Think Iowa's economy is improving? One key federal measure says no

Tax and budget policy expert Randy Bauer explains that although personal income has been rising across the country in recent years, Iowa is not doing as well in comparison to other states. -promoted by desmoinedem

How is Iowa doing, economy-wise, in comparison to other states? There are a variety of statistics and competing claims. I would argue that one key measure, which the federal government uses to figure out Iowa’s federal share of a very important program, suggests that Iowa is not doing as well in comparison to other states.

In fact, using this measure, Iowa has been falling behind for the last four years.

During election season, it is not unusual to see challengers and incumbents differ on how a state is doing – incumbents will point to good statistics to support current policies, and challenges will find others that argue for a change. Part of the challenge in these “back and forth” debates is to determine the validity of the claims, which often rests on the type of backing provided to prove or disprove the assertion.

At the state level, analysts are awash in data, including a lot provided on a monthly, quarterly or annual basis by the federal government. Much is useful, but often its sheer volume makes it hard to separate the wheat from the chaff (or, in the case of Iowa, the corn from its husk). Further, the data is often not using the same set of assumptions, which can make comparisons difficult.

A common statistical disconnect is the difference between nominal versus real data. Nominal data is general raw numbers or percentages, while real data has been adjusted for inflation. This is an important distinction, and personal income is a useful example of why: for nearly every state over the past five years, personal income has been rising on a nominal basis.

This is understandable, as in most growing economies, inflation exists, and it will tend to drive up most prices – which means that last year’s dollar is more valuable than this year’s. Given that personal income is generally cited to reflect growth in income available for consumption, it makes sense to measure this in a way that will accurately reflect whether that consumption is able to purchase more, less or the same amount of goods and services – hence the “real” adjustment for inflation. In this case, the personal income statistics don’t look quite as sanguine.

It becomes even more “messy” when one tries to determine how one state is doing versus its peers. This sort of “benchmarking” is much like watching a race and determining who is leading and trailing and who may be gaining or falling back. Again, making adjustments and comparing a lot of data for a lot of states is a difficult process and subject to much interpretation.

This statistic that suggests Iowa is not doing so well is FMAP, which is the acronym for the Federal Medical Assistant Participation rate. FMAP is used to determine what percentage of the costs associated with the Medicaid program will be borne by the federal government. This federal participation rate varies – states that are deemed to be “poorer” obtain more federal match, while “richer” states get less match. For the past four years, Iowa’s federal match has been increasing, meaning its share of personal income is decreasing.

For those who may new to federal programs, Medicaid is a key health insurance program that primarily provides coverage and benefits for low-income individuals, children, their parents, the elderly, and people with disabilities. According to the Kaiser Family Foundation, two in five children in the U.S. are covered by Medicaid, as well as three in five in nursing homes, for in five with disabilities, and one in seven adults (ages 19-64). It is the largest state-federal program in terms of spending.

A little known fact is that state participation in Medicaid is optional. Since 1982, all 50 states participate in the program. There is significant variation across states in spending, eligibility, covered services and other program features. Once certain minimum federal standards are met, each state determines how its program is administered, who to cover, what services to cover, and how providers are paid.

A primary mechanism for getting all states to participate (and/or expand the program) has been the federal match (via FMAP). All states receive a minimum of 50 percent and a maximum of 83 percent federal match in return for their participation. For fiscal year (FY) 2019, regular FMAP rates range from 50.00 to 76.39 percent.

The federal government has also increased the federal participation rate under certain circumstances – as for Medicaid expansion under the Patient Protection and Affordable Care Act (ACA or “Obamacare”). For Medicaid expansion within the ACA, the federal participation in future years is set by statute at 90 percent. All told, in 2015, the federal government covered about 62 percent of the costs of Medicaid, with the states picking up the rest.

The FMAP is inversely proportional to a state’s average personal income relative to the national average. States with lower average personal incomes have higher FMAPs. Personal income data is lagged, so data used for FY 2020 is from the three years of 2016 to 2018.

One of the advantages of the FMAP calculations is the opportunity for ready comparisons (at least for the states with an FMAP above 50.00 percent). It is possible, for example, to compare both their rate over time and the increase and decrease.

One of the complaints about only comparing the rate is that some states have historically had higher personal income than others (this is often referred to as “being born on third base and thinking they hit a triple”). While that may be true, the comparison of the change in FMAP over time gives a relative sense of the standing of a state in comparison to all other states – how is it doing relative to them in terms of increasing (or decreasing) the state’s share of personal income?

The following table provides that data for Iowa’s FMAP for recent fiscal years (which run from July 1 to June 30):

Iowa’s change in FMAP over time
State FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Change FY 2015 to FY 2019
Iowa 55.54 54.91 56.74 58.48 59.93 60.88 5.34

In the case of Iowa, the state’s FMAP has been increasing, meaning its relative share of U.S. personal income has been decreasing. That, at least from a personal income perspective, is not a good thing.

Randall Bauer is a director in the Management and Budget Consulting practice for the PFM Group. Since 2005, he has led its state and local government tax policy practice. He has numbered nearly half the state and many large local governments among his clients. Prior to joining PFM, he spent 18 years in state government, including serving for seven years as Governor Tom Vilsack’s State Budget Director.

Tags: Economy, Medicaid

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