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Stimulus Through a Legal Lens
by Kim Gordon

As federal programs and laws attempt to spur economic investment, School of Law experts offer insight into the legal implications of rebuilding the American economy

The $789 billion American Recovery and Reinvestment Act — the Stimulus Plan — passed in February represents the most expensive effort to stimulate the economy in American history.

The 1,000-plus page Stimulus Plan is a complex document based on a simple premise: “What is good for working families is good for the economy, and what is good for the economy is good for working families,” according to the White House Press Office.

The Congressional Budget Office reports the short-term goal of the recovery measure is to create and save nearly 4 million jobs over the next two years. The Obama Administration insists the only way to build a strong and lasting economy is to address what it believes are the underlying problems of American society — unaffordable health care, overdependence on foreign oil and underperforming schools.

The massive recovery measure is a mix of new spending, tax relief for individuals and tax incentives for businesses that combine “shovel ready” projects with long-term investment in health care, energy, technology and education.

Through a legal lens, School of Law experts examine the implications that may arise as these new and amended federal programs attempt to revitalize the American economy. Professors Matthew T. Bodie, Michael Korybut, Kerry A. Ryan and Nicolas P. Terry discuss how the Stimulus Plan and other federal recovery programs will collectively affect the landscape of employment, bankruptcy, tax and health law.

UNEMPLOYMENT

MATTHEW T. BODIE
Associate Professor of Law
Expertise: Employment, Discrimination & Labor Law

Since the Stimulus Plan became law, there’s been a quiet but steady movement in some states to reassert their rights under the 10th Amendment, which states “the powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.” Governors and lawmakers from more than 25 states have recently introduced resolutions declaring state sovereignty, claiming the federal recovery act impermissibly dictates to the states how to spend money and enact policy.

“When you see talk of states’ rights and even secession, what you’re seeing is frustration by state officials in dealing with the popularity and complexity of these federal programs,” says Professor Matthew T. Bodie. “While the Stimulus Plan creates another interesting chapter in American history regarding the relationship between the states and the federal government, the programs do not violate the 10th Amendment.”

At the crux of the latest federal vs. state debate are provisions of the Stimulus Plan’s nearly $36 billion expansion and extension of state unemployment benefits — the largest in U.S. history. The plan is intended to work on several levels. One part of the plan increases and extends unemployment insurance in a fairly straightforward manner. However, other parts of the plan seek to expand unemployment compensation coverage to groups many states currently do not cover: part-time workers, people who quit for compelling family reasons and the long-time unemployed who are in job training programs.

As incentive for these changes, the Stimulus Plan offers funds to replenish state unemployment insurance trust funds that are rapidly running dry. The U.S. Department of Labor reports that nearly 5 million Americans are now receiving state unemployment benefits. Experts report as many as 30 state unemployment insurance trust funds may be depleted within three years.

“Unemployment benefits are even more important in a severe recession, since the chances of finding another job are diminished,” Professor Bodie says. “Moreover, these benefits mirror the overall macroeconomic purpose of the Stimulus Package because they fuel the purchase of goods and services, which ultimately bolsters the economy. Workers who benefit from these programs generally need to spend their benefits on basic necessities.”

The stimulus package also includes a $2.7 billion expansion of the federal Temporary Assistance for Needy Families (TANF) program, which temporarily increases state funding of welfare programs with federal money.

Although it may seem difficult to fight efforts to aid the distressed, many state lawmakers, including ones from Missouri, oppose accepting federal funding for state programs with so many federal strings attached. Opponents insist the measures only provide a short-term fix, requiring billions of dollars annually for states to maintain in the long run.

“A lot of what the Stimulus Plan does is allow states to receive more money from the federal government, which creates a complex web of federal and state interaction,” Professor Bodie offers. “It’s like the federal government is hanging a series of carrots in front of the states, but in order to get the carrots you have to jump through hoops. State lawmakers like the carrots, but they don’t always like the hoops.”

Q&A
What do the unemployment expansion benefits entail?
First, the Stimulus Plan increases the $300 average weekly payment by $25. The program provides jobless workers an additional seven weeks of compensation, on top of the 13 weeks they regularly receive. Workers in states with high unemployment rates receive an additional 13-week extension for a total of 33 weeks.

In addition, the Stimulus Package includes a series of reforms entitled the Unemployment Insurance Modernization Act (UIMA). Essentially, UIMA offers states a proportional slice of a $7 billion funding allocation, but only if the state reforms its unemployment laws in very specific ways. Most states will need to adjust current laws to meet the following provisions outlined in the recovery measure. UIMA funding is broken out into two sections: In order to receive one-third of its total UIMA money, a state needs to recalculate base-pay provisions to allow workers to receive benefits sooner. To receive the remaining two-thirds of the federal stimulus money, the states must enact two of the following four provisions:

• Provide benefits to those seeking only part-time jobs
• Extend unemployment benefits for an additional 26 weeks, after regular benefits expire, to people in job training programs
• Cover people who leave jobs for ‘compelling family reasons,’ such as illness, disability, domestic violence or to follow a spouse to a new job
• Add $15 per week to the benefits of unemployed people with dependents

What is at the core of the federal vs. state debate over unemployment expansion?
To put it simply, some states are upset with the federal government telling them what to do and how to do it. Each state administers its own unemployment insurance programs and sets its own rules. UIMA provides fiscal incentives to encourage states to broaden their eligibility rules to improve unemployment coverage among low-wage, part-time and other workers who now have trouble accessing benefits. Many states will be forced to change the definition of unemployment under state law in order to receive federal stimulus funds.

The key argument against making the federally mandated changes is that the states and business owners will be saddled with additional taxes because the states will be responsible for covering the costs after the stimulus funds run dry. States want to keep taxes low to attract businesses to their state and retain the businesses they have.

For many states, the bottom line is: Will the federal money cover the cost of expanding and extending unemployment benefits over the long-term? And that answer varies greatly depending on the state. The National Employment Law Project (NELP) conducted a study to investigate how many years of reform the federal stimulus money would cover for each of the 50 states and the District of Columbia. In other words, they were looking at how long the state’s allocation of the $7 billion pot would cover the reforms that UIMA required. Missouri placed 50th with stimulus funds only covering the programs for 2.8 years. Only Alaska (2.3 years) was lower.

So from an actuarial perspective, it may not make financial sense for Missouri to adopt the changes necessary to receive the UIMA funding. But for some states, it’s a good deal. NELP predicts that the UIMA funds will cover reforms in North Carolina, for example, for 66 years. In the long-run, Missouri employers will end up paying for the unemployment programs, which could increase taxes on business and lead to further job losses in the state. That’s the risk lawmakers may fear.

Do other changes in the unemployment provisions concern you?
Critics are concerned expanding TANF may undermine welfare reforms. In 1996, Congress enacted TANF, the sweeping welfare reform that eliminated open-ended welfare entitlement. The legislation replaced the Aid to Families with Dependent Children (AFDC) program, which many criticized as creating a culture of welfare dependency. TANF is a finite, block grant approach that limits welfare recipients to five years of federal benefits over a lifetime and requires recipients to work after two years of government support. The reform also introduced a mandatory ‘workfare’ component that holds states accountable for helping citizens transition to self-sufficiency.

While TANF generally provides states with a fixed amount of money annually, the stimulus emergency funds offer additional money to help states respond to the rising need for government assistance during the economic crisis. However, a state can only receive funding if it has increased welfare caseloads and expenditures, which creates incentives for states to increase the number of their welfare recipients. This cuts against the prior TANF philosophy of encouraging states to decrease the number of recipients.

According to the Department of Health and Human Services, welfare cases dropped from 12.6 million in 1997 to fewer than 5 million in 2007. Could changes to TANF really unravel welfare reform?
I don’t think so. The Stimulus Plan allows states to temporarily access emergency contingency funds based on increased expenditures for 2009 and 2010. The argument for temporarily expanding TANF assistance is that we are in a crisis period — we want to make sure kids aren’t going without food and people aren’t sleeping on the streets. With unemployment spiking, we should not be in rush to push people of welfare. Instead, states should have the leeway to allow people access to different types of welfare and unemployment programs because now needy people, often single mothers, are much more likely to be in desperate straits.

Does the Stimulus Plan provide for any other major changes in labor and employment law?
No, not in the big picture. Nothing in the Stimulus Bill affects major federal employment discrimination laws, such as Title VII of the Civil Rights Act, the Americans with Disabilities Act or the Family and Medical Leave Act. We may see very significant changes in labor law if the Employee Free Choice Act is passed. That legislation would enable working people to bargain for better benefits, wages and working conditions by restoring workers’ freedom to choose whether or not to join a union. However, that legislation is stalled.

How effective will the unemployment programs be at stimulating the economy?
Unemployment benefits can help stimulate the economy, as struggling families will spend money on housing, groceries and other basic necessities. If we expand unemployment compensation so that it lasts longer and pays more, it will help more people avoid foreclosure and stay in their homes, which gets at one of the core problems behind this recession. The question then becomes: When and how do we ease back the financial support? However, I don’t think we need to be asking those questions just yet.

BANKRUPTCY & FORECLOSURE

MICHAEL KORYBUT
Professor of Law
Expertise: Bankruptcy, Commercial Transactions & Secured Transactions

A flood of federal efforts over the past year have attempted to address one of the worst housing meltdowns in American history, helping to plunge the nation’s economy into the deepest recession in decades.

Coast-to-coast, more than 2.3 million homeowners faced foreclosure proceedings last year, an 81 percent increase from 2007, according to RealtyTrac, publishers of the nation’s largest foreclosure database. Analysts say that number could soar as high as 10 million in the coming years, depending on the severity of the recession. In an attempt to stem the wave of foreclosures and steady the housing market, Congress and the prior and current administrations have launched nearly a dozen federal programs since last year.

“A significant limitation with most of these programs is eligibility. Many consumer home owners, for a variety of reasons, are not able to participate, and lenders have been reluctant to volunteer their assistance,” explains Professor Michael Korybut. “The most recent efforts by Congress and the Obama Administration create more of a stick than a carrot. In other words, these players wanted to devise a way, in effect, to force lenders to work with consumer home owners to help them stay in their homes.”

In particular, the latest congressional effort is the 2009 Helping Families Save Their Homes Act, pending legislation that the House of Representative passed and sent to the Senate in March. A controversial part of the legislation would amend the U.S. Bankruptcy Code to allow judges in certain Chapter 13 bankruptcy cases to “cram-down” the amount of a loan a consumer owns on his or her primary residence to the home’s current fair market value, reset the interest rate and stretch out the time period for payments. Under the current Bankruptcy Code, mortgages on a primary residence cannot be so modified.

Homeowners with negative equity, in which the value of their homes is less than the amounts they owe to their lenders, would find the cram-down feature appealing, Professor Korybut explains. For example, if an outstanding home loan was for $200,000 and the home’s fair market value had dropped to $150,000, the new law would allow a bankruptcy judge to lower the loan amount to $150,000, most likely wiping out much of the $50,000 difference recoverable by the lender in a Chapter 13 bankruptcy.

Q&A
What are the pros of the pending law?
On the positive side, the cram-down feature is an extremely powerful tool because now the debtor is in the driver’s seat. Homeowners in a negative equity situation can choose to file for Chapter 13 bankruptcy, stop foreclosure on their primary residence, which is the single largest asset most people own, and devise a plan on how to pay off creditors, in many cases for much less than what they originally owed. The new cram-down feature enhances the power of a Chapter 13 case for consumers because it will allow bankruptcy judges to modify primary home mortgage contracts, previously unassailable, against the lender’s will — and that’s huge.

One hoped-for effect of the pending law would be that rather than abandon their homes with negative equity, home owners will be able to force lenders to work with them to make mortgages affordable, and thus these home owners will ‘stay and pay, not walk away.’ In turn it is thought that by allowing people to stay in their homes and avoid foreclosure, the homeowners’ communities will be assisted by putting a floor on the falling housing market, which in turn would help stabilize the economy.

And the cons?
A main argument against this legislation is that it will raise the cost of mortgage lending across the board. The cram-down process forces lenders to take a loss by reducing the principal. So how do lenders compensate for that hit? By raising interest rates and fees for everybody and lending to fewer people.

Thus, instead of helping the ailing housing market, permitting the modification of home mortgages instead could exacerbate the current economic crisis by raising the cost of borrowing, destabilizing the credit market and freezing lending.

Opponents add the pending law will only postpone foreclosures for a few years because many people, especially if they’re unemployed or if their income has been dramatically reduced, will still not be able to pay their mortgages, even after modification in bankruptcy.

How accessible is the new bankruptcy law to the millions of Americans facing foreclosure?
Many low-income people may not be able to afford to file for bankruptcy and take advantage of the new law. A Chapter 13 bankruptcy case can be an arduous and time-consuming process, and this legislation makes the law more complicated, which results in the process becoming much more expensive.

Does the Helping Families Save Their Homes Act fundamentally change bankruptcy law?
No, not in the statutory big scheme of things. The U.S. Bankruptcy Code is a rich and detailed body of law, and there have been far more dramatic changes to it over the decades. However, for the millions of Americans who fall in the negative equity category and are able to use this law to keep their homes, this is a really big deal.

How will this affect the legal community?
There may be a large increase in bankruptcy filings, which could potentially overwhelm judges and the courts. There probably will be significant infrastructure changes like new forms and procedures, and even special dockets, especially in states that have been hit the hardest such as California and Florida, which could experience the most dramatic increase in bankruptcy filings. If the new law is passed, it will have serious implications and both lenders’ and debtors’ counsel will need to get up to speed on the law quickly. Both sides will have to start thinking on behalf of their clients how strategically and procedurally to apply the new law.

Does the legislation create an over-reaching expansion of judicial power?
That’s a hard question to answer. On the one hand, no, it doesn’t since currently judges have the power to modify many types of contracts in bankruptcy (other than primary residence mortgages). And given other requirements of a Chapter 13 bankruptcy, bankruptcy judges have been charged with making some intimate decisions about a consumer debtor’s life, such as what are reasonable expenses a consumer should be able to spend during the Chapter 13 case’s duration. On the other hand, providing a cram-down feature for home mortgages could potentially affect so many lenders and borrowers, we should think very carefully about whether an unintended consequence might be the erosion of the sanctity of contracts. People who make contracts expect them to be fulfilled or enforced as agreed — many types of beneficial behavior and decisions are predicated on this idea.

TAX RELIEF

KERRY A. RYAN
Assistant Professor of Law
Expertise: Income Taxation, Estate & Gift Taxation

Tax cuts, credits and incentives top the Stimulus Plan’s rescue efforts. The Congressional Budget Office reports that the Making Work Pay tax credit is the recovery measure’s most ambitious and expensive provision — with $116.2 billion slated for the program. The credit provides a refundable tax credit of up to $400 for working individuals and $800 to working families implemented through reduced income tax withholding.

The credit attempts to fulfill President Obama’s campaign promise to cut taxes for 95 percent of workers, affecting 129 million households. The Stimulus Plan’s combination of the $800 tax credit and the $1,200 expanded child tax credit will also lift an estimated 2 million people above the poverty line, according to congressional reports.

But will the new tax laws be enough to stimulate the economy? And will the provisions provide effective aid to millions of struggling Americans, including the nation’s most vulnerable families? Professor Kerry A. Ryan offers expert insight on the potential impact and effectiveness of the Stimulus Plan’s extensive and complex tax incentives and programs.

Q&A
Will the new tax provisions be effective?
The new tax provisions add an additional layer of complexity to an already excessively complicated tax system. Ther
e are efficiency and equity costs associated with increased complexity. In general, the effectiveness of the new tax measures will depend on how these costs measure up against the achieved social, economic and environmental benefits.

What impact will the Making Work Pay Tax Credit have on reviving the economy?
If the goal is to spur demand through increasing families’ take-home pay, the subsidy amount per family (about $13 per paycheck) is not sufficient to achieve that goal.

Which of these new tax laws will benefit those people hit hardest by the recession?
Many of the tax provisions are aimed at low- to moderate-income families, including the Making Work Pay credit, increased earned income credit and the additional child tax credit. Putting additional money in the hands of these families makes economic sense because it will spur consumer spending rather than increase savings.

Increasing the exemption amounts for the Alternative Minimum Tax (AMT) offers relief for middle-income families. The AMT was designed 40 years ago to ensure that the wealthy pay some tax, but was never indexed for inflation so it began ensnaring middle-income families. The $69.8 billion program — the third largest in the Stimulus Package — spares millions of middle-income Americans from paying the AMT in 2009.

How are the new laws affecting tax policy?
From a tax policy perspective, there are positives and negatives. On the positive side, many of the tax benefits are in the form of refundable tax credits rather than exemptions, deductions or nonrefundable credits. This assures that all families, regardless of the level of their tax liability, can fully participate in the tax subsidy programs.

On the negative side, the sheer number and temporary nature of the tax provisions result in increased complexity in our tax system. Furthermore, many of the new tax benefits interact with existing tax and spending programs in complicated ways. It is not clear that interaction was considered or accounted for by Congress in its haste to enact the Stimulus Package.

Do any of the new tax laws concern you?
The new tax credit for first-time homebuyers gives me pause because overinvestment in housing, spurred in part by the generous tax benefits available to homeowners, is partly what got us into this mess in the first place.

What are the key issues we need to be aware of as these new laws unfold?
We need to monitor the administrative costs associated with such a massive package of short-term changes to the tax code. The Internal Revenue Service must mobilize fairly quickly to implement these provisions before they expire. This will draw scarce administrative resources away from the more systemic issues that the IRS should be addressing.

Will these programs be effective over the long term?
No. Many of the tax provisions are temporary band-aids that will not be effective in the long term — they may not even be effective in the short term.

HEALTHCARE

NICOLAS P. TERRY
Chester A. Myers Professor of Law & Senior Associate Dean for Faculty
Expertise: Health Law, E-Health & Products Liability

The Stimulus Plan directs roughly $150 billion to health care programs. “Yet, most of those funds are directed far more at stimulating the economy than at the fundamental health care reform that President Obama identifies as a key to economic recovery,” Professor Nicolas P. Terry says.

Intersecting those two goals is the $20 billion slated for health information technology. While relatively modest in terms of the overall Stimulus Plan, this sum is the largest government infusion of funds into health care information technologies.

“While likely to stimulate investment in such technologies and create employment for many health care informatics professionals, both the Obama and Bush Administrations have taken the position that widespread use and exchange of health information technology can be transformative; that electronic medical records and related technologies will improve quality of care, reduce duplication of services and limit medical errors,” Professor Terry explains.

Q&A
What are the forward-looking provisions of the Stimulus Plan?
T he plan sketches out a health care vision that will have important ramifications for health care and the lawyers who work in and around the country’s most regulated industry.

First, and perhaps of least surprise, the recovery act dramatically increases the funds available for disposal by the National Institutes of Health. Second, the recovery plan provides $1.1 billion for comparative-effectiveness studies, which will allow researchers to compare drugs, medical devices, surgery and other ways of treating specific conditions. For the first time, the plan will provide substantial amounts of money for the federal government to compare the effectiveness of different treatments for the same illness. Third, the plan radically revisits the model for creating a universal electronic health records system for the United States.

Do the research provisions create any legal issues?
No, not in themselves. However, the past decade has seen our research institutions under increased pressure to improve their processes surrounding human subjects research, while the federal government has become ever more vigilant in tracking the dispersal of its funds.

As to the comparative-effectiveness research, while it has its own intrinsic value, the program is a likely indicator of some of the approaches we will see in the new administration’s forthcoming health care proposals.

What exactly is the plan regarding electronic health records?
The recovery measure is a classic example of ‘shovel-ready’ stimulus funding. President Bush’s administration in 2004 originally set the goal for a nationwide interoperable health records system within 10 years and laid some of the administrative and technical infrastructure. That system was designed to reduce direct and indirect health care costs associated with medical errors. The Stimulus Plan supplements the Bush plan by creating new records products, services and systems as well as training or re-training the operators necessary.

The recovery act includes $20 billion for health information technologies, including funds for regional health information exchanges and, involving by far the largest expenditures, incentive payments to Medicaid and Medicare providers who adopt approved health records systems. Along with such “carrots” come some “sticks” — penalties that will be imposed on doctors who do not adopt approved technologies.

You’ve written extensively regarding the privacy and confidentiality implications of health information technology in general and electronic health records in particular. Does the recovery measure reduce any of your concerns?
Yes. The Stimulus Plan (specifically Subtitle D of the act’s ‘Health Information Technology for Economic and Clinical Health Act’) makes a number of changes in the regulation of health information generally, and electronic health records in particular. Indeed, the recovery act may well be seen as ‘HIPAA 2.0.’The recovery measure closes off what many have regarded as regulatory gaps in the original HIPAA regulations. For example, ‘business associates’ will no longer be indirectly regulated through terms in their contracts but directly subject to the HIPAA code, including its penalties. In addition, there will be new regulations tightening up the idea of ‘minimum necessary’ disclosure standard and new restrictions on the use of protected health information for marketing purposes, including fundraising. Renewed attention is also being paid to what many have viewed as HIPAA’s major operational deficiency — enforcement. There are tighter definitions of breaches of the HIPAA code and there will be more enforcement, including the involvement of state attorneys general.

Are there any novel legal approaches to the protection of personal health information?
Yes, regulations under the new statute generally will prohibit any unconsented-to sale of personal data contained in electronic records systems. Further, although previously seen in the war against financial identity theft, the recovery measure imposes a duty on health care data stewards to notify patients when their data is at risk. Oddly, the newest type of health information data steward, providers of personal health records, are not subject to either the old or the ‘improved’ HIPAA but only to the new ‘breach notification’ provision.

How will this affect the legal community?
Many viewed millennium year HIPAA 1.0 as an employment stimulus plan for lawyers. And lawyers involved with Institutional Review Boards and academic risk management and compliance will be working overtime. There will be no shortage of legal work when it comes to dealing with the new statutory and regulatory provisions in the health care sections of the recovery act. But, this time let us hope that is not the only part of the economy that is stimulated.