The Problem Is Getting Worse

Throughout 2020, many states have been reporting higher rates of drug overdoses, indicating the opioid crisis worsened across the nation and has particularly escalated amid the pandemic. Although this information may have been missed with all the other newsworthy events of 2020, S&P Global Ratings believes that the depth and breadth of the opioid epidemic coupled with the effects of the COVID-19 pandemic may be becoming a threat to local government credit quality. The new data indicates increases in opioid overdose rates across the nation in 2020, while at the same time the pandemic and recession have pressured state and local government budgets, leading to fiscal austerity measures with public mental health spending often facing significant cuts. The current opioid drug epidemic continues to demand spending from local governments that may be struggling to maintain structural budgetary balance amid the pressures resulting from COVID-19. Moreover, leading research has linked high rates of opioid abuse with regional economic declines, including through lower labor force participation rates.

In our 2017 report "The Opioid Crisis Is Real, But Not Yet A Threat To State Credit Quality" (published Oct. 31, 2017, on RatingsDirect), we noted that Medicaid absorbs a significant amount of state substance abuse treatment costs. Medicaid and other federal programs continue to be a particularly important component in addressing the national response to the opioid crisis because their structures can provide sustained funding to address the issue compared with shorter-term grant funding. Although states continue to bear more Medicaid costs than local governments do, we think local costs required to respond adequately to opioid abuse are likely to increase and will be spread between public health and public safety spending. However, we expect such costs will rarely be explicitly reported as direct cost to opioid overdose response, and thus will continue to be difficult to comprehensively identify. Because of the lack of data, actual costs are very likely higher than estimated. State and federal programs are also unlikely to cover the sometimes difficult-to-quantify local costs of the opioid epidemic. This would likely further stress local government credit quality. Our report also noted that there were large regional disparities in epidemic severity. While regional differences continue to exist, most states continue to report rising overdose fatalities in 2020, underscoring the crisis as a growing national issue.

The Economic Costs Are Inescapable

Decreased labor force participation and worker productivity is strongly linked to the rise of the opioid epidemic. Medical data on opioid prescription and overdose death rates indicate that opioid misuse is most prevalent among prime working age adults (those aged 25 to 54). A 2017 study by economist Alan Krueger suggested that up to 43 percent of the observed decline in the male labor force participation rate between 1999 and 2015 could be attributed to the increase in opioid prescriptions. Furthermore, a 2018 study by the American Action Forum, focused specifically on the impact of opioids on labor force participation, found that in 2015 opioid addiction caused almost one million prime working age individuals to be absent from the labor force. Likewise, employers have reported negative effects on their production. As an example, in 2018 the Federal Reserve Bank of Cleveland found that businesses it surveyed reported difficulty finding qualified employees due to candidates' inability to pass drug tests. In 2017 Senate Banking Committee testimony, then-Federal Reserve Chair Janet Yellen discussed the strong relationship between weak job opportunities and increased opioid misuse.

Although state and federal programs help defray health care and criminal justice costs, supporting these systems ultimately falls on local governments. The additional demand for these services requires greater spending from counties and municipalities. For health care, local governments often provide insurance benefits for employees and retirees, and they also cover the cost of uncompensated care in public hospitals. In certain states, counties also cover a portion of overall Medicaid costs. Local governments are often more directly involved with criminal justice spending, operating police departments, correctional facilities, and court systems. Studies on the economic cost of the opioid epidemic, including a 2017 report by the White House Council of Economic Advisors, have also focused on the health care costs and found that individuals addicted to opioids utilize a significantly greater share of health care resources than non-addicted peers, as well as account for higher costs to the criminal justice system. An expansive study from the Centers for Disease Control and Prevention (CDC) by Florence et al. (2016), estimated that, in 2013, prescription opioid overdose, abuse, and dependence in the United States cost $78.5 billion. The report notes that nonfatal opioid costs, including health care spending, criminal justice costs and lost productivity due to addiction and incarceration made up 73 percent of this cost; the study also found that fatality costs, made up almost exclusively of lost potential earnings, contributed the remaining 27 percent. Similarly, a 2017 study by the Substance Abuse Research Alliance found that, in the state of Georgia, the health care costs associated with opioid misuse were estimated to be $447 million in 2007, with estimates indicating an 80 percent increase in costs between 2007 and 2017. Furthermore, the study found that the cost of inpatient care for opioid-related treatment increased more than twofold between 2002 and 2012, to $15 billion dollars in 2012. Research from the Center for Health Care and Policy Research at Pennsylvania State University also explicitly notes that state and local governments have shouldered the costs of the epidemic, including the costs to families and individuals.

Many of the opioid-related expenditures, including schools, law enforcement, jails, and other judicial branch services, have been more difficult for local governments to accurately and comprehensively capture as municipalities and associated entities do not have the tracking tools, software, coding methodologies, or spreadsheets the discretely identify such costs. Examples of opioid-related expenditures specifically for school districts include additional training for teachers, special education costs, stocking of opioid antagonists/overdose-reversing counter-drugs (i.e. naloxone), as well as additional social and emotional services, and counselors. Since 2018, at least six states (South Carolina, Minnesota, Arizona, Virginia, Pennsylvania, and New York) have proposed legislation to incorporate instruction on the opioid epidemic. Moreover, a 2018 report by the U.S. Department of Health and Human Services notes that, on a national level, there are higher child welfare caseloads in counties with a higher overdose death rate and drug-related hospitalizations. In addition, such cases tend to be more complex and severe, and they increasingly involve children remaining in care for longer—all of which equate to significant costs for local governments.

The CDC notes that building state and local capacity through implementing drug monitoring programs and responding to drug outbreaks plays a critical role in preventing opioid overdoses. Research indicates that factors predicting local severity of the epidemic include low education levels; limited job opportunities and manual labor jobs, including jobs with higher rates of injury prone employment; and poor economic prospects. Furthermore, overdose rates are higher in communities in which there is a lack of resources to combat addiction—i.e., treatment programs or emergency medical response capability.

How This Affects Local Government Credit Ratings

In some cases, the effects of prevalent opioid misuse could pressure local economic metrics or financial performance to an extent that downward rating action is warranted. Dealing with the crisis can create local government budgetary pressure at the same time it weakens economic metrics. Importantly, it presents a vicious cycle wherein weaker economic conditions may lead to weaker financial conditions, which can in turn further weaken economic factors—and so on. Decreasing property values and retail sales make it more difficult for local governments to fund themselves. When governments make budgetary adjustments to maintain fiscal balance, special programs such as those for fighting opioid abuse are often the first to face cuts. As a result, the severity of the crisis can increase, which can in turn lead to further economic deterioration.

Economic activity has a negative correlation with opioid use

While the direction of the causal relationship can be debated, we generally expect economic activity will likely lag in areas where the opioid crisis is more severe. This view is supported by work done by the CDC, which reports opioid prescribing rates and estimated drug poisoning mortality rates by county. For each measure, IHS Markit projects five-year gross county product (GCP) growth is on average significantly lower for counties in the highest quintile than for the rest of the U.S. Similarly, projected retail sales growth is much lower on average for counties in the highest quintile, and negative for the 20% of counties with opioid prescribing rates above 84.4 per 100 persons in 2018. Our credit ratings incorporate forward-looking economic strength estimates such as these, as well as per capita income, total taxable market value, and unemployment rates.

Table 1

Substance abuse can increase a government's expenses

In terms of finances, a higher rate of opioid abuse can reduce a local government's ability to cut expenditures given higher health care and criminal justice costs, as well as maintaining drug monitoring and prevention programs. It also may weaken year-to-year budgetary performance, with unexpected increases in public health or public safety due to overtime, as well as costs to purchase necessary equipment and expensive intervention medication like naloxone. Mental health facilities and criminal justice center expansions are major capital projects, and they may require local governments to increase borrowing, leading to higher debt outstanding and higher debt service costs. Over time, the total additional required spending could crowd out other programs and make budgets less flexible year to year. This possibility is exacerbated by climbing fixed costs generally from debt service and retiree benefit expenses. Revenue collections may also become more volatile and harder to predict. Lower labor force productivity and participation is also likely to permanently lessen revenue dependent on economic activity, such as sales tax collections and permitting fees. Additionally, lower incomes over time could limit revenue flexibility. The interplay between income levels and affordability of tax rates influences the ability of the government to support operations and meet capital needs.

Another financial aspect of the crisis pertains to the legal battles and settlements local governments negotiate with opioid manufacturers and distributors. On some occasions, settlements or judgments have provided counties and municipalities with substantial payouts. So far, these payments have typically financed public health programs. While we believe the opioid crisis will have greater downward credit pressure in the large majority of cases, we could raise ratings on a local government's debt if we believed that settlement or judgment payouts materially strengthened an issuer's financial position or budgetary flexibility. However, we have also observed local governments incurring significantly increased legal expenses over the course of these proceedings, occasionally drawing on fund balance to cover costs. Additionally, judgments or settlements have typically been one-time, and local governments that use the revenue to finance ongoing operation could have difficulty realigning recurring revenues and expenditures after the funds exhaust. We note that state and federal officials have often tried to dissuade local governments from negotiating individual settlements with opioid manufacturers and distributors.

Overall, counties with high opioid prescribing rates or high drug poisoning mortality rates tend to have slightly lower credit ratings (see table 2). Specifically, our average general obligation credit rating for a county within the top 20% of drug poisoning mortality rate is approximately half a notch lower than our average rating for the remaining counties. The difference is more pronounced for prescribing rates, with the average rating for the top 20% of counties slightly less than a full notch lower. We note that the causal links are again complex. As an example, worsening local conditions (e.g., increasing unemployment rates) can lead to greater rates of opioid misuse and, separately, can also diminish our view of credit factors.

Table 2

COVID-19 is exacerbating the challenges

These challenges are especially pronounced during and after the COVID-19 pandemic. Local government costs to contain or combat the novel coronavirus upended budget planning and are likely to force out spending to address the opioid crisis. High fixed costs from debt, pension, and OPEB spending limit budget flexibility, exacerbating the challenge. Addressing both COVID-19 and substance abuse may be especially challenging if governments prefer to keep overall health services budgets the same, or if the governments rely on a dedicated health and human services levy. Additionally, the national recession arising from the pandemic and social distancing measures decreased local government revenue at the same time it worsened conditions for fighting the opioid epidemic. State and local fiscal austerity measures will likely lead to painful budgetary trade-offs. In some instances, local governments may need to cut public services that help limit opioid addiction and overdoses, potentially creating larger problems down the road.

The Medical Crisis Intensified With COVID-19

Although it is too early to have definitive data on the effects the COVID-19 pandemic has had on the opioid crisis, nearly every available report is decidedly negative. In October, the American Medical Association reported that more than 40 states had recorded increases in opioid-related mortality in 2020. As of June 2020, The Overdose Detection Mapping Application Program (ODMAP) estimated that drug deaths for the year are 13% over what they were this time the previous year. Should this rate continue, 2020 drug overdoses will reach record highs. National Public Radio reported that state-mandated stay-at-home stay at home orders disrupted support networks and led to greater relapses. To this end, ODMAP estimated there was a 17.6% increase in suspected overdose submissions comparing the weeks prior to and following the commencement of state stay-at-home orders. S&P Global Ratings noted that the pandemic had created significant uncertainty among not-for-profit health care organizations, suggesting they will likely have to make expenditure reductions to align expenses with lower revenues from elective procedures (see "Not-For-Profit Acute Care Sector Outlook Revised To Negative Reflecting Possible Prolonged COVID-19 Impact," March 25, 2020). The Wall Street Journal reported in April that recovery programs were in some circumstances forced to be online-only, and in other cases no longer included drug tests. Doctors' offices were closed in March and April, limiting individuals' ability to receive prescriptions for addiction-fighting drugs like suboxone, as well as making it harder to renew legal opioid prescriptions. Programs aimed at reducing opioid-use deaths often caution against using drugs alone, a practice which the Washington Post reported social distancing efforts and laws complicate. The Wall Street Journal also reported that COVID-19 disrupted illicit drug supply chains, meaning users were more likely to seek dealers and products with which they were unfamiliar. A broad freeze on non-COVID-19 work at the National Institutes of Health has indefinitely delayed a billion-dollar research program on addiction treatment. Drug overdoses are strongly linked to higher levels of unemployment and economic stagnation, and employment opportunities are now more limited. Unemployment rates peaked at 14.7% in April nationally and much higher in certain areas. While unemployment rates have improved since April, significant economic pressures from COVID-19 and the slow recovery remain.

The effects of COVID-19 have also made responding to the escalating crisis more difficult for states and local governments. Social distancing measures reduced use and fee-based revenue such as court and parking fees in many local governments. The slow economic recovery is likely to lower property tax collection rates. Sales tax slumps in March and April also contributed to difficult funding conditions. Reduced state revenues have led some states to reduce aid to counties and municipalities. According to a 2012 report submitted to Congress by the National Association of State Mental Health Program Directors, states cut approximately $4.35 billion in public mental health spending between 2009-2012 during the Great Recession, while utilization in publicly financed inpatient and outpatient behavioral health funding increased by 10% during that same time period. In a potentially painful reprise of the Great Recession, several states implemented budget cuts for Medicaid, behavioral health services, and/or substance use disorder programs in their fiscal 2021 budgets, including Oregon, Colorado, Georgia, New Jersey, Florida, and Utah. Similarly, many local governments have implemented budget cuts and eliminated positions, limiting response capacity.

Federal Programs Can Provide Direct Relief

Federal programs aimed at combating the opioid epidemic can provide direct financial relief to state and local governments. Increasing its commitment compared to previous years in 2019, the federal government approved $1.8 billion in grant funding to combat the opioid epidemic. Around half of this program will help states, localities, and territories track overdose data and develop treatment strategies.

The federal Medicaid program indirectly provides substantial relief from the health care cost increases related to the opioid epidemic. In addition to providing health care benefits for employees, local governments frequently cover the cost of uncompensated care in public hospitals. Medicaid significantly reduces this burden by reducing the frequency of uncompensated care. In 2018, Medicaid reimbursed over $1.2 billion for opioid treatment medications, which was a 27% increase over the 2016 reimbursement amount. According to a study by the Center for Budget and Policy Priorities, between 2013 and 2015, the states that expanded Medicaid experienced drops in the uninsured rate for opioid-related hospitalizations--most notably, Kentucky (90%), Oregon (89%), and West Virginia (86%). Medicaid enrollment generally rises in recessions, and the recent recession was no exception. With the Supreme Court hearing California v. Texas in this session, the question of a repeal of the Affordable Care Act (ACA) is on the docket. An ACA repeal would likely mean that either a portion or all of such costs related to opioid health care options would be passed on to state and local governments. Currently, 35 states have implemented Medicaid expansion through the ACA.

Most state and federal funding related to the opioid epidemic relate to public health. While these programs provide substantial support for local government, reimbursement structures can leave room for inadequate coverage because the full economic costs of widespread opioid misuse are difficult to quantify. Additionally, as discussed above, many of the costs are related to public safety or less tangible economic deterioration. So far, state and federal programs are less likely to target these effects, and we believe they are unlikely to approach the full cost of the epidemic.

Case Studies

Bucks County, Penn.

On May 28, 2020, S&P Global Ratings revised its outlook on Bucks County, Pa.'s general obligation (GO) debt to negative from stable, citing the county's decreased available reserve position and the possibility it could deteriorate further. County officials attributed the reserve decreases to the ongoing opioid crisis, and estimated the crisis required the county to incur $12 million in one-time expenditures in fiscal 2017. The opioid epidemic also, in part, motivated the county's $60 million of borrowing to expand its prison system and upgrade its 911 system.

The county sued prescription opioid manufacturers and distributors in May 2018. As of our May report, it was expecting to receive a significant amount of money from a settlement with the opioid manufacturers, but the amount and timing had not yet been determined. The CDC estimated that the age-adjusted rate of overdose deaths for Bucks County was 38.4 per 100,000 in 2018, which is in the highest 5% of counties for which we have available data. In 2016, the county coroner reported that fentanyl was the opioid most often involved in county drug overdoses, detecting the opioid in 90 out of 158 overdose deaths.

Cuyahoga County, Ohio

In October 2019, Cuyahoga County made national headlines when it became one of the first local governments in the country to reach a settlement with opioid manufacturers and distributors. Under the settlement, the county received $22 million in 2019 and $95 million in 2020. That money has been allocated to a newly created fund. The fiscal 2020 budget included the appropriation of $19 million received in 2019 for various purposes, including covering certain opioid crisis-related costs currently provided by both the county's general fund and its health and human services (HHS) levy fund. Prior to receiving the settlement fund, the county had accrued a deficit in the HHS fund, which in 2019 received a $15 million transfer in from the general fund. We note that the fiscal 2020 budget included a smaller $5 million transfer into the HHS fund, and officials stated the transfer will not be necessary this year. In March 2020, we wrote that the we viewed the settlement money as a positive credit aspect because it provided the county with additional budgetary flexibility to address the growing opioid epidemic. The CDC estimated that the age-adjusted rate of overdose deaths for Cuyahoga County was 37.0 per 100,000 in 2018, which is also in the highest 5% of counties for which we have data.

Palm Beach County, Fla.

Palm Beach County began including opioid response funds in its fiscal year budget in 2017 ($1.0 million that year) and has appropriated $2 million annually each fiscal year since. The county's fiscal year 2020 budget also included $5.7 million for behavioral health and substance abuse disorder services through Financially Assisted Agency funds. Palm Beach County also partnered with BeWell PBC, as well as mental health service providers, to establish a behavioral health system focused on improved quality of care. Palm Beach County's age-adjusted rate of overdose deaths in 2018 was 27.7, which is in the top 20% of counties. However, although overdose deaths remain a public health social risk for the county, its management has noted that the above strategies and partnerships have helped mitigate the risk.