Sunday, April 29, 2012

An Old New Idea in Transit Financing

Rail transit used to be a dominant mode of transportation in American cities.  Until the middle of the twentieth century, the majority of people in cities lived in neighborhoods where they could easily walk to neighborhood shops and take streetcars to get downtown to work.  And, rail transit was not limited to just large cities.  Cities of all sizes had streetcar networks. 

Things have obviously changed since the streetcar’s heyday.  Only a few US cities have rail transit.  Part of this decline is undoubtedly due to the rise of the automobile and the development of the interstate highway system, but part of it could have to do with the way transit systems are funded.  As noted in a 2010 article in The Atlantic, rail transit systems were often built with largely private funds.  Real estate developers installed lines to help people get out to freshly built homes on land the developers owned.  In this way, transit construction and operation were subsidized by profits from real estate transactions.  The figure below shows how streetcar installation was used to spur real estate development in the Twin Cities.  

These days, most systems are built with mainly public funds, and tax revenues have to subsidize the fares to cover operating costs.   However, tightening public budgets are threatening transit development just as environmental and demographic concerns (i.e., climate change and an aging, less-mobile population) seem to warrant increased transit services.  Given the importance of providing efficient transportation to all people, perhaps it is worth trying to develop a new financing strategy based on the old streetcar strategy.

Essentially, the old streetcar financing method was a value capture method.  This type of funding uses loans (or other capital) to pay for infrastructure with the expectation that the future land value gains resulting from the installation of that infrastructure will allow the loan to be repaid or the capital investment recouped.  The process worked incredibly well then, and the principles underlying the strategy still seem valid today.  It is all based on new transit lines increasing the value of land around them.  In fact, a fairly recent Brookings Institute report suggests that a new lightrail line through Washington DC could increase the surrounding land values by as much as $3 for every $1 spent on construction.  If transit providers could somehow gain access to some of that increased value, they could easily use it to pay back construction loans.

Local governments have long used different forms of value capture to pay for some infrastructure improvements through tools like taxincrement financing (TIF) and assessments, but the scale of transit projects requires a much stronger tool to effectively and equitably collect sufficient sums of money.  Two options present themselves.  First, the government could purchase land along transit routes prior to transit construction and lease or sell the land for development after.  The transit agency in Hong Kong has successfully used this method.  Second, the government could turn transit services back over to the private sector, and real estate developers could use revenue from commercial and residential development to cross subsidize transit services.  Japan has successfully taken this route.

Transit development is currently threatened by a weak economy and an anti-tax political fad.  It is time to look for new funding strategies, and the old streetcar strategy seems to offer an option worth exploring further.

Electronic Toll Collection

Just recently, on April 27th, an Eden Prairie women was caught by a State Trooper driving within a MnPASS lane with a mannequin.  Despite her best efforts at dressing the mannequin up, the woman was cited for driving solo in the High-Occupancy Vehicle (HOV) lane.  (Skip to 5:45 of this video for exciting info on enforcement of MnPASS lanes).

This story lead me to learn more about the MnPASS system, or "sane lanes" as they are commonly called.  Within a 2009 urban mobility report, completed by the Texas Transportation Institute, it was found that the Twin Cities region had garnered an estimated cost of $1.5 billion in lost time and excess fuel consumption for that year.  In order to combat these costs, and expected increases in congestion, the Minnesota Department of Transportation (MnDOT) has turned to priced lanes as an option to manage system-wide congestion and generate needed revenue.

The system MnDOT uses is MnPASS.  Under this system, single occupant vehicles (SOV) may choose to use lanes originally designated for HOVs for a fee, which is determined by the current level of road congestion.  Currently, MnPASS is available along I-35W in the south metro area, as well as I-394 in the west metro area.  Hoping to secure full funding and legislative support, MnDOT is looking to expand MnPASS to I-35E north of St. Paul, between I-94 and I-694.  The expanded area is expected to bring in an additional $1.9 million annually, while increasing the average daily volume of cars from 145,800 to 152,100, with 11,200 vehicles using the express lanes.

Basically, the MnPASS system operates so that when congestion increases on the tolled MnPASS lanes, the toll itself increases.  As this toll increases, the number of SOVs diverted from the MnPASS lanes back to the general purpose lanes increases.  Eventually, a balance is reached that maximizes the number of SOVs in the HOV lanes, while maintaining free-flow conditions.  Overall, revenues generated from the I-35W and I-394 MnPASS corridors are nominal, covering repayment of capital costs and operating costs for the fee collection system (MnPASS studies) (2010 Study).

Trouble in State and Federal Medicaid Relations

The relationship between federal and Minnesota state agencies responsible for Medicaid administration has been tenuous as of late. Minnesota’s Medicaid program is administered at the state-level by the Department of Human Services (DHS), and the Centers for Medicare and Medicaid Services (CMS) is the federal agency that administers Medicaid in partnership with states. States are reimbursed by the federal government for a percentage of the costs of providing Medicaid services. Typically, the federal government covers 50% of Minnesota’s Medicaid spending. The majority of this money is paid to managed care companies (HMOs like UCare, Medica, BCBS, and HealthPartners) to provide health care coverage for certain low-income adults without children, pregnant women and families with children.

Governor Dayton’s 2011 budget established a new competitive bidding process for managed care contracts. Medicaid plan providers were now required to submit a bid for a monthly payment amount per enrollee, and the state assesses the bids based on the quality and cost and chooses two or three plans to contract for each county. As part of the 2011 contracts, plan providers were requested to voluntarily cap their profits at 1 percent of revenue for the state health care program. This action was taken largely in response to a historic state budget deficit and the massive earnings of the major healthcare providers over the preceding years. Providers agreed to the 1% cap, and additional profits would be returned to the state. Excess profits for 2011 were expected to return over $70 million. Furthermore, as seems equitable, 50% of those returns would be reimbursed to the federal government.

Sounds easy enough, right? Think again. In March 2011, UCare (one of the four contracted managed care companies in the State) voluntarily donated $30 million in its reserves to the state, stating that the money was donated in response to the state’s massive budget deficit. Thus began a debate between DHS and CMS over how to classify the funds and how they should be allocated. DHS believed the money qualified as a “bona fide donation” and had no relationship to Medicaid payments, allowing the state to retain the entire balance. CMS argued that the funds qualified as “repayment” from a Medicaid provider, and therefore the federal government was entitled to half. The lengthy negotiations came to an end in April 2012, when the DHS released this press release and reversed course, agreeing to include the funds as part of those claimed under the 1% cap. While DHS Commissioner Lucinda Jesson claimed the decision was based on a matter of fairness, it was made conveniently in time for Jesson’s scheduled testimony in Washington at a House of Representatives hearing on Medicaid fraud. The hearing is part of a hushed investigation that recently made headlines thanks to Michele Bachmann:
Link to KARE11 story.

Medicaid is a complex program requiring coordination between federal, state, and local governments. Minnesota and other states often dispute or appeal unclear or contradictory federal mandates. Even minor issues require an intricate network of coordination and collaboration to resolve. Relationships between state and federal agencies can become tense, and efficiency is surrendered to costly negotiations and litigations. When millions of dollars are on the line, the stakes get a bit higher. As is currently under investigation in Minnesota, players may take advantage of Medicaid’s complexity in order to game the system. In a recent Star Tribune article, U.S. Senator Chuck Grassley, R-Iowa, who initiated the Justice Department’s investigation of the UCare donation, was quoted saying “the state [of Minnesota] clearly has structural problems with its Medicaid payments that need examination. If a state is gaming the federal government to get more out of Medicaid, the state is gaming taxpayers nationwide and ultimately hurting the people who need Medicaid.”

Shift Happens: State Accounting Shifts & Their Impact on Minnesota School Districts & Charter Schools

Given the lively class conversation about charter school financing that we had recently, I am excited to share some information from my expenditure paper, which examines two state accounting shifts - the education aid appropriation shift and the property tax shift - and explores their impact on Minnesota’s school districts and charter schools.  In this entry, I will explain the education aid appropriation shift and demonstrate why it is generally tougher on charter schools than school districts.

In Minnesota, independent school districts receive funding mostly from two sources (Source #1): 
  1.  State Education Aid Appropriation (75.7%)
    This funding source includes both General Education Aid, which provides the basic fundamental support of education, as well as Categorical Aid designated for programs that vary between districts such as special education and adult basic education.
  2. Local Property Tax Levies (22.8%)
    This funding source includes local property tax levies usually approved directly by voters that provide money for operating and debt service expenses.
In normal circumstances, the State of Minnesota pays 90% of a school district’s “Education Aid Appropriation” (category 1 from above) for a specific fiscal year, which is July 1 – June 30 for school districts and the state, by the end of that fiscal year.  However, the state “holds back” or “shifts” the remaining 10% until October of the following fiscal year.  The purpose of this shift in normal years is to verify final enrollment numbers and ensure compliance with other state requirements before making a final payment (Source #2).

From 2009 - 2012, however, the state “hold back” or “shift” has increased significantly from 10% to 40% of the total aid entitlement.  This means that districts are only receiving 60% of their education aid appropriation funds during that fiscal year.  The state has done this to help balance the official budget during a challenging economic recession (Source #2).  As of January 2012, the state has delayed nearly $2.8 billion of payments to schools, according to Tom Melcher of the Minnesota Department of Education (Source #4).

In response to these increasing shifts, school districts have generally employed two strategies.  First, districts have taken advantage of their accumulated cash reserves or cut budgets to cover their cash flow needs internally.  Second, school districts borrow money from external sources.  One tool they can use is an Aid Anticipated Certificate, which helps publicly funded agencies secure cash flow in advance of state payments.  These certificates allow districts to borrow money at very low interest rates (less than 1%) through organizations like MNTAAB.  Because of these two strategies, districts are able to manage through these shifts relatively well. (Source #3).

Charter schools, on the other hand, usually do not have the same options for dealing with the shifts at their disposal.  Given that most charter schools in Minnesota are under ten years old, many have not had the opportunity to build reserves large enough to meet their temporary cash flow needs.  Additionally, since charter schools do not have the taxing authority or the state guarantees that districts enjoy, they are ineligible for Aid Anticipated Certificates and the low interest rates that accompany them.  (Source #3).

In the conventional banking market, charter schools are also at a disadvantage.  Even if districts were unable to get Aid Anticipated Certificates, they would likely be able to qualify for a cheaper line of credit from commercial lending sources because in addition to their taxing authority, they have other capital which can be used as collateral.  Meanwhile, charter schools cannot own real estate and have fewer assets that can be used as collateral for a loan.  As a result, charter schools pay much higher interest rates for conventional loans and lines of credit (Source #3).

In response to these challenges, charter schools and social finance organizations like Nonprofits Assistance Fund have advocated for change at the legislature.  In 2011, helpful adjustments were made to the aid payment schedule for charter schools, even though the overall shift percentages will stay the same moving forward.  These adjustments have helped charter schools better manage their cash flow to some degree, but major challenges still remain.

Source #1:  "Financing Education in Minnesota 2011-12."  Minnesota House of Representatives Fiscal Analysis Department.  September 2011.  

Source #2:  "Minnesota School Finance:  A Guide for Legislators."  Minnesota House of Representatives Research Department.  November 2011.

Source #3:  "State Education Funding Shift Has Disparate Impact on Minnesota Charter Schools."  Nonprofits Assistance Fund, Minnesota Association of Charter Schools, & Charter School Partners.  March 2011.

Source #4:  Melcher, Tom.  “E-12 Education Funding Update.” Minnesota Association of School Business Officials Legislative Conference.  July 27, 2011.  Conference Presentation.

Friday, April 27, 2012

Minnesota Investments in Prevention

Minnesota made an unprecedented investment in prevention when it passed major health reform legislation in 2008. This investment is called the Statewide Health Improvement Program (SHIP). The goal of SHIP is to help Minnesotans live longer, healthier lives by preventing the leading causes of chronic diseases: tobacco and obesity.  In 2008, SHIP was funded for $47 million over two years. Grants were made to 53 community health boards and 11 tribal governments throughout MN. Grantees were tasked with creating policy, system, and environmental changes in schools, worksites, communities, and health care organizations. Grantees selected interventions to implement from a menu created by the MN Department of Health. A few of these interventions (strategies) were: safe routes to school, school wellness policies, healthier school food menus, tobacco free worksites, and community gardens. The City of Bloomington video about their SHIP program provides a good snapshot of the SHIP strategies.
Funding for SHIP was cut drastically during the 2011 budget stalemate in the legislature. It was cut from $47 million over two years to $15 million over two years. It’s hard to tell whether or not it was cut simply for budgetary reasons or if it was cut because legislatures do not think it is a successful program. Articles published recently in the Star Tribune illustrate this problem. A counter editorial to these articles was also published in the Star Tribune. Due to the decreased funding, fewer communities across MN received funds to implement SHIP and some strategies have been modified.

The ultimate goal of SHIP is to reduce health care costs through having healthier people in Minnesota. Unfortunately, it is hard to show measurable progress toward reaching this goal in such a short time (2 years). Legislators want to be able to book health care cost savings already, but it is almost impossible to do that in two years. SHIP is not about a quick fix to health care. It is about creating sustainable behavior change in people.

Watch this video for more on the importance of prevention of chronic disease.

Tuesday, April 24, 2012

What if you called 911, and no one answered?

Historically, public safety services have been considered a fundamental function of government, and the idea of cutting these services, much less going without, was unheard of.  But, the current economic climate has forced some Minnesota cities to make tough choices regarding these services, namely policing.
Foley, Minnesota, population 2603, made news recently after announcing plans to terminate their contract with the Benton County Sheriff’s Office for police services, and hire a private security firm to patrol the city.  The Minnesota Attorney General’s Office and the Peace Officer Standards and Training Board, the agency that licenses police officers in Minnesota, both raised objections and concerns that ultimately resulted in the security firm backing out of the contract to patrol the city.  Ultimately, Foley decided to resurrect its own police department, which had been disbanded in 2003.
While Minnesota cities and counties have a nearly unchallenged natural monopoly on law enforcement services, the full range of police services that many Minnesota residents take for granted, from barking dog complaints to traffic enforcement to homicide investigations, are not provided because the city or county is obligated to do so.
No Minnesota municipality is required by law to provide police services, although the Sheriff of each county is required by statute to “keep and preserve the peace of the county”; including keeping the county jail, attending to the district court, and to pursue and apprehend all felons.  Sheriffs in Minnesota have generally interpreted the latter requirement to constitute a legal and moral duty to investigate felonies that are in-progress, but do not recognize a duty to perform any functions outside of those prescribed by statute.  Indeed, the US Supreme Court in DeShaney v. Winnebago County established that in general, the state has no specific duty to protect individuals, outside of those duties specifically enumerated by statutes.
The Anoka County city of Nowthen faced a similar dilemma.  Prior to incorporation as a city, the former Burns Township relied on Sheriff’s Office service that had been provided at no charge.  It’s likely that some of the impetus to enter into a contract with the Anoka County Sheriff’s Office came after learning what services the city wouldn’t get.   A recent Minnesota Public Radio article quoted the Executive Director of the Minnesota Sheriff’s Association: "It gets down to the inability to meet the demands of what statutorily we must do and what discretionarily the public wants us to do."
Ironically, despite government’s natural monopoly on police services, shrinking budgets may ultimately bring natural market forces into play, as taxpayers decide exactly what services, and level of service, they want their police departments to provide.

Friday, April 20, 2012

Rural transit finance

There was an article this week by Minnesota Public Radio on the transit service provided by Montevideo, MN.
In 2007, the three-bus transit system in Montevideo in western Minnesota gave people about 15,000 rides, making the dial-a-ride system one of the tiniest of the state's 60-plus transit services.
The next year, ridership declined. Each passenger trip cost the system more than $7.
That's when the town of 5,000 shifted gears, so to speak. The city council stopped thinking about transit as a public works service like street sweeping or sewage treatment. Instead, it started to envision helping people get around as a community collaboration.
The changes made contributed to an increase in ridership - from 15,000 to 27,000 rides per year - and a decrease in the cost per trip - from more than $7 to $5.34 - between 2007 and 2011. The article notes that this increase made it the fastest growing transit service in the state, though the growth rate in outstate Minnesota was a robust 12 percent. According to an article in MinnPost from 2010, the cost per trip is much lower in the core of the Twin Cities - where Metro Transit is the main provider, and the cost per trip is $2.34. However, the cost per trip ranges among suburban transit providers between $2.71 and $5.18, so Montevideo's service is nearly competitive with those services on that measure.

Doing the math, that means that the cost to the city to provide the service went from $105,000 to $144,180. Given the increase in cost, and the evident pride the city staff have in the improved service, it would appear that they are seeing other positive outcomes from the increased ridership. It is intriguing that they were able to improve results so dramatically, because the changes made sound more like moderate improvements to service delivery than a drastic redesign. The article does not provide many details on what specific changes were made, and unfortunately the City's website does not either.

As a sidenote, it is likely not a coincidence that a rural transit service would be reframed as an opportunity for collaboration and community development in this particular town, because there is very interesting work being done in these areas by an organization called CURE. Nonetheless, interesting that a core public works service can be managed more effectively by another department with different objectives.

Tuesday, April 17, 2012

Graphic Overview of Tax Sources and Expenditures

I ran across this blog post from The Atlantic providing some nice graphics describing federal taxes. It includes information on tax sources, expenditures, and tax breaks. Enjoy.

Sunday, April 15, 2012

The State of Minnesota & the University

The University of Minnesota is one of two of Minnesota’s public higher education systems, enrolling 69,221 students at five campuses across the state. The University is unique in that it is the state's only land-grant research university. 
Like many other public higher education institutions across the county, the University's funding from the state has decreased over the last several years due to budget deficits. Today, it is operating with state funding below 1999 levels. 

"In good economic times, states direct additional revenue to higher education. In slow economic times, however, higher education - more than any other budget item - suffers reductions," reports NSCL's Blue Ribbon Commission on Higher EducationA recent editorial explains how as enrollment has increased, state funding has decreased. As a result, the burden to fund our higher education system is put on students and families in the form of tuition increases.

The Blue Ribbon Commission on Higher Education states, "Higher education is both the problem and the solution." The solution lies in higher education's ability to increase global competitiveness and drive the economy. For this reason, University officials have urged state legislators to recognize the system's economic impact; every dollar invested in the University generates $13.20 in the state's economy. This money is generated by jobs created by the U, purchases made by the U, and competitive research grants awarded to the U. 

Although the University is one of the state's most powerful tools that can be used to address its most pressing challenges, the University will face two major obstacles in the 2013 Minnesota legislative session. First, the state has a projected budget shortfall of $1.1 billion for FY 2014-15. After several consecutive deficits, Minnesota's budget has been cut to the bone and many creative, short-term fixes have been exhausted. In addition, the legislature will likely experience another significant turnover in leadership and membership. Over 30 legislators will retire and many of the remaining will face tough elections as a result of redistricting. As Blue Ribbon Commission on Higher Education states, "This lack of leadership and expertise is due in large part to increased legislative turnover." University officials will need to quickly educate new legislators before the 2013 legislature convenes to determine the FY 2014-15 budget. 

Saturday, April 14, 2012

Privatization of Public Education for Low-Performing Districts

        The privatization of public education is gaining political and cultural attention.  Typically, the privatization argument focuses on economics.  For instance, CATO reports that school districts misstate per-pupil spending costs.  The District of Columbia claimed to spend $17,542 per student; but after including costs beyond the general fund, such as capital expenditures, CATO found the actual cost to be $28,170 per student.  They believe it would be cheaper to send District of Columbia children to private schools that range in tuition from $21,000 to $30,000.  Although these numbers are highly debatable, the basis of the argument focuses on financials.

            Recently, the privatization argument has shifted its focus to equity.  In Minnesota, Rep. Woodard authored a bill that would take public funds from low-performing schools and allow students to attend private schools with vouchers.  Eligible students’ families can make up to 175% of the poverty threshold.  Notably, the student also has the option of open enrolling in another public school district.  With both open enrollment and private school attendance, the home district would be responsible for providing bus service. 
            There is little economic argument in this scenario: transportation costs would be higher for the low-performing districts and administration costs would be higher for the state.  Instead, the bill focuses on equity issues.  Proponents argue that vouchers offer struggling families the choice to choose better schools; as a result students improve grades and graduation rates. 
            The Choice is Yours program has proven most of these claims to be true.  This public voucher program, the result of an NAACP lawsuit against the Minneapolis School District, allows any Minneapolis student eligible for free or reduced lunch to open enroll in one of eight west suburban districts.  Overwhelming this program has been successful for participating students (reporting 97% approval), however the program caps open enrollment slots to 2,000.  School districts closer to North Minneapolis, such as Robinsdale and Hopkins, have waiting lists for nearly every grade.  As a result, many students cannot participate in the program or they must attend a school district over 25 miles from their home.   
           Although the Choice is Yours program has been highly beneficial for students, it continues to economically and promotionally hurt the Minneapolis School District.  Initial funding for the program, particularly its transportation costs, came from a federal grant.  If Minnesota were to adopt a private voucher program, it would be near impossible for districts, such as Minneapolis, to pay the transportation costs.  Additionally, the declining enrollment harms districts' economies of scale, forcing schools to close, programs to be cut, and extracurriculars to be dropped.  Privatization, particularity in the form of private vouchers for low-performing districts, would benefit some students, harm others, and continue to shift public funds from the inner city.

Friday, April 13, 2012

Integration Aid in Minnesota

The State of Minnesota spends a very small portion of its education budget on integration aid, a categorical aid that aims to further desegregation in Minnesota’s schools. Specifically, integration aid attempts to compensate school districts for the implementation and transportation costs associated with state or court ordered school desegregation plans. At $127 million, integration aid was less than one percent of the state’s approximately $14.5 billion general fund appropriation for education for fiscal years 2012 and 2013.

Minnesota’s integration aid is distributed directly to districts via the per-pupil education formula, 70 percent coming from state aid and 30 percent from local levies. Minneapolis, St. Paul, and Duluth public school districts receive the most integration aid. During the 2010-12 school year, 125 districts were required to develop school integration plans and were eligible for integration aid. The amount of aid each district receives varies by district. For fiscal years 2012 and 2013, the per-pupil integration revenue aid was $480 for Minneapolis, $445 for St. Paul, $206 for Duluth, $129 for eligible districts with more than 15 percent students of color, and $92 for all other eligible districts.

In 2005, the Office of the Legislative Auditor authored a report evaluating the state’s Integration Revenue program. In that evaluation, the OLA found that the program’s objectives were unclear to districts and that some districts used the aid in questionable ways. The report also found that the Minnesota Department of Education did not provide proper oversight of the program and how integration aid was spent. Since then, the Integration Revenue program has remained a somewhat political issue in the Minnesota legislature. This was especially true last year.

In 2011, the legislature passed a law that would eliminate the integration aid portion of the current funding formula for years after fiscal year 2013. At the same time, the legislature established a 12-member Integration Revenue Replacement Advisory Task Force to “develop recommendations for repurposing integration revenue funds to create and sustain opportunities for students to achieve improved educational outcomes.” The task force was charged with developing a new integration aid funding formula.

In their report to the legislature, the task force was able to provide recommendations on how integration aid ought to be used by districts and how the Minnesota Department of Education can enhance their oversight of the program. The task force was unable to agree on what a new integration aid formula should look like. If the next legislature does not act in 2013 to repurpose the integration revenue program, integration aid in Minnesota will disappear. If action is not taken to sustain integration aid, districts will lose an important funding source for desegregation activities and progress made toward desegregation may slow down. It will be interesting to see what happens next year on this important issue in education finance.

Source of Integration Districts by Collaborative Images: Minnesota Department of Education.

Special Education Cross-Subsidies

In 1975, the federal government passed the Individuals with Disabilities Education Act and pledged to provide 40% of the funding for the newly mandated educational programming.  However, the federal contribution never actually approached this level.  As a result, states and local school districts have had to bear most of the costs of these mandated special education services. 

In Minnesota, special education has enjoyed strong statewide support.  Special education is integrated into the general education aid formula and has its own type of categorical aid.  But since 2003, after a revision to the cost growth formula, the state’s contribution to special education has not kept pace with actual growth in special education expenses.   

Because federal and state government categorical aid to special education does not cover the full costs of the legally required services, school districts are forced to cross-subsidize those services with funds from other sources.  Since 2007, the Minnesota Department of Education has been required to file an annual report to the Minnesota legislature informing them about the state of district cross-subsidization of special education.

The above chart, taken from the 2011 report “Special Education Cross-Subsidies Report,” shows the amount of categorical aid from federal and state sources is consistently insufficient to cover special educational expenditures.  The gap between the two lines represents the amount of the actual cross-subsidy for the year, which is reflected directly in the chart below.  I received this chart when attending a presentation by Tom Melcher of the Minnesota Department of Education to the Minnesota Association of School Business Officials in February 2012. 

These two charts have some interesting points worth highlighting.  First, the temporary impact of the stimulus can be seen from years 2008-2011 by the sharp increase in revenue and the decline in the amount of cross-subsidization.  In FY 2012, however, the stimulus' effect is gone, and the amount of cross-subsidization required has risen substantially.  Second, the top graph shows a growing gap between expenses and revenues as expenditures are rising faster than revenues.  This indicates that cross-subsidization will continue to increase.

Another interesting graph I received at the MN Association of School Business Officials presentation in February 2012 was the one posted above.  The green bar represents the amount of cross-subsidization required in each category of district by location and size.  Of note here is that 44% of the total special education expenditures in the inner ring suburbs were covered by cross-subsidization, compared to 36% in the Minneapolis and Saint Paul districts.

Cross-subsidization is an important measure to track because it indicates the extent to which mandated special education services are taking resources away from other types of school services.  In Minneapolis and Saint Paul, $968 of a conventional student's $5,224 general education aid allotment goes to subsidize the unfunded special education services for other special needs children.  Tracking these numbers is one thing.  Using them to discuss the difficult philosophical and ethical issues underlying them is another matter altogether.

Monday, April 9, 2012

Medicaid Spending for Long-Term Care: An Unsustainable Problem for Minnesota

Medical Assistance for Long-Term Care (MALTC) Spending in Minnesota
Medicaid is a funding partnership between the federal and state governments, and its purpose is to provide health care coverage for low-income individuals who otherwise would not be able to afford care. In 2009, all MA spending for Minnesota totaled roughly $7.4 billion, but over 40% of spending - $3 billion – went toward coverage for Minnesotans receiving long-term care.  
MALTC spending levels reflect the market costs of long-term care in Minnesota. Although costs vary depending on where care is received – metro area vs. rural – the average individual can quickly incur tens of thousands of dollars worth of care even if he or she does not reside in a nursing home:
Avg. Daily Nursing Home Rate : Private
Avg. Daily Nursing Home Rate : Semi-Private
Avg. Monthly Cost in Assisted Living Facility
Home Health Aide Average Hourly Rate
Homemaker Services Average Hourly Rate
Adult Day Services Daily Rate
Minneapolis/ St Paul
Rochester Area
Rest of State
State Average
It is important to note that not all individuals receiving long-term care automatically qualify for MA. In order to be eligible for MA, an individual must meet an asset limit of $3,000. For income, the guidelines are much broader and require that the eligible person must have medical and long-term care expenses that exceed his or her countable income.

Minnesota’s MALTC Compared to Other Jurisdictions
            Minnesota ranks 9th out of the 50 states and the District of Columbia in regard to percentage of Medicaid spending for long-term care. To put the state in perspective, North Dakota ranks 1st (with 64% of all Medicaid spending directed toward long-term care) and New Mexico ranks last (with just 15% of its Medicaid spending going toward individuals receiving long-term care). When the ranking is based on dollars, Minnesota still ranks quite high: 12th out of 51 jurisdictions. Minnesota’s $3 billion in spending ranks well below #1 New York, which spends about $22 billion each year on Medicaid-funded long-term care, but spends much more than #51 Hawaii which directs just $231 million toward long-term care.
            It is also useful to consider Minnesota’s MALTC spending relative to other states with similar populations, such as Wisconsin and Colorado:
Medicaid Spending for Long-Term Care
In Dollars
As a Percentage of all Medicaid Spending
(Data from the Kaiser Family Foundation,

Problems with the Current Financing Structure
            The most significant problem with Minnesota’s current MALTC spending is sustainability. After the Governor and legislature resolved their budget stalemate in July 2011 by passing a state operating budget of just under $34.5 million, a total of $11.4 billion was dedicated to Health & Human Services expendituresfor FY 2012-13. With about $3 billion spent annually on MALTC, about 9% of the state’s operating budget was allocated for this particular expenditure. However, with long-term care costs growing at a rate of 4.7% - 6.6% per year, we can only expect that MALTC will continue to take up a greater share of the state of Minnesota’s budget.
Compounding the problem is the coming influx of baby-boomers to the age group that most often needs long-term care – age 65+. Looking ahead to 2035, about 1.4 million individuals in Minnesota will be age 65 or older and it is likely that many of them will need long-term care as they get older. Unfortunately, many aging Minnesotans do not have the resources to pay for their own long-term care needs. Instead, they will need to rely on either help from family members or Medical Assistance as they spend down their assets.
Current Redesign Efforts & Recommendations
            Minnesota intends to respond to the anticipated increased demands on its MALTC funding system through the “Own Your Future” campaign, which launched in March 2012. The centerpiece of the campaign is personal responsibility as it urges Minnesotans to develop a financing plan for their long-term care needs. In order to accomplish this, the campaign takes a threefold approach.
1. Raise awareness about the need for long-term care planning.
2. Identify and develop long-term care financing products that are accessible for middle-income individuals before they begin to need long-term care services.
3. Collaborate with the federal government to change Medicaid’s/MA’s long-term care provisions to encourage private payment for long-term care.
            In order for MALTC spending reforms to be successful, Minnesota will need use the Own Your Future campaign to identify private financing options that can compete with the “free” care that Medical Assistance would otherwise provide. Additionally, it will be important for the campaign to identify products that are still useful even if an individual never needs long-term care. Products that offer individuals multiple ways to use their money, assuming they do not need long-term care services, may be more appealing to those whom the campaign targets. In any case, the Own Your Future campaign should target individuals well before they reach an age where they may need long-term care.