CHAIR'S REPORT
FISCAL AFFAIRS AND GOVERNMENT OPERATIONS COMMITEE
TO: Members of the Executive Committee
FR: Senator
Chair, SLC Fiscal Affairs and Government Operations (FAGO) Committee
RE: Report of Activities of the FAGO Committee at the 61st Annual Meeting of the Southern Legislative Conference in
The Fiscal Affairs and Government Operations Committee convened on Sunday, July 15, and Monday, July 16. The following is a synopsis of the presentations made to the Committee on both days. An attendance list is attached.
Business Session, July 15, 2007
I. Federal REAL ID Legislation: Financial Implications for States
Senator Larry Martin,
Background
The federal REAL ID Act of 2005 has created a furor in states across the country with reports that states face an estimated $14.6 billion in costs in order to satisfy the Act’s requirements. Six states, including two SLC states (
Senator Martin’s Presentation
Senator Martin began his presentation by noting that there are several occasions in American history when states opposed the actions of the federal government and even the king of
Following the provisions of this federal legislation, Senator Martin indicated, would entail a substantial increase in overall costs at the South Carolina Department of Motor Vehicles (DMV). Even at this juncture, Senator Martin noted, his state’s DMV is weighted down by surging costs and the need to trim agency expenditures; implementing the provisions of REAL ID without comprehensive financial assistance from the federal government would only further exacerbate an already tenuous situation.
According to Senator Martin, implementation of the federal legislation would result in about $25 million to $29 million in additional costs to his state;
Senator Martin stressed that
Alongside the financial concerns, Senator Martin also emphasized that there are security concerns related to REAL ID that would place additional burdens on the state. For instance, issues such as security clearances for DMV employees; potential for erroneous data; increased physical security for storage of the information; document storage/verification infrastructure; a “Federated” database that will now be available to other institutions; and the fact that South Carolina will lose control of the privacy of its residents’ information all are factors that could result from the adoption of REAL ID. In closing, Senator Martin stated that REAL ID was real expensive which is why the state of
Representative Guest’s Presentation
Representative Guest noted at the outset that he was the force behind the formation of L.A.R.I. or Legislators Against Real ID, which has grown to become an organization of lawmakers from 34 states across the country. He was persuaded to lead this effort as a form of “reasonable rebellion against the federal government” in order to ensure the protection of critical states’ rights.
The origin of REAL ID, Representative Guest indicated, was legislation added on as part of the emergency Iraq/Afghanistan supplemental appropriations bill in May 2005, designed to provide emergency funds for
According to Representative Guest, there are several instances where a REAL ID would be required by federal officials. For instance, federal officials maintain that a REAL ID would be required if an individual sought to board a federally regulated aircraft. Similarly, if an individual sought to enter a federal building or a nuclear power plant, a REAL ID would be mandatory. Potentially, in the future, Representative Guest predicted that a REAL ID would be required to open a bank account, participate in federal programs, secure housing and even to obtain employment. Even more disturbing, according to Representative Guest, is the fact that the federal Department of Homeland Security (DHS) website notes that “DHS may consider expanding these official purposes through future rulemakings to maximize the security benefits of REAL ID.” According to Representative Guest, this statement from DHS demonstrates that the federal government has the authority to change the rules regarding REAL ID without further legislation.
While May 2008 is listed as the date by which all states have to comply with the requirements of the REAL ID legislation, Representative Guest indicated that states may request an extension even though they have to submit their requests no later than February 1, 2008. Full compliance with REAL ID’s requirements has to take place no later than December 31, 2009. According to Representative Guest, there were several documents that individuals would have to provide in order to secure a REAL ID, and these include a valid U.S. passport; a certified birth certificate; if a foreign passport is being submitted, all the necessary verifications; verification of the individual’s Social Security number; proof of principal residence in the United States; and finally, the necessary documents from the U.S. Citizenship and Immigration Services (USCIS) establishing the individual’s lawful status in the United States, if appropriate.
In further elaborating on the implications of a REAL ID, Representative Guest stated that at a minimum, the following pieces of information would have to be contained on a REAL ID: full legal name; date of birth; driver’s license number; high-resolution digital color photo and bio-metric identifier; principal residence; and signature. The card, he noted, would contain common machine readable technology. He also added that it would not provide for exclusion on religious grounds.
One of the more controversial aspects of contemporary identification cards, including REAL ID, Representative Guest indicated, is the common machine readable technology aspect of these cards. He stated that there currently are five card types being considered by the federal DHS, including the 1D bar code; 2D bar code; optical stripe; contact integrated circuit chip; and contactless integrated circuit chip. Yet, another disturbing feature of the REAL ID legislation, according to Representative Guest, is the use of document retention policies. Specifically, he noted that states would 
be required to retain copies of an individual’s records for 10 years and share this information with other states, or maintain databases that other states could access through a computer network. He also noted that DHS has proposed a global sharing of this information across different levels of government. Another controversial aspect of this federal legislation is the fact that REAL ID will not thwart identity theft, one of the fastest growing criminal activities in contemporary American society. In fact, he contended that REAL ID would actually result in an increase in identity theft with the propensity for an increase in the black-market for documentation.
In closing, Representative Guest stressed that REAL ID would only give Americans a false sense of security and that states should join him in seeking to “Stop REAL ID.”
Program Session, July 16, 2007
I. Homeowners’ Insurance and Storm-Prone Coastal States
Senator Bill Posey,
Background
The homeowners’ insurance environment in a number of SLC and non-SLC states continues to be in turmoil in the aftermath of recent hurricane seasons. Several insurers have pulled out of areas in these coastal states, and state legislators continue to grapple with holding down premiums without driving away companies.
Senator Posey’s Presentation
Senator Posey began his remarks by noting that it will only be a matter of time before several states will face the same kind of issues that swept across
While the ensuing dozen years or so after Hurricane Andrew were relatively quiet on the hurricane front, the entire scenario changed in 2004 and 2005, when Florida endured eight hurricanes—storms that affected every one of Florida’s 67 counties at least once—with insured losses totaling $36 billion. Senator Posey added that forecasters called for a continuation of these trends and that at least into the next decade, the region would experience intense, severe hurricanes. Given the tremendous insured losses experienced by the industry during this time period, by 2006, he noted, homeowners insurance premiums had skyrocketed to severe heights as the industry sought to recover from the losses in the prior two years. As a result of this development, practically every legislator who ran for office in 2006 pledged to enact measures to bring about relief to homeowners across the state. Consequently, a few days into 2007, the new governor convened a special session of the Florida Legislature to address this looming issue, Senator Posey stated.
According to the Senator Posey, even though the Republican-controlled Legislature and Republican governor were committed to across-the-board rate reductions during this special session, the reality proved more cumbersome. He also stated that the Florida Legislature is by-and-large a very free market oriented body that certainly had “no interest in getting into the insurance industry.” However, given the dire situation associated with the huge premium increases in homeowners’ insurance rates, and the fact that many homeowners could not secure insurance coverage at any cost, the Legislature had to get involved in devising an appropriate response to this crisis, he noted. Senator Posey indicated that the discussions on an appropriate solution to the issue, certainly the top issue facing Florida at that time, were conducted in a very bi-partisan fashion, and he commended the tremendous work done by his Democratic colleague (Senator Steve Gellar, the ranking minority member of the committee) on this topic.
In seeking solutions to the crisis, Senator Posey indicated that legislators made a concerted effort to break down the cost structure of a homeowner’s premium. While this was a very difficult task, in approximate terms, Senator Posey noted that 25 cents of every dollar involved sales and advertising costs; another 25 cents involved operational costs and profits; a further 25 cents involved the amount set aside for “normal” losses; and the final 25 cents involved re-insurer charges. It was this final category that had seen the largest jump, stated Senator Posey, with charges leaping to as much as 75 cents from the former 25 cents. As a result, the Legislature decided to work on lowering the cost of re-insurer charges by expanding the state’s CAT fund. The higher premiums charged to the insurance companies contributing to the CAT fund amounted to up to a 10 percent increase, with the larger companies bearing a greater share of the burden. He added that the goal was to increase the CAT fund from $12 billion to $34 billion. Another important provision of the legislation passed in January 2007, he stated, was significantly enhancing the powers of the insurance advocate in the state.
The legislation that eventually passed the Legislature with almost unanimous support 116 to 2 in the House of Representatives and 40 to 0 in the Senate was not perfect, he added, and also indicated that “we don’t claim that the work is done.” For instance,
Another important measure of the legislation was that the customers of Citizens Property Insurance, the state-run corporation, initiated a repeal of the average 21 percent rate increase that took effect in January 2007. Citizens Property Insurance customers who faced an additional 56 percent increase in rates in March 2007 also were provided relief when this rate increase was repealed. He noted that Citizens Property Insurance, which ran substantial deficits in 2004 and 2005, as did many insurance companies, has now become the state’s largest home insurer, covering 1.7 million households. The new legislation repeals a requirement that Citizens Property Insurance assess higher rates than private companies and now allows it to offer more than just windstorm coverage to
In closing, Senator Posey noted that there is light at the end of the tunnel, but that there will continue to be significant hurdles to overcome in the future. He recommended that preventive measures be taken to minimize the impact of hurricanes and mitigate the related financial losses. He noted that the building code enhancements implemented after Hurricane Andrew in 1993, and then again in 2000, were the reason why the hurricanes that hit
Dr. Weisbart’s Presentation
According to Dr. Weisbart, there are four main factors currently driving the coastal insurance affordability and availability scenario. First, there is extensive coastal development and each unit is now a larger potential loss; second, the greater frequency and severity of major storms, which in turn results in higher “direct” insurance premiums, higher reinsurance premiums and higher repair costs given the scarcity of labor and materials; third, the fact that insurance carriers are re-evaluating their “appetite” for coastal property insurance risk; and, fourth, post-Katrina lawsuits have added to the uncertainty about future loss payments resulting in rising rates.
Dr. Weisbart noted a review of the profit cycle in the insurance industry over the last three decades indicates that this is a widely fluctuating market. For instance, there were several years of record profits (1977 at 19 percent; 1987 at 17.3 percent; 1997 at 11.6 percent; 2006 at 14 percent) while there also were lean years (1975 at 2.4 percent; 1984 at 1.8 percent; 1992 at 4.5 percent; 2001 at negative 1.2 percent). More specifically, the underwriting gains/losses in
Dr. Weisbart noted that tropical systems accounted for nearly half of all insured catastrophic losses between 1986 and 2005, up from 27.1 percent between 1984 and 2003, and two of the 10 hurricanes that caused the greatest direct economic damage since 1900 occurred in 2004 and 2005. The devastating hurricanes of 1926 that destroyed
An important statistic cited by Dr. Weisbart is the documented steady rise in the percent of insured coastal properties as a percent of statewide insured exposure. He indicated that there were six states that had a coastal exposure greater than 50 percent of their total statewide exposure, with
In listing what works and what does not with regard to hurricane risk, Dr. Weisbart stated that there are a number of successful tools for controlling hurricane exposure. Specifically, he indicated that strengthening building codes; enforcing building codes stringently; fortifying home programs; basing insurance rates on sound actuarial principles (risk-based rates that are not government controlled); maintaining disciplined underwriting priorities; removing impediments to capital flows; and creating incentives to adopt mitigation techniques, are critical measures.
Dr. Weisbart also highlighted several flaws in the FHCF format, including the fact that there is no true spreading of the risks involved given that Citizens Property Insurance’s—the entity established by the state as a homeowners' insurance safety net—market share is concentrated in the riskiest areas, and the fact that the FHCF remains Citizens Property Insurance’s sole re-insurer. He also cited additional flaws in Florida’s approach with the FHCF including the fact that the rates charged to residents are below “actuarially sound” levels; Citizens Property Insurance and the FHCF are too thinly capitalized so losses are substantially funded via post-event assessment; likely to alienate the business community; the state’s approach with Citizens Property Insurance and the FHCF subsidizes homeowners insurance rates for wealthy people, who have no need for a subsidy; and, finally, because, in his perspective, it does little to address true risk of hurricane damages.
Dr. Weisbart called on legislators to raise the level of public awareness regarding risk with mandatory risk disclosures in all residential real estate transactions, require signed waivers if the homeowner declines flood coverage (which will also waive rights to any and all disaster aid) and if possible, mandate flood coverage. He also urged legislators to strengthen and enforce sound building codes and to allow markets to determine all property insurance rates.
In closing, Dr. Weisbart listed several additional points including that it is unwise to blame the insurance industry for rising rates since they reflect the risk of loss. In order to reduce rates, Dr. Weisbart exhorted the legislators to reduce the risk of loss by retrofitting buildings and enacting tougher building codes. Finally, he noted that while everyone wants help, not everyone needs help and that legislators should seek to subsidize incomes for poor people, not premiums for everyone.
II. State Children’s Health Insurance Program (SCHIP) Financing Update
Linda Nablo, Director, Department of Medical Assistance Services,
Background
Financing the SCHIP program remains of huge concern to a number of SLC states, and details on SCHIP financing in the short and long terms, national trends, the future direction of the program at the federal level, innovative programs from states and cost-sharing practices, all are critical issues that need to be addressed.
Ms. Nablo’s Presentation
According to Ms. Nablo, the SCHIP program, which was introduced in 1997, now is available in all 50 states, the
In
According to Ms. Nablo, the program improvements introduced in 2002 included a single application for both the Medicaid and SCHIP programs; a reduction in the waiting period to receive assistance; implemented aggressive outreach for Medicaid and FAMIS based on market research; elimination of monthly premiums (though co-payments continue); provisions for continuous coverage in FAMIS for a period of 12 months; and implementation of an electronic application system. These improvements, she indicated, resulted in a significant increase in the average monthly increase of enrolled children: 419 children in SCHIP on average per month before the program improvements to 1,107 children per month after the improvements. She also noted that SCHIP in
In terms of lessons learned by
In terms of the future of SCHIP, Ms. Nablo indicated that funding for the program will cease on September 30, 2007, without re-authorization. She noted that Congressional hearings already had begun with the U.S. Senate Finance Committee and the U.S. House of Representatives’ Energy and Commerce and Ways and Means Committees taking the lead role in these hearings. She added that governors and various advocacy groups have taken positions and the debate is becoming increasingly partisan. If Congress funds SCHIP at its current level, this would entail program cutbacks for most Southern states.
Mr. Smith’s Presentation:
According to Mr. Smith, he has been involved with SCHIP from its inception in 1997 when he was on the staff of the U.S. Senate Finance Committee and when he worked for the
Mr. Smith stated that 10 years ago, before the introduction of SCHIP, there were 10 million uninsured children, the driving force for SCHIP. Now, he noted, some 10 years later, certain reports indicate that there are 9 million children still uninsured. Since some 16 million children were added to SCHIP in the last 10 years, Mr. Smith raised the question as to how this was possible. He disputed the notion that there were actually 9 million SCHIP-eligible children still uninsured and agreed with a recent Urban Institute report indicating that there were fewer than a million children that were SCHIP-eligible that were uninsured.
The $35 billion price tag for the newly re-authorized SCHIP pays for more than the SCHIP-eligible children under the current rules, stated Mr. Smith. He added that this price tag includes children that are Medicaid eligible. According to Mr. Smith, SCHIP was never intended to cover all children in the
Mr. Smith stated that on October 1, 2007, unless there is re-authorization from Congress, SCHIP will cease to exist. “What does this mean for the states?” he posited. For instance,
In terms of what is being done to prevent this situation, Mr. Smith indicated that the administration is very interested in reauthorizing SCHIP, and there is bi-partisan support in Congress to do the same. This also was the case when the program was initially introduced in 1997. Mr. Smith asserts that both the states and the federal government have learned a great deal from what works and what does not in terms of SCHIP, and a re-authorized program would be even more effective given all this experience. The stumbling block to this re-authorization, according to Mr. Smith, is that there is an effort in
In closing, Mr. Smith reiterated that the administration strongly supports the reauthorization of SCHIP in the manner in which it was originally devised, and he encouraged the states to support this move.
III. Nominating Committee Report
The Nominating Committee, comprising Senator Douglas Henry, Tennessee; Representative Julia C. Howard, North Carolina; and Delegate
Southern Legislative Conference Fall Conference
The SLC will meet for its 2007 Fall Conference October 26-29 at the Westin Riverwalk,
SLC Staff Contact: If you have any questions regarding this report or the 2007 SLC Fall Conference, please contact
Attendance List
Southern Legislative Conference 61st Annual Meeting
Fiscal Affairs and Government Operations Committee
July 14 – 18, 2007
Senator Ted Little
Representative James Buskey
Representative Bill Dukes
Representative Joe Faust
Representative John Knight
Representative Frank McDaniel
Representative Arthur Payne
Representative Howard Sanderford
Representative William Thigpen
Jerry L. Bassett, Legislative Reference Service
Jason Isbell, Legislative Reference Service
Barry Pennington
Paul
Arkansas
Senator Shane Broadway
Senator Irma Hunter Brown
Representative Sharon Dobbins
Florida
Senator Bill Posey
Representative Mitch Needelman
Francesca Plendl, AstraZeneca
Georgia
Senator Don Balfour
Senator Jack Hill
Representative Ben Harbin
Representative Mickey Channell
Representative Carl Rogers
Representative Don Parsons
Clint Mueller, Association of County Commissioners of Georgia
Michelle NeSmith, Association of County Commissioners of Georgia
Kentucky
Senate President David L. Williams
Speaker Jody Richards
Senator Ernie Harris
Senator Dick Roeding
Representative C.B. Embry, Jr.
Representative Harry Moberly, Jr.
Dennis Boyd, University Health Care, Inc.
Mary Duesenberry, The Council of State Governments
Nancy Hublar, Beverly Enterprises, Inc.
Donna Little, Legislative Research Commission
DeeAnn Mansfield, Legislative Research Commission
David Thomas, Legislative Research Commission
Mark Treesh, Insurance Institute of Kentucky
Elizabeth Borne,
Sherry Phillips-Hymel, Senate Finance Committee
Maryland
Senator Nathaniel Exum
Delegate Sheila Hixson
Delegate Roger Manno
Mississippi
Senator Videt Carmichael
Senator Hillman Frazier
Missouri
Representative Jim Guest
North Carolina
Representative Harold Brubaker
Representative
Representative Julia C. Howard
Representative William McGee
Karen Cook, Lorillard
Oklahoma
Senator David Myers
Representative Dennis Johnson
Representative Randy McDaniel
South Carolina
Senator Larry Martin
Representative Daniel T. Cooper
Representative Rex Rice
Tennessee
Senator Douglas Henry
Senator Mark Norris
Walt Gose, Sanofi-Aventis, U.S.
Cathy Higgins, Office of Legislative Budget Analysis
John Morgan, Office of the Comptroller
Marlene L. Sanders, Eli Lilly & Company
Gary Selvey, National Federation of Independent Businesses
Frank Jackson,
Richard Ponder, Johnson & Johnson
Virginia
Senator Charles Colgan
Senator John Edwards
Senator Yvonne Miller
Senator John Watkins
Julia Hammond, National Federation of Independent Businesses
Dick Hickman, Senate Finance Committee
Michael Jay, House Appropriations Committee
Gary Riddle, Schering-Plough Company
John Stone, Bon Secours Health System
West Virginia
Senator Joseph Minard
Senator John R. Unger II
Jerry Bird, Public Service Commission
Jim Brown, The Council of State Governments
Jean Cantrell, EDS Corporation
Amanda Klump, Altria Corporate Services
Dennis Smith,
Jeff Drozda, Golden Rule Insurance
New York
Steven Weisbart, Insurance Information Institute
North Dakota
Representative Kim Koppelman
Alan Smith,
Christopher Drumm, AmeriHealth Mercy Plan
