the expense of state regulators, Congress capitulated to some of these demands.  Consequently, he noted, the new federal financial regulations transgress into state areas of scrutiny and state legislators should stave off further attempts to “federalize” the regulation of the insurance industry within their jurisdictions.  This state role, he added, not only generates revenue for states but also ensures that states maintain actual oversight and vigilance over the operation of insurance activities.

Then, Representative Damron spoke briefly about the Surplus Lines Insurance Multi-State Compliance Compact (SLIMpact), an area where state legislative action is needed urgently.  This compact calls for establishing a governing commission to establish an allocation formula to help states share surplus lines’ premium tax dollars.  In addition, Representative Damron noted that policy resolutions would be presented at both The Council of State Governments and the National Conference of State Legislatures (NCSL) meetings in December 2010 that will call on Congress to consider providing state legislatures with a one-year extension (until July 2012) to enact the necessary SLIMPact legislation.  The goal, he indicated, was to enable states to establish uniform payment methods and reporting requirements, set-up a single policyholder notice to replace the various forms used across the country, create a single tax rate for surplus lines insurance, charge their own rates on multi-state risks and set uniform payment dates.

4.  Unemployment Insurance (UI):  Commissioner Laura A. Fortman, Department of Labor, Maine

Commissioner Fortman indicated that by the mid-1990s, Maine’s unemployment system was “broken” and there was widespread consensus across the state that reform was urgently needed.  As a result, in the late 1990s, a bipartisan panel of legislators, along with representatives of the business sector and labor advocates, was formed to explore restructuring the program.  She noted that that, while employers sought long-term stability in unemployment premium rates to prevent costly loans to the system, worker advocates sought “to ensure program integrity so that benefits would be there when workers needed it.”  All the parties involved concluded that mitigating the costs to businesses while protecting workers was critical.  The plan that emerged from the panel resulted in legislation in 1999 that created a new “array system” that established new tax rates alongside an increase in the taxable wage base from $7,000 to $12,000.

According to Commissioner Fortman, the array system divided employers into 20 categories based on their “reserve ratios.”  While the reserve ratio is computed as “taxes paid less benefits charged” divided by the employer’s average payroll for the prior three years, each category contains approximately 5 percent of the total of all taxable wages.  The reforms also resulted in the employer contribution rates shifting to the frequency an employer’s separated workers tapped the state’s unemployment insurance program.  Furthermore, she noted, rates were adjusted annually based on projections of how much revenue the state unemployment insurance program needed each year using such variables as recent benefit costs, unemployment patterns and economic projections for the coming year.  Commissioner Fortman indicated that the array system also was designed to accumulate fund reserves to pay 18 months of benefits at high unemployment levels with the state defining high unemployment as average benefit costs of the highest three benefit payout years over the past 20 years.  She added that this feature minimized the risk of the state having to borrow funds from the federal government.  As a result, Maine has not borrowed any funds from the federal government even during the high unemployment period of the Great Recession.

The reforms enacted in 1999 generated several advantages according to Commissioner Fortman, including the following:

  • Automatically keeping pace with current benefit costs and responding quickly and easily to fluctuating shifts in the economy;
  • Maintaining adequate fund reserves to pay increased benefits during tough economic times;
  • Reducing the need to borrow or dramatically increase taxes when businesses can least afford it.

In closing, Commissioner Fortman stated that the reforms were critical in ensuring that Maine had one of the better-funded programs in the country and in 2009, the program paid out $256 million in benefits to workers in regular unemployment insurance payments while employer contributions totaled $83 million.

Conclusion

Treasurer Kopp fielded a number of questions directed to the presenters and the ensuing discussion provided additional information on the dire fiscal situation challenging states and potential solutions.  She then encouraged FSWG members and others interested in issues impacting state finances to contact either her or CSG staff regarding future topics for discussion, thanked the panelists for participating and sharing their expertise and finally, with no more business up for discussion, Treasurer Kopp adjourned the meeting.