July 28, 2014

Washington Budget Report: July 23, 2013

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Debt Limit Showdown Could Harm U.S. Credit Outlook

Three recent reports by credit ratings agencies (Moody’s Analytics, Fitch Ratings and Standard and Poor’s) have shown some improvement in the credit outlook for the United States, mostly due to the steadily improving economy and the declining deficit.

Moody’s and Standard and Poor’s upgraded their respective outlooks from “negative” to “stable.”

But as Robert L. Bixby, Executive Director of The Concord Coalition, points out in a new blog, “Concerns remain about the long-term outlook and the ability of elected leaders to raise the nation’s debt ceiling without provoking a crisis.”

Bixby writes that, “Despite their caveats, these reports might feed into an optimistic narrative that says the declining deficit and improving economy mean we can back away from efforts to rein-in the nation’s unsustainable structural budget deficit (i.e., a “grand bargain”).

This is a false, if politically tempting, narrative and one that is not supported by the credit ratings reports. The need for a comprehensive fiscal plan is not about cutting the deficit in the near-term while the economy is still weak, but about putting the budget on a sustainable long-term track.”

As noted by Standard and Poor’s, “We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation’s longer-term fiscal challenges could place renewed downward pressure on the rating.”

Fitch’s said that it will conduct a further review before the end of the year. It specifically noted that, “Avoidance of a ‘debt ceiling crisis’ and government shutdown would suggest that despite profound political differences, there is a common willingness to avoid disruptive and regular episodes of ‘crisis’ and would be supportive of a stabilization of the Outlook.”

 

Detroit Becomes Largest City to File for Bankruptcy

The city of Detroit filed for bankruptcy on Friday, making it the largest city in the United States to do so. 

A number of factors led to the city’s current fiscal hole, including outsized pension obligations, a shrinking population, and high unemployment. The state appointed an emergency financial manager in March to address the situation but city officials have since determined bankruptcy to be the only viable path forward.

Detroit is not alone; 13 other cities and local governments have filed for bankruptcy since the 2008 financial crisis. According to the Federal Reserve, the total debt of state and local governments is nearly $3 trillion. An analysis by Boston College in 2012 also found that local governments are liable for roughly $1 trillion more in pension liabilities than they have assets to pay for.

 

Health Care Costs Put Pressure on Military Budget

As health care costs claim more and more of the nation’s defense budget, policymakers must make tough decisions about how to rein in those costs.

The Congressional Budget Office (CBO) last year projected that spending on the military health system could increase from $51 billion in 2013 to $65 in 2017. A recent CBO presentation shows health care costs consuming over 14 percent of the defense budget in 2030, up from less than 10 percent this year.

Much of this spending is related to the Pentagon’s TRICARE health plans, including TRICARE for Life, the military’s wrap-around coverage for enrollees in Medicare Part B.

Military families pay significantly less for health care than their civilian counterparts with employer- based insurance. Last year military retiree families with TRICARE Prime, a managed care option, paid only $965 in out-of-pocket costs while their civilian counterparts in an HMO paid $6,080.

More than a fourth of military retirees switched from private insurance to TRICARE between 2001 and 2012. The Defense Department attributes most of that to low TRICARE premiums and out-of-pocket expenses.

Reform options include minimum out-of-pocket costs for TRICARE for Life so that it no longer covers most or all of Medicare’s cost-sharing requirements. The latest Simpson-Bowles deficit-reduction plan endorses similar reforms.

Other options include consolidating military medical agencies and increasing various fees, copayments and deductibles. CBO estimates that such options could save billions of dollars a year.

Even though coverage for active-duty servicemen or service-related injuries would be untouched by reform options, many members of Congress have opposed even moderate steps to help the Pentagon hold down its health care bills for military retirees.