July 29 to August 2, 2006.
TO: Members of the Executive Committee
FR: Senator Jack Hill, Georgia, Chair, Fiscal Affairs & Government Operations (FAGO) Committee
RE: Report of Activities during the 60th Annual Meeting in Louisville, Kentucky, July 29-August 2, 2006
The Fiscal Affairs & Government Operations Committee convened on Sunday, July 30, and Monday, July 31. The following is a synopsis of the presentations made to the Committee on both days. An attendance list is attached.
Sunday, July 30, 2006
I. Innovative State Approaches to Medicaid
Mark Birdwhistell, Secretary, Cabinet for Health and Family Services, Kentucky
Medicaid spending continues to be a major expenditure item at every level of government, and states are enacting a number of measures to both reshape the program and generate savings. A number of Southern states, including Kentucky, are in the forefront of this state-led effort, which includes securing waivers from the federal government that allow innovative strategies to lower costs and enhance services.
Secretary Birdwhistell’s Presentation
Secretary Birdwhistell began his presentation by noting that Kentucky’s Medicaid program was in the process of a major transformation and that he was very pleased to be part of this process. Secretary Birdwhistell indicated that he began his professional career in the state’s Medicaid agency, where he worked for 17 years, before he left to lead a private health plan operated by the University of Kentucky. This private health plan had a deficit of $20 million when he assumed control over it; when he left to join Governor Fletcher’s cabinet a decade later, the plan had a surplus of $65 million.
Along with almost every other state in the country, Kentucky’s Medicaid program has faced dire financial problems, a trend that both contributed to and caused the grim budget problems confronted by states in the early years of this decade. There was an urgent need to reform the state’s Medicaid program and this was one of Governor Fletcher’s key priorities when he assumed the role of the state’s chief executive. Officials quickly realized that if steps to restore the program to financial health were not initiated, the state would have to begin striking Kentucky residents from the Medicaid rolls, a step that had been implemented in several other states. In order to accomplish the complex task of repairing the state’s Medicaid program, the first step was securing a precise definition of the state’s overall Medicaid position, including its fiscal and service components. An important strategy employed in this connection involved conducting a series of public forums to elicit public feedback. Along with members of the public, Secretary Birdwhistell sought the participation of non-healthcare interest groups and lobbyists in order to stress the point that unless the state reformed its Medicaid program, there would be minimal state funds available to allocate to several other crucial sectors, including education, economic development, transportation, etc.
The next task was deciphering the range of individuals covered by Medicaid. Based on information secured, half of all births, one- third of all children and one-seventh of all seniors in the state were covered by Medicaid, a very sizable population. Furthermore, the state’s Medicaid population was “a very sick cohort” that required frequent medical assistance, a fact reflected in Kentucky’s consistent low national rankings for cardiovascular disease, cancer, diabetes and other debilitating illnesses. This, Secretary Birdwhistell stated, prompted the acute need for sound wellness and disease management programs that would help lower the state’s rankings in these risk categories.
According to Secretary Birdwhistell, another striking development was the lopsided distribution of Medicaid monies in the state. For instance, Kentucky was spending $700 million on about 24,000 individuals in long-term nursing facilities, and a mere $30 million on long-term care for 72,000 individuals living at home in communities across the state. This information quickly revealed the need for more efficient programs to finance alternatives to long-term nursing care.
These initial inquiries stressed the need to provide the right care at the right time in the right setting to Kentucky’s Medicaid recipients in a manner that would not bankrupt the state. The agency established the following primary goal in revamping the state’s Medicaid program: stretching the state’s Medicaid resources to appropriately meet individual needs while proactively engaging the state’s Medicaid recipients in their own health and welfare. In pursuing this primary goal, the importance of enhancing the agency’s infrastructure capabilities was realized, and he noted that a series of measures were initiated over a period of about 18 months to do so. These measures were designed to transform the agency to operate like a private sector health plan and included modernizing and developing the agency’s technological capabilities; enacting a system to credential providers; establishing call centers; creating a 411 nurse service; and appointing a pharmacy benefit administrator. Secretary Birdwhistell noted that restraining pharmacy costs was a huge necessity and a system of tracking and securing rebates from the pharmaceutical companies was initiated. As a result of those steps, Kentucky’s Medicaid program now utilizes almost 60 percent of generic pharmaceutical products, a development that generates huge savings to the state.
The other vital strategy pursued to transform its Medicaid program involved seeking greater flexibility by securing waivers from the federal government. Secretary Birdwhistell emphasized that the greater level of flexibility that the states could assume in administering their Medicaid programs, the more it would ensure, not only that those most in need of medical care would receive it, but also that the state’s financial position would not be compromised as a result of high Medicaid expenditures. Kentucky adopted a two-track approach in applying for waivers. The first track involved an omnibus, super-waiver application to the U.S. Department of Health and Human Services that was submitted in November 2005. The second track involved aggressively lobbying the U.S. Congress to secure such a waiver. While securing federal government waivers for greater flexibility was a strategy pursued by a number of states, Kentucky’s application sought to assign Medicaid recipients into different benefit packages based on need. This was a drastic shift from the way Medicaid services had been provided in the past. In this connection, Secretary Birdwhistell stated that his state adopted portions of plans initiated in a number of states from across the country, from Florida to West Virginia to Vermont. He stressed the need for states to exchange best practices. In terms of the lobbying efforts (i.e., the second track), he highlighted the efforts of Governor Huckabee and the National Governors Association in pro-actively lobbying members of Congress, and noted that he too testified before a Congressional sub-committee on the topic.
After a period of review, the federal government approved the waiver application and authorized Kentucky to proceed with the proposed changes to its Medicaid program. The passage of the Deficit Reduction Act of 2006, which was signed into law in early 2006, was crucial in granting states the flexibility to proceed with revamping their Medicaid programs. Kentucky was one of the states that benefited immensely from this new federal law. In fact, Kentucky was allowed to proceed with the proposed changes based on a simple plan amendment.
As a result of these waivers, and as of July 1, 2006, all Kentucky’s Medicaid recipients are enrolled in one of four benefit packages, based on their needs and medical requirements. These plans include: Global Choice (the plan offered to a bulk of the state’s Medicaid population); Family Choice (the plan provided to families with children); Optimum Choice (the plan offered to those with serious disabilities); and Comprehensive Choice (the plan offered to those in long-term care). According to Secretary Birdwhistell, Kentucky was the first state in the country to launch a comprehensive Medicaid reform plan, a development noted by U.S. Department of Health and Human Services Secretary in the following manner: “Kentucky is leading the nation in crafting Medicaid benefits to meet the needs of the state’s residents.”
In closing, Secretary Birdwhistell stressed that the current environment required that states develop innovative strategies to deal with Medicaid pressures and encouraged all the SLC states to pursue the greater flexibility being provided by the federal government in providing Medicaid services to residents.
Monday, July 31, 2006
I. Global Economy, Regional Impacts
William Poole, President and Chief Executive Officer, Federal Reserve Bank of St. Louis
National and international economic trends play a sizable role in SLC state economies. The increasingly dominant economic role played by China, along with the diverse impacts of operating in a global economy, requires that policymakers in every part of the country heed the ongoing structural transformation of local, state and national economies.
Mr. Poole’s Presentation
Mr. Poole began by noting that while press reports regarding the enormous growth of China’s exports to the United States remain extensive, the purpose of his presentation was to emphasize that the sale of U.S. goods and services to China also is very large, continues to increase and is critically important to the United States. In fact, firms in the 16 SLC states are engaged in substantial exporting activity to China, and Mr. Poole used two illustrations to emphasize this point. First, Kanawha Scales and Systems, a company located in Poca, West Virginia, with a population of about 1,000, exports coal-loading machines to China, which account for about one-third of the company’s $50 million annual revenues. Second, a group from Kentucky will be involved in the construction of a thoroughbred racetrack in China, the first in mainland China, which will result in 1,500 Kentucky thoroughbreds being sold and shipped to China. In addition, a number of Chinese will come to Kentucky to learn how to be trainers, exercise riders, jockeys, grooms and hot walkers.
According to Mr. Poole, increases in international trade depend on three key factors: income growth, reductions in trade barriers, and declines in transportation costs. While income growth remains the most important factor in stimulating trade worldwide, the other two factors also are significant. In fact, almost without exception in the past 55 years, growth in world merchandise exports has exceeded growth in gross domestic product (GDP). Mr. Poole noted that beginning in 1978, China embarked on a series of policy changes that led to its economy relying increasingly on markets and price signals for allocating productive resources. As a result of the ensuing changes, the Chinese economy is now the world’s second largest economy, trailing only the United States in terms of total production, measured in dollars at purchasing power parity. The most vivid illustration of the rapid Chinese growth is documented by the fact that—adjusted for inflation—China’s per capita GDP in 2004 was 6.6 times its 1980 level. Yet, although the overall Chinese economy is large, China still is a country with a relatively low level of per capita income; Mr. Poole also stated that China’s real per capita GDP today is about equal to U.S. per capita GDP in 1886.
Integrating the Chinese economy into the United States and world economies poses challenges, Mr. Poole noted, primarily due to the increased supply of low-skilled labor into the global economic system. There are two immediate effects of this phenomenon. The wages of low-skilled labor in high-income countries fall or increase more slowly than before China’s entry into the world trading system. Second, prices of those goods that require relatively large amounts of low-skilled labor decline. Both these trends, particularly the adverse income changes, generate demands for a government response to ameliorate the negative results faced by broad segments of the economy. In terms of a government response, Mr. Poole indicated that the optimal solution for the United States as a whole is to adopt policies that will increase the skill levels of affected workers, so that they can increase their compensation and employment prospects, which will allow them to adjust to the evolving economic environment. Importantly, China’s economy has expanded so significantly in size that in recent years it has served as an engine of growth, not only in Asia, but also worldwide. According to Mr. Poole, a wealthier China means rising Chinese demand for goods of all sorts, including high-tech goods that China does not produce.
In the context of an expanding Chinese economy, Mr. Poole indicated that the last decade has seen a substantial increase in the U.S.-China bilateral trade balance. Specifically, in 1995, the U.S. bilateral trade deficit with China was approximately $20 billion; this deficit has increased yearly, reaching $202 billion for 2005, which was 28 percent of the overall U.S. trade deficit. However, in 1995, China’s share of the overall U.S. trade deficit was actually larger, about 35 percent. Obviously, since 1995, the growth of U.S. imports from China has exceeded the growth of U.S. exports to China; specifically, between 1995 and 2005, U.S. imports from China increased more than fivefold, while U.S. exports to China increased by a factor of 3.6.
In terms of the SLC states, Mr. Poole indicated that electrical machinery and equipment as well as nuclear reactors, boilers, machinery, and mechanical appliances, accounted for 25 percent of the SLC states’ exports to China during 2005, the largest two export sectors, in the SLC states and the United States as a whole. Electrical machinery and equipment remain the leading export category for two SLC states—Texas and South Carolina—while nuclear reactors, boilers, machinery and mechanical appliances remain the leading export category for four states—North Carolina, Missouri, Maryland and Oklahoma. For the remaining 10 SLC states, Mr. Poole noted, the following commodity codes appear: plastic products for Alabama and West Virginia, oil seeds for Louisiana, cotton for Tennessee, wood pulp for Georgia, base metals for Virginia, iron and steel products for Kentucky, fertilizers for Florida, vehicles and parts for Mississippi, and inorganic chemicals for Arkansas.
In closing, Mr. Poole indicated that the growth of the Chinese economy has provided, and will almost certainly continue to provide, U.S. firms with important export opportunities. However, the continuing integration of China into the world economy presents both political and economic challenges, a trend that will continue in the upcoming months and years. As challenging as this might sometimes be, “taking advantage of the opportunities presented by Chinese growth, rather than simply attempting to negate the competitive pressures, is in the best interest of both countries.” Mr. Poole cited the experience and strategies of the SLC states in seizing these opportunities to increase exports to China, and noted that export growth by nearly all of the SLC states has exceeded the national average.
II. The 65 Percent Solution
Paul Gazzero, Director of Analytics, Standard and Poor’s, New York
Based on executive orders, legislative initiatives, referenda or constitutional amendments, a number of states have proposed measures requiring school districts to spend at least 65 percent of their operational budgets on in-class instruction. Given the pressure to provide quality education in a state fiscal environment that continues to face challenges, there is a great deal of interest in determining what the latest research reveals in terms of the relationship between spending levels and student performance.
Mr. Gazzero’s Presentation
According to Mr. Gazzero, in recent years, there has been an increasing focus in states across the country to review and initiate policies to affect the relationship between spending and student achievement. In response to this trend, and given the critical importance of education, Standard & Poor’s (S & P) established a subsidiary unit to serve policymakers at the national, state and local levels by providing sound education data.
S & P’s School Matters unit (www.SchoolMatters.com), set up in March 2005, according to Mr. Gazzero, seeks to synthesize academic, demographic and financial data for a return on resources analysis. He noted that the return on resources referred to the relationship between student achievement and spending in the demographic context.
S & P’s prior education research showed that education officials often reviewed such categories as student performance; spending and revenue; school environment; and community demographics as independent variables, and rarely computed their cumulative effects on a school’s return on resources. Consequently, Mr. Gazzero noted, this S & P effort was designed to fill this information vacuum.
Mr. Gazzero indicated that one of the projects undertaken by this S & P unit recently was a detailed analysis of the 65 percent solution, i.e., the trend sweeping across the nation with about two dozen states seriously considering it (Georgia already has legislation passed) that would require school districts to spend at least 65 percent of their budgets on classroom instruction. Given that school district budgets remain under severe stress as a result of rising operating costs, particularly in light of elevated oil prices and rising pension and healthcare costs for district staff, Mr. Gazzero noted that the need to maximize the impact of every dollar spent on public education provided part of the impetus for this growing movement. Proponents of this approach stress that this approach would increase the amount of money spent in the classroom without increasing taxes; reduce the amount spent on wasteful administrative costs by making districts accountable for how they spend their money; and improve student performance by focusing on classroom activities.
In light of this growing trend, S & P, Mr. Gazzero stated, is interested in exploring whether there was empirical evidence documenting that allocating more money to instruction (i.e., a minimum of 65 percent) would necessarily result in higher student achievement. Interestingly, he stated, the 65 percent solution surfaced at a time when many education reform initiatives placed their emphasis on measurable student outcomes, as opposed to financial inputs; yet, the 65 percent solution drive was an input-driven initiative, without any measurable outcome, such as a quantified achievement goal or targeted return on resources.
According to S & P’s analysis of district level spending and student achievement data in the states that currently are considering a 65 percent solution, Mr. Gazzero noted, there was no automatic link between higher instructional spending allocations and higher achievement levels. Before reaching this conclusion, S & P analyzed the combined reading and math proficiency rates and instructional spending allocations of the school districts in each of the following nine states: Minnesota, Ohio, Louisiana, Texas, Kentucky, Florida, Kansas, Arizona, and Colorado. Mr. Gazzero stressed that while this did not mean that how districts spent their money does not matter; in fact, allocating more money to instruction is a laudable goal. However, mandating a specific spending allocation is not likely to provide a “silver bullet” solution to raising student achievement, according to the extensive research performed by S & P. The wide range in districts’ academic proficiency rates at any given spending allocation suggests that the specific ways that school districts use their instructional dollars may have as much, if not more, of an impact on student achievement as the percentage of dollars spent in the classroom, he added.
In terms of defining classroom instruction, Mr. Gazzero indicated that he was guided by the National Center for Education Statistics’ definitions, which include classroom teachers’ and instructional aide salaries; instructional supplies including computers, television, or other multimedia devices used in instruction; co-curricular activities including field trips, athletics, music, arts; tuition paid to out-of state-districts; and payments to private institutions for special needs students. Then, outside the classroom expenditures include instructional staff support services such as teacher training, instruction and curriculum development, library and media services; student support services such as attendance takers, guidance counselors, nurses, and social workers; school and district-level administration; operations and maintenance; food services; and transportation.
Mr. Gazzero noted that there is considerable debate among the different players regarding definition of the terms classroom instruction and district operating budgets, which represent the numerator and denominator, respectively, in calculating the percentage of district spending attributable to student instruction. In this context, Mr. Gazzero stated that S & P research demonstrated that if the goal behind mandating a minimum instructional spending allocation is to ensure that money is targeted effectively toward improving student achievement, then precisely how the money is spent in the classroom is as important as what percentage is being spent on instruction. For example, three possible ways that a district might increase the percentage of its budget allocated to instruction expenditures include: paying existing teachers more; hiring more teachers (or reducing class size); and purchasing more computers for the classroom. He also indicated that an alternate formula proposed by critics of the 65 percent approach includes the expenditures related to the instruction of students, excludes administrative expenditures, and maintains comparability across districts. Under this alternate formula, instruction expenditures and instructional staff support services are included within the calculation of the percentage spent on instruction in order to allow districts flexibility to implement instruction-related initiatives that are likely to positively impact student achievement.
In conclusion, Mr. Gazzero stated that S & P’s analysis revealed that there was no minimum spending allocation that is a “silver bullet” solution for improving student achievement. While spending more on instruction generally is thought to help raise test scores, the data revealed no significant relationship between instructional spending at 65 percent, or any other level, and student performance. As policymakers search for ways to ensure that districts are minimizing inefficiencies and optimizing the effectiveness of their resources, he stressed the need for transparent and accurate data as an essential first step. Mr. Gazzero also emphasized the need to examine how the most resource-effective districts, i.e., high achieving, lower spending districts, allocate their instructional resources as a strategy for securing insights into the specific instructional techniques that would lead to higher student performance.
III. Nominating Committee Report
The Nominating Committee, comprising Senator Douglas Henry, Tennessee; Senate President Pro Tem John Chichester, Virginia; and Delegate Sheila E. Hixson, Maryland, chaired by Senator Henry, presented its recommendations for Committee chair and vice chair for 2006/2007. Senator Henry announced that there was a single name submitted for chair and a single name submitted for vice chair. Consequently, Senator Jack Hill, Georgia, was re-elected chair, and Representative John Knight, Alabama, was re-elected vice chair for the upcoming year.
SLC Fall Meeting
Savannah, Georgia, November 10-13, 2006
All committees of the Southern Legislative Conference will meet during the SLC Fall Meeting in Savannah, Georgia, November 10-13, 2006. Committee sessions will take the form of open roundtable discussions, with conference wide plenary sessions for all members. In keeping with the wishes of the SLC appointing authorities, please note that meeting notification does not authorize travel.
Staff Liaison: Sujit CanagaRetna, email@example.com, (404) 633-1866
Southern Legislative Conference 60th Annual Meeting
Fiscal Affairs & Government Operations Committee
July 29 – August 2, 2006
Senator Shane Broadway
Representative Booker T. Clemons
Kevin Anderson, Bureau of Legislative Research
Kim Arnall, Bureau of Legislative Research
Ann Cornwell, Office of the Secretary of the Senate
Roger Norman, Division of Legislative Audit
Charles Robinson, Legislative Joint Audit
Senator Jerry Grafstein
France Bonsant, Member of Parliament
Daniel Charbonneau, Canada-US Inter-Parliamentary Group
Jim Tatten, Catholic Health Initiatives
District of Columbia
Steve Blackistone, National Transportation Safety Board
Kevin Thompson, EDS Corporation
David Thorpe, American Beverage Association
John Webb, Direct Selling Association
Senator Don Balfour
Representative Tommy Benton
Representative Burke Day
Representative Johnny Floyd
Senator Jack Hill
Senator Ralph Hudgens
Representative Carl Rogers
Representative A. Richard Royal
Representative Donna Sheldon
Representative Bob Smith
Sujit CanagaRetna, Southern Legislative Conference
Colleen Cousineau, Southern Legislative Conference
Asenith Dixon, Senate Research Office
Todd Edwards, Association of County Commissioners of Georgia
Angie Fiese, Senate Research Office
Jim H. White, ACI, Inc.
Senate President David L. Williams, SLC Chairman
Speaker Jody Richards
Senator Denise Harper Angel
Representative Eddie Ballard
Senator Walter Blevins
Senator Charlie Borders
Senator Tom Buford
Representative Tom Burch
Representative Dwight Butler
Representative Mike Cherry
Representative Jim DeCesare
Representative David Floyd
Representative Derrick Graham
Senator Ernie Harris
Representative Mike Harmon
Representative Joni L. Jenkins
Representative Thomas R. Kerr
Representative Jimmie Lee
Representative Mary Lou Marzian
Representative Tom McKee
Representative Harry Moberly
Representative Lonnie Napier
Representative Darryl T. Owens
Representative Ruth Ann Palumbo
Senator Richard “Dick” Roeding
Senator Dan Seum
Senator Tim Shaughnessy
Representative Brandon D. Smith
Senate President Pro Tem Katie Kratz Stine
Senator Elizabeth Tori
Senator Jack Westwood
Senator Ken Winters
Representative Addia K. Wuchner
Barbara Anderson, EDS Corporation
Stacy H. Bassett, Office of the Governor
Amy Barkley, Kentucky Action, Inc.
Hunter Bates, Bates Capitol Group, LLC
Todd Bledisloe, Eli Lilly Pharmaceuticals
Mark Birdwhistell, Kentucky Cabinet for Health and Family Services
Tonya Chang, American Heart Association
Keon Chi, The Council of State Governments
Laura Coleman, The Council of State Governments
Jena Collins, Apple
Mary Dusenberrry, The Council of State Governments
Becky Harilson, Office of the Senate President
Mary Ellen Horner, McBrayer, McGinnis, Leslie & Kirkland, PLLC
Patrick Jennings, Bates Capitol Group, LLC
Travis K. Kirchner
Bert May, Kentucky League of Cities
Karen Thomas Lentz
John Mountjoy, The Council of State Governments
Timothy M. Mulloy, ICON Properties/ Louisville Downtown Marriott
Barbara McDaniel, Toyota Corporation
Kristy Taylor Standifer, EDS Corporation
John Warren, Kentucky Education Association
Amy D. Wickliffe
Jeff Drozda, Golden Rule Insurance
Senator Chris Ullo
Delegate Sheila Hixson
Senator Edward J. Kasemeyer
Delegate Ruth Kirk
Diana Saquella, State Teachers Association
Senator Hillman Frazier
Senator Jack Gordon
Senator Joseph C. Thomas
Representative George Flaggs, Jr.
Representative J.B. Markham
Representative John Read
Representative Percy Watson
Richard J. Moor, House Appropriations Committee
Don Richardson, Office of the House Clerk
Speaker Rod Jetton
Joe Elstner, Federal Reserve Bank of St. Louis
Ted Farnen, Senate Staff
Maria Hampton, Federal Reserve Bank of St. Louis
William Poole, Federal Reserve Bank of St. Louis
Representative Bill Daughtridge
Representative Philip Haire
Representative Julia C. Howard
Canaan Y. Huie, Senate Staff
Gordon H. Rosenberry, Johnson & Johnson
Speaker Pro Tem Susan Winchester
Representative Joe E. Brown
Candice Morgan, University of Phoenix
Senator Douglas Henry
Senator Mark Norris
Wanda L. Arnaud, University of Phoenix
Roark C. Brown, Legislative Budget Office
Walter Gose, Sanofi- Aventis Pharmaceuticals
John G. Morgan, Office of the Comptroller
Dale Sims, Treasury Department
Charlie Sorrells, Eastman Chemical Company
Ellen Tewes, Office of Legal Services
David Thurman, Budget Office
Senator Royce West
Sano Blocker, EDS Corporation
Gary A. Fuchs, EDS Corporation
Crayton Webb, Mary Kay Inc.
Senate President Pro Tem John Chichester
Delegate William K. Barlow
Delegate Phil Hamilton
Senator Yvonne B. Miller
Senator John Watkins
Richard E. Hickman, Senate Finance Committee
Esson M. “E.M.” Miller, Division of Legislative Services
Laurie Smalling, Wal-Mart Stores, Inc.
Senate President Pro Tem William R. Sharpe, Jr.
Delegate Robert D. Beach
Senator Walter Helmick
Senator Joseph M. Minard
Senator Roman W. Prezioso
Aaron Allred, Legislative Services Division
Terry Bird, Public Services Commission
John Perdue, Office of the Treasurer