Testimony – Unfunded Mandate Reform Act

Good morning. I am grateful for the opportunity to testify on behalf of the nation’s Governors on a five-year review of the Unfunded Mandates Reform Act (UMRA).

The Unfunded Mandates Reform Act – The Successes

When the Unfunded Mandates Reform Act was first enacted, many expressed fears that it would interfere with the efficiency of Congress, that it would not change congressional decisions, and that it lacked sufficient enforcement. Those apprehensions were misplaced. The work of the Congressional Budget Office (CBO) has not obstructed committee action, but rather has served to enhance congressional decision-making through better information. Much credit is due not only to both of your committees, which were so essential to the enactment of UMRA, but also to the superb work at CBO.

Direct mandates have declined sharply in the wake of the Act. But I would venture that UMRA has had an even greater intangible benefit. As Congressman Portman once told us, he was certain this would be one of those bills that he could frame and hang on his wall, and it would become just another relic of history. But, to his surprise, the Act has led – time and again – to members asking his advice: “Do you think this bill will cause an UMRA problem? With whom should I work?” The very threat of a CBO report has engendered efforts to reach out to state and local leaders before the fact – instead of after. It has changed the nature of our intergovernmental discussion in a very positive way.

When UMRA was enacted in 1995, its purpose was to curb the practice of imposing unfunded federal mandates on state and local governments and to strengthen our intergovernmental partnership. UMRA was clearly intended as a means of reducing the fiscal and programmatic impact of purely federal decisions on state administered or financed programs. In deference to the principles of federalism, UMRA recognized that federal legislation should not impose unnecessary burdens on state and local governments. The Act established new procedures designed to ensure that both the legislative and executive branches fully consider the potential fiscal impact of unfunded federal mandates before imposing them on state and local governments or the private sector. Title I of the Act amended the Congressional Budget and Impoundment Control Act, setting forth requirements for committees and CBO to study and report on the magnitude and impact of federal mandates proposed in legislation, including for private-sector mandates over $100 million. UMRA established a point of order against the consideration of legislation if it contains an unfunded intergovernmental mandate exceeding $50 million or if a committee, when reporting a bill or joint resolution, fails to include in either the committee report or the Congressional Record a statement from CBO estimating the direct costs of any mandate contained in the legislation. The new procedures have largely succeeded in ensuring debate and accountability during the consideration of legislation containing unfunded intergovernmental mandates.

Exemption from UMRA – A Growing Problem

While the Governors believe that UMRA has led to a significant improvement in Congress, its very success has demonstrated areas where the spirit of the law has been circumvented, notwithstanding extraordinary impacts on states. Let me provide three examples.

The Senate tax bill. Even though the state estate tax provision in the Senate version of the tax bill would result in a cost shift to the states of between $50-$100 billion over the next ten years from the accelerated cut and elimination of the state death tax credit, thereby creating a severe, disproportional impact on states compared to the federal government, the provision has been determined not to violate UMRA because the change in federal law would create no “enforceable duty” on the states. This change, if agreed to by the conferees, would impose an unprecedented mandate on states; yet it is defined in such a way that it avoids the clear purpose of the law to ensure discussion with states, debate, and accountability.

Medicaid. Enacted in 1965 as the nation’s primary health and long-term care program for the poor, Medicaid is state administered and jointly financed by the states and the federal government. Currently serving approximately 40 million individuals at a total annual cost of $200 billion, Medicaid spending is very sensitive to both federal legislation and regulation. Its legislative history in recent years has been one of congressionally mandated expansions, reimbursement requirements, and other dictates. It is interesting therefore that the most important state-federal program in existence, Medicaid, is exempt from UMRA.

There are two primary reasons why Congress has exempted Medicaid from consideration under UMRA. The reasons are quite different but neither is completely convincing from a public policy standpoint.

The first reason is that given the sheer size of Medicaid, there are very few decisions that could be made at the federal level that would not cause state spending to increase by at least $50 million – the threshold in UMRA. Fairly minor eligibility expansions, benefits requirements, reimbursement changes, or systems changes can easily total hundreds of millions – if not billions – of dollars in increased spending. Therefore, many in Congress do not want to have UMRA apply to Medicaid for the simple reason that it would make it very difficult to make changes to the program.

The second is that some in Congress believe that UMRA can never truly apply to Medicaid simply because of the nature of the program. In order to operate a Medicaid program, each state must provide a certain number of mandatory services to mandatory populations. Beyond those minimum federal requirements, however, there are a large number of eligibility and benefits options that states may choose. States have embraced many of these options, such as prescription drug coverage, home and community-based long-term care, and expansions of coverage to low-income pregnant women and children, and to seniors living in poverty.

The rationale of this second reason is that because so much (approximately 60 percent on average) of any given state’s Medicaid budget is taken up by optional services and/or optional populations, these options could be eliminated or reduced in a budget crunch. Once implemented, these optional benefits become very difficult to eliminate.

Therefore, it becomes obvious that new requirements on Medicaid cannot simply be absorbed by eliminating other categories of Medicaid spending. New requirements serve only to increase the Medicaid baseline and truly do constitute unfunded mandates.

UMRA should be a vehicle to help us all rethink this program – which now constitutes more than 20 percent of state budgets. Rethinking this federal-state program so that it makes sense and works is one of the Governors’ highest priorities.

The Health Insurance Portability and Accountability Act (HIPAA). NGA policy on this Act is clear: “HIPAA represents one of the largest unfunded federal mandates in recent history, as no federal dollars were explicitly committed to the implementation of this federal law.”

The main goal of the Health Insurance and Portability Act is administrative simplification. HIPAA standardizes data collection and processing across all sectors of the health insurance industry, including Medicaid, State Employee Benefits Programs, and other related state agencies. In practice, every insurer and provider will be required to 1) use standardized codes for billing and reporting, and 2) convert to compatible electronic computing systems. In theory, once fully implemented, a doctor or hospital would fill out the same electronic form for private health insurance as they would for Medicaid.

While it has been very difficult for NGA to ascertain how much HIPAA will cost the states, anecdotal evidence suggests that HIPAA is easily the largest single unfunded mandate on states in quite some time. While HIPAA has an opt-out for self-funded state plans, it will be practically impossible for states to remain the only purchaser not utilizing these uniform standards.

Because HIPAA applies to Medicaid, CBO has determined that there cannot be mandates under UMRA since states could always eliminate optional services or populations to pay for the new mandated requirements. Again, this clearly circumvents at least the spirit of UMRA.

Potential Modifications to Title I

From a federalism standpoint the world has shifted considerably over the last five years. Essentially, the nature of mandates has changed and preemption of state authority has superceded mandates as the major problem. Specific changes are as follows.

  • First, recent legislative proposals such as the Internet tax moratorium and the Senate-proposed accelerated repeal of the state credit on the estate tax, indicate that the federal government will increasingly intrude or restrict state tax sources. For well over 200 years Congress has respected the sovereign right of states to enact their own revenue systems. Recent tax initiatives in Congress are changing this critical precedent.
  • Second, Medicaid and related programs are becoming an increasing proportion of both state and federal spending. To continue to exempt this program substantially reduces the effectiveness of UMRA.
  • Third, the federal government is increasingly preempting state regulatory authority when no costs are involved. From health care to banking to telecommunications, state regulatory power is being widely preempted in the name of interstate commerce. This is a scary trend for our federalism form of government.

It is critical to amend UMRA and expand its scope to cover these important issues.

Title II of UMRA

Title II of UMRA requires agencies to assess the effects of proposed and final federal rules on state and local governments and the private sector, and to prepare a statement for any mandate requiring an expenditure of $100 million or more in any one year. The title also requires agencies, for rules with an intergovernmental or private sector mandate, to identify and consider a reasonable number of regulatory alternatives and to “select the least costly, most cost-effective, or least burdensome alternative” or explain why not.

This section of the law has not been as effective. Over the last five years, there has been relatively little consultation with state and local governments.

President Bush has recently created a task force on federalism to focus on this issue and federalism in general. The task force has a goal to complete a new executive order by August 26, 2001.

Our recommendation at this time is to not make changes to Title II but to wait and see what the Administration does with a new executive order and then determine its effectiveness. Some general guidelines to the Administration would be as follows.

  • First, enforcement is the key. Executive orders by the last three Administrations have never been enforced. Most sounded good on paper, but agencies rarely complied with the directives.
  • Second, like CBO, there needs to be several staff individuals within the Office of Management and Budget or the White House that coordinate, meet on a regular basis with representatives of states and local governments, and enforce any Executive Order.
  • Third, the activity must be highly focused or targeted. For example, we are most interested in the top 20-40 legislative or rule initiatives. The seven state and local groups would be willing to help the Administration focus on the key issues.

Mr. Chairman, thank you and I would be happy to answer any questions.