Managing local government health care costs: The ambiguous incentives of federal health care reform

Recent local government and school district budget deliberations have honed in on deep and often contentious modifications to health care benefits. Many have asked how far local governments will go in reducing benefits now that they have been given greater flexibility to pare down employee health care costs without having to collectively bargain with most unions. These questions likely will continue and become more dynamic with the phasing in of the federal health care reform law.

In 2014, federal law will require all individuals to have health insurance, with new government-subsidized health care exchanges offering an alternative option for small businesses and individuals who are not eligible for Medicare, Medicaid or affordable employer coverage. States can allow large employers to participate in these exchanges in 2017.

How large employers, both public and private, will react to the federal health care reform law is a big unknown. Besides taking advantage of lower cost plans provided through exchanges, some speculate that employers may also consider dropping coverage altogether.

The wild card is a “play or pay” penalty imposed on large employers for not providing affordable employee health care coverage. Large public and private employers who fail to do so will be subject to a $2,000 annual penalty beginning in 2014 for each of their employees, provided that any of their employees have a household income low enough to qualify for a federal subsidy to help pay for coverage within an exchange. Employers offering coverage that pays less than 60% of expenses would face similar penalties, but only for those employees eligible for the federal subsidy. This applies to even seasonal employees that work full-time hours in any given month, a population that currently does not get health coverage in most local governments.

With many local governments paying annual premiums of $20,000 or more for family plans, and picking up more than 80% of plan costs, a $2,000 penalty would be a bargain. Consequently, some argue that many local governments will drop or significantly reduce employer-based coverage.

A recent Urban Institute report challenges this perspective, arguing that for any large employer such a shift would wrongly ignore market realities and the dynamics of worker preferences. While the Institute's report notes that exchanges could better suit some lower-income individuals because of the subsidies for which they are eligible, employers still need to maintain an edge over competitors to retain and attract highly skilled and higher paid employees. Those individuals would not receive subsidies and their share of the exchange plan costs would be approximately 30%, as compared to the typical 15% in employer-based plans.

The report also argues that market competition will force employers who decide to drop health insurance to fully cover the lost benefit with increased wages. On top of that, the employer would still face the $2,000 penalty for each worker.

Do these considerations hold true for local government employers in particular? One factor that has been downplayed is that local governments and their competitors will likely be pressured to contemplate significant changes to employee compensation. Consequently, the market pressure to maintain health care benefits in order to remain competitive may be diminished as all employers continue to recalibrate compensation. Nevertheless, a key question is how local governments will balance the reality of restricted resources and the need to preserve critical public services with their equally compelling need to attract and retain quality workers.

Assembling the parts

In a 2006 report on the City of Milwaukee’s economic development efforts, the Public Policy Forum concluded that “unlike the vast majority of its peer cities, the City of Milwaukee has neglected to sit down with stakeholders and map out an economic development plan. Absent a plan or guiding vision, one is left to conclude that the City has and will continue to engage in economic investments, no matter how worthy, in an ad-hoc fashion.”

Five years later, the economic development landscape in Milwaukee has changed dramatically. Privately-funded entities such as the Milwaukee 7 and Milwaukee Water Council have become prominent players on the economic development scene, suggesting a level of public-private teamwork that had been found lacking in 2006. Nevertheless, important questions remain regarding the precise roles and responsibilities of the various players in carrying out citywide economic development efforts and in formulating the city’s economic development vision.

In a new report released today - "Assembling the Parts: An examination of Milwaukee's economic development landscape" - the Forum attempts to address those questions.

The report commends City and private sector leaders for adding “strength and focus” to the community’s economic development efforts, citing city government’s successful efforts to spur revival in the Menomonee Valley, the ground-breaking work of business-led groups to build industry clusters and support entrepreneurship, and the bold plans of university leaders to establish world-class research institutions. The report also suggests, however, that while we’re assembling the right parts, we may be missing the blueprint needed to build a well-oiled machine.

Indeed, one of the report's key findings is the continuing lack of a true citywide strategic economic development plan that establishes clear economic development priorities, links those priorities to specific strategic objectives, measures each objective with performance indicators and benchmarks, and names the entities to be held accountable for each objective. It cites examples from other cities in which such planning is being used “to meaningfully enhance collaboration and coordination, create new tools, and foster accountability and innovation.”

The report concludes by stating that Milwaukee’s elected and business leaders “should be proud of their efforts to build an economic development infrastructure that has assembled many of the parts needed for success.” It asks, however, whether they now “have the patience, skill and camaraderie to transform those parts into a cohesive and strategically organized whole.”

The full report can be accessed here, and the media release here.

Income Inequality in Metro Milwaukee

The Occupy Wall Street demonstrations have sparked a public debate over income inequality that has spread across the nation and beyond. In Milwaukee, where the city’s poverty rate has ranked among the nation’s highest for several years, the issue of income inequality is a familiar one. Could it be, however, that the Milwaukee metropolitan area actually has slightly less income inequality than the U.S. as a whole, and if so, what does that mean?

A new report from the U.S. Census Bureau analyzes and ranks states, metro areas, and even neighborhoods in terms of how evenly income is divided among the population. The method used to rank each place, called the Gini measure, is a scale from zero to one in which a measure of zero means incomes are totally equal throughout a population, and a measure of one means 100% of that population’s income is concentrated in one household. Notably, while the Gini measure captures how income is distributed, it does not take into account factors such as the relative wealth of a population or the cost of living of each place.

According to the Census Bureau study, Wisconsin has one of the lowest levels of income inequality among U.S. states. The level of inequality within the Milwaukee metropolitan statistical area (MSA), which includes the counties of Milwaukee, Ozaukee, Washington, and Waukesha, is below that of the nation as a whole and in the middle of the pack when compared with the 50 other metro areas in the U.S. with populations of at least one million. Below is a breakdown of select metro areas on the list, including those at the extremes and Milwaukee’s regional peers. Each metro area’s poverty rate and percentage of households earning at least $200,000 are also included on the chart.

Income inequality in U.S. metro areas with populations over one million, 2005-2009 (51 total)

It’s difficult to determine how to interpret the Gini measures by themselves. Because of the small difference in Gini measures found between metro areas at the extreme ends of the scale, for example, metro Milwaukee does not appear to be much different from the New York or Salt Lake City metro areas. Indeed, all of the metro areas measured fall within what appears to be a relatively narrow range.

One might logically theorize that metro areas with higher Gini measures would have higher percentages of households at the extremes – both very high-income and very low-income. Based on the data on poverty and high-income households in the chart, the Milwaukee MSA has both a lower poverty rate and a lower percentage of high-income households compared with the New York metropolitan area and the U.S. as a whole, while the State of Wisconsin has lower rates than metro Milwaukee for both categories. But perhaps most interestingly, the combined percentages of people at the extremes (poverty rate plus percentage of high-income households) follows the Gini measures almost perfectly, as shown in the chart’s final column.

While these data invoke more questions than answers, several observations can be gleaned with regard to metro Milwaukee. First, while poverty in the city of Milwaukee is unacceptably high, the poverty rate for Milwaukee’s MSA is relatively average compared with other metro areas. Thus, poverty may be less concentrated in the central city of other metro areas compared with metro Milwaukee.

Second, the Milwaukee MSA has a relatively low percentage of high-income households compared with other metro areas and the nation as a whole. In addition to the data on the above chart, a recent study by the Brookings Institution shows that metro Milwaukee is not among the 54 U.S. metro areas whose share of very high-income households (>$200,000/year) exceeds their share of all households. Some might argue that metro Milwaukee’s relatively low level of high-income households puts us at an economic disadvantage because high-income households are those most likely to create desperately-needed jobs.

Third, if income inequality is at undesirable levels in general throughout the U.S., metro Milwaukee is not significantly different. Current research has shown that the richest 20% of Americans own approximately 84% of the nation’s wealth, and that Americans across divisions of race, gender, income, and political affiliation all would prefer less inequality.

Finally, since the data used in the Census Bureau report are from 2005-2009, both pre-recession and peak recession years are included. With the economy continuing to struggle, it will be interesting to see how these numbers change over time.

TIF changes on the horizon in Wisconsin

In a rare showing of bipartisan accord in Madison last week, the Wisconsin Assembly unanimously passed a bill allowing local governments to create new tax incremental financing (TIF) districts jointly between two bordering municipalities. The changes included in the bill raise several questions about how TIF currently is used in metro Milwaukee, and how it could be used most effectively.

TIF is a financing tool that allows municipalities to borrow against future property tax revenue to fund current development projects. Though few people are familiar with TIF, it is the most widely utilized economic development tool in Wisconsin. In fact, a past Forum report, Too Much or Not Enough?, revealed that as of 2008, there were nearly 1,000 active TIF districts in Wisconsin with a total assessed value of over $15 billion.

IF was originally created to facilitate redevelopment efforts in blighted urban areas, but in 2003, state law was broadened to allow TIF to be used for nearly any type of development project deemed impossible to realize without public assistance. The bill approved by the Wisconsin Assembly makes TIF even more flexible. In addition to allowing TIF districts to cross municipal borders, the multi-jurisdictional districts would also be exempt from a state law restricting municipalities from creating new TIF districts if 12% of their total property value already falls within existing TIFs.

Past Forum research has revealed that the City of Milwaukee utilizes TIF at a far lower rate than many smaller cities in the metro area and many large cities in the Midwest. According to the Wisconsin Department of Revenue, the City of Milwaukee’s current TIF utilization rate is 3.9%, which falls below the state average and far below the state’s limit. Allowing the City to team up with its neighbors could help to boost Milwaukee’s TIF utilization rate and property values, provided there are promising and fiscally sound projects at the city’s edges. The same may be true for other large municipalities in the Milwaukee metro area. The Forum’s economic modeling has suggested a 10% increase in TIF utilization by Wisconsin cities with populations over 50,000 could result in a 2% increase in their total property values.

However, Too Much or Not Enough? also suggested TIF utilization rates at the municipal level have regional economic impacts. Exempting shared districts from the 12% state limit could result in over-utilization in suburban and rural communities on the metro edge. Our economic modeling indicated a 10% increase in TIF use by an average Wisconsin suburb could result in a 0.2% decrease in property values for that community and a 1.1% decrease in the property values of the central city. All of the communities in the Milwaukee metro area that currently have TIF utilization rates in excess of the state limit are smaller suburbs, so new shared TIF districts in those places should be analyzed carefully to avoid detrimental regional effects.

There are also several practical hurdles potential cross-municipal TIF districts will have to overcome. First, all of the taxing jurisdictions within which the project is located would need to sign off on the project. For example, a hypothetical new TIF district on the border between West Allis and Brookfield would have to get the approval of two cities, two counties, two school districts, and two technical college districts. In addition, under current Wisconsin law each municipality is allowed to use its own set of criteria to determine whether a project qualifies for TIF, so potential projects would have to meet the standards on both sides of the municipal border.

With TIF districts crossing borders and having regional economic impacts, it may be more useful than ever to develop uniform TIF standards for the metro area that facilitate the development of this new type of district while helping municipalities to choose new TIF districts that are beneficial not only for their own property values, but for the Milwaukee region as a whole.

Racine school district holding itself accountable to goals, but academic achievement still lags peer districts

Racine Unified School District (RUSD) implemented a district-wide vision for improvement in March 2009. Called the North Star vision, it is intended to specify "the path to successful completion of high school for all RUSD students with an ultimate goal of every graduate being ready for a career and/or college.” It includes performance targets at each grade level to be used in creating school improvement plans and in setting school-level learning targets.

The vision is the result of a collaborative effort by the school board, district administrators, the teachers and administrators unions, and the support staff union. A simple graphic illustrating the measures of focus at each grade level has been widely distributed to parents, teachers, and district stakeholders.

 In this year's version of our annual report comparing RUSD and its ten peer districts across the state, we highlight RUSD’s visions and targets for each grade level, starting with the most advanced grades. For each measure, we present several years of trend data, starting with the 2008-09 school year as a baseline in most cases. We note where RUSD met or exceeded its 2010-11 target, as well as where it has fallen short, and we analyze the goals for 2011-12.

 We find:

• Of the North Star goals, only in writing has the district surpassed its target for all students. There has been progress toward some of the other goals for some subgroups of students but, on the whole, large racial and socio-economic gaps in performance persist and entire grade levels are falling short in math and reading.
• The large and persistent achievement gaps are concerning because RUSD serves a lower-income, less-educated population than most of its peers and the state as a whole. RUSD ranks first among peer districts in student poverty, as measured by free or reduced-price lunch eligibility. In addition, 54% of RUSD students belong to minority racial or ethnic groups, ranking RUSD first among the peer districts in terms of minority enrollment.
• Long-term trends in math and reading continue to cause concern, although the 72% of RUSD 4th graders proficient or advanced in reading in 2010-2011 is up slightly from 2009-10, as is the 76% of RUSD 8th graders proficient or advanced in reading. However, the 52% of 10th graders proficient or advanced in reading is a slight decline over the previous year. Improvements in math scores were not seen in 2010-11 in 4th, 8th, or 10th grades.

We applaud RUSD for established the North Star vision and making impressive improvements in writing proficiency. Transparently holding itself accountable to these goals allows all stakeholders to envision the path to higher achievement, and the efforts that will be needed to get there. Click here to download a copy of the 14th Annual Comparative Analysis of Racine School District. The report was sponsored by Education Racine Inc. and the Johnson Foundation.

Maxmizing the local economic benefits of academic research

This afternoon the Public Policy Forum takes up the topic of the economic impact of academic research at our Viewpoint luncheon. One specific way in which research leads to job creation and business development is via technology transfer – the legal process in which new discoveries are patented, marketed, and licensed to commercial manufacturers. Southeast Wisconsin is home to several academic research institutions, each of which goes about technology transfer independently, for the most part. A new Forum report to be presented at the luncheon today examines whether greater collaboration among the region’s research institutions is needed to maximize the local economic impacts of technology transfer.

Our analysis finds that there are three models that might be considered by academic leaders to enhance collaboration in technology transfer and potentially augment the effectiveness of existing efforts:

• Joint Office of Technology Transfer
  A joint office of technology transfer could potentially result in greater expertise in economic development practice for the participating institutions, as well as economies of scale. However, a joint office may stretch the resources of technology transfer officers to the point that some institutions may experience reduced levels of service. Equitably funding a joint office to serve public and private institutions also would be challenging.
• Joint Infrastructure for Informal Technology Transfer Activities
  Currently, much of the technology transfer work performed by academic institutions is of the informal variety - building awareness of academic research projects by industrial researchers and investors through networking and partnering. At the federal level, this work is performed by a permanent consortium of the federal research labs. A similar consortium of local institutions could be created and charged with raising the profile of translational research for local industry. Each participating institution would have to trust, however, that its financial contributions to the consortium would eventually result in benefits for its researchers.
  
• Joint Economic Development Entity
  We found four different types of collaborative economic development agency models aimed at increasing the local economic impact of academic research. All are aimed at encouraging and supporting the transfer of technology to local industry and start-ups, but each does so a little differently. The biggest hurdle for this model is sustainability - a previous, state-funded, southeast Wisconsin economic development effort, TechStar, proved unsustainable.

In addition to considering the creation of a new full-fledged collaborative infrastructure based on one of the three models above, the region's research institutions could consider collaborating on more targeted strategies to ensure that their research positively impacts the local economy:

1. Expand the UWM-MCW First Look Forum to other research institutions—Offer more researchers the opportunity to participate in these events designed to connect academic researchers to investors and industry.
2. Jointly offer start-up support or an entrepreneur-in-residence program—Collaborate to ensure local researchers have the opportunity to be educated about commercializing technology through company formation, mentored through the technology development and venture formation process, and connected with outside resources that can provide services, advice, funding, and management expertise.
3. Jointly raise funds for pre-seed grants—Expand the UWM Catalyst Grant program to other research institutions by working together to raise additional funds from foundations and industry.
4. Utilize a joint tech transfer advisory committee—Maximize local resources by forming a joint advisory committee of investors and industry leaders to advise on patenting decisions, particularly those arising from research projects conducted collaboratively by two or more CTSI institutions.
5. Create a local industry database—Provide researchers at all local institutions with data about industry needs and interests, as well as contacts, by jointly creating and managing a local industry database.
6. Host clinician informant panels—Increase awareness among researchers who are not also clinicians by jointly hosting opportunities for discussion of clinical problems in need of solutions.

It is clear that the region’s academic research institutions have yet to capture the full economic development potential of their research. By collaborating more closely to identify local discoveries that fill gaps in the global market, and by working together to help create or grow local players in that market, academic leaders could take better advantage of their rapidly emerging research prowess.

Priority-setting at the Milwaukee County Courthouse

In the Public Policy Forum's annual review of the Milwaukee County Recommended Budget - released this morning - we commend the administration’s efforts to establish clear priorities and make difficult decisions, but emphasize there is “still much work to be done” to address the county’s structural imbalance.

Clearly, this is a budget that does not shy away from difficult spending cuts, ranging from elimination of support for the Emergency Medical Services (EMS) program and local arts groups, to substantial reductions in the Office of the Sheriff, to another sweeping call for health care savings from county workers. We caution that while the programmatic impacts and consequences of those decisions must be carefully deliberated, the county executive and his budget staff deserve credit for recognizing the need to cut somewhere.

Despite several positive strides in the budget to address the county’s structural problems, the report notes that significant challenges remain. It points out that the use of reprogrammed federal funds to avert substantial bus service reductions is a two-year solution at best, and that the county’s continued reliance on annual wage freezes and health care cuts as primary budget-balancing tools may not be sustainable.

In addition, the report cites the county’s glaring lack of reserves – an issue exacerbated by a recommendation to diminish its contingency fund – as giving pause to any notion that it has fully reconciled its fiscal shortcomings, or that 2012 will be the first year in recent memory devoid of the need to debate mid-year corrective actions to avoid running a deficit.

The report concludes by noting that debate is needed regarding the priorities and strategies selected in the recommended budget, as well as the “appropriate mix of revenue enhancements and spending cuts.” It says it is imperative, however, for the county board to follow the budget’s example of making difficult decisions and avoiding short-term gimmicks.

The full report can be accessed here. The Forum released a similar review of the 2012 City of Milwaukee budget on Friday.