Truth in Budget Reporting
Newspaper articles on government budgets virtually never tell the reader the two most important facts: What was the budget last year, and what is it this year? Instead, the typical budget article trumpets “cuts” and “austerity,” and never actually mentions that the budget is going up by four percent, or six percent, or nine percent in the coming year. So two cheers to the Washington Post for its article on Virginia governor Robert McDonnell’s proposed budget, which does—eventually—give you most of that information. Still, the second paragraph (and second sentence) of the article says that McDonnell “proposed saving nearly $1 billion in a variety of ways.”
You have to wait for the seventh paragraph, on the jump page, before you find out that the proposed budget amounts to $85 billion over two years. And only in the 20th of 25 paragraphs do you find out that
The two-year budget, which begins July 2012, will be the largest spending plan in Virginia history, growing by about $7 billion.
So two cheers for giving the facts, even if the lead of the story might have led some readers to think that McDonnell was cutting $1 billion from the state’s budget. And three cheers for Steve Contorno of the Washington Examiner, who put the basic facts clearly in the third paragraph (and third sentence) of his article:
In an hour-long address to the General Assembly’s budget committees, McDonnell laid out an $85 billion spending plan through June 30, 2014, up from $79 billion in 2010-2012.
Please, reporters: when you write about a city, state, or federal budget, please tell us readers and taxpayers how much the budget actually is, and how much it will be next year. With that information, we can figure out for ourselves whether it involves cuts or not.
Deloitte Survey: Concerns about Government
A Deloitte Growth Enterprise Services survey of 527 executives at mid-market companies (annual revenues of between $50 million and $1 billion) found “tempered optimism” that the economic recovery will continue. However, the survey also found significant concern over government fiscal and regulatory policies.
A whopping 50 percent cited federal, state, and local debt as the greatest obstacle to U.S. growth in the coming year. Lack of consumer confidence (39 percent) and rising health care costs (33 percent) came in second and third. Lest anyone construe the executives’ concern about government debt as implied support for tax increases, high tax rates came in fourth at 30 percent. Government austerity, which can include tax increases, and infrastructure needs came in at 15 and 9 percent, respectively.
When asked to choose up to three items that represent their company’s main obstacle to growth, only 21 percent cited government budget cuts. I’m frankly surprised that the figure isn’t higher considering that a number of these companies probably “do business” with government. Increased regulatory compliance was only a tick higher at 22 percent. Health care costs came in third at 30 percent, and uncertain economic outlook was first at 41 percent. I would pin that uncertainty on government policies. It is likely that a substantial number of the respondents would agree given other survey results.
Reducing corporate tax rates (33 percent) was the clear winner when the executives were asked to choose up to two measures by the U.S. government that would most help mid-size businesses grow in the next year. Keeping interest rates low (32 percent) was close behind, followed by rolling back health care reform (23 percent). Keynesian measures that are popular in the White House, supporting increased infrastructure investment and stimulating private consumption, came in at 19 percent and 14 percent, respectively.
Finally, many, if not the majority, of respondents expect regulatory costs to increase next year, particularly in the area of health care reform. Respondents expect the president’s Affordable Care Act to sharply increase costs (33 percent) or slightly increase costs (33 percent). A majority (56 percent) expect tax compliance costs to increase. A near majority (49 percent) expect both economic and occupational health & safety regulatory costs to increase.
In sum, the good news is that optimism is on the rise in the business community. The bad news is that the heavy hand of government is still a dark cloud hovering over the recovery.
ObamaCare’s New Freedom
Earlier this month, President Obama’s HHS Secretary Kathleen Sebelius took to the Washington Post‘s op-ed page to reassure everybody that ObamaCare “puts states in the driver’s seat” and “gives states incredible freedom to tailor reforms to their needs.”
One grows weary of exposing the brazen falsehoods this administration incessantly and unconscionably peddles about its corrupt, unconstitutional, and irredeemable health care law. But here I go again: the very idea that ObamaCare puts states in the driver’s seat is nonsense. States already had the power to enact all the taxes, mandates, and price controls that ObamaCare expects them to implement — and to make what few choices ObamaCare leaves them.
If you want to know what Incredible Freedom really means, look to Wisconsin, where President Obama — who is evidently bored with the federal budget — has inserted himself into a state budget dispute, as David Boaz has noted.
As it turns out, Incredible Freedom means you are free to do exactly what President Obama wants.
The Washington Post reports on talk of federal bailouts for states (like Wisconsin) that are struggling with huge deficits and unfunded liabilities in their state pension and retiree health care programs. However:
The White House has dismissed such speculation, saying states have the wherewithal to raise taxes, cut programs and renegotiate employee contracts to balance their books.
A startling admission. Perhaps someone in the White House can pull Sebelius aside and explain that states also had the wherewithal to enact all the “reforms” that ObamaCare imposed on them. States already were “in the driver’s seat. They already had the power “to tailor reforms to their needs.”
Then along came ObamaCare.
Slasher Stories
In Hollywood, there is a genre called “slasher movies.” In the media, there is a genre of “slasher stories” on state government budgets. A piece in the WaPo today is classic:
Democratic and Republican governors alike are sounding similar themes, as they slash once sacrosanct programs…In California, Gov. Jerry Brown (D) has proposed closing a $25 billion budget gap by…slashing funding for higher education…Sen. Dean A. Rhoads, the chamber’s senior Republican, said Nevada should be raising taxes as well as slashing programs.
Wow, it sounds brutal doesn’t it? For a different perspective on state budgets, see my testimony last week to the Senate Budget Committee.
New Cato Study: ObamaCare’s Medicaid Mandate Imposes Staggering Costs on States
ObamaCare requires each state to open its Medicaid program to all legal residents earning up to 138 percent of the federal poverty level. Supporters estimate this mandate will cost state governments little: the Kaiser Family Foundation’s worst-case-scenario estimates suggest that state Medicaid spending would rise by just 1.2 percent in New York and 5.1 percent in Texas between 2014 and 2019.
In a new working paper titled, “Estimating ObamaCare’s Effect on State Medicaid Expenditure Growth,” Cato Institute Senior Fellow Jagadeesh Gokhale shows that those estimates are generally far too low. Gokhale finds that all of the five most-populous states — California, Florida, Illinois, New York, and Texas, which account for roughly 40 percent of U.S. population — will struggle to cope with rising Medicaid spending even without ObamaCare’s Medicaid mandate. But ObamaCare significantly increases that burden on four of them:
In its first year of full implementation (2014), ObamaCare will increase spending on Medicaid by 9.0 percent in Florida, 22.2 percent in Illinois, 6.4 percent in New York, and 13.5 percent in Texas. Spending in California is projected to be smaller by about 3 percent.
The cost grows over time. The following chart shows the burden that ObamaCare’s Medicaid mandate will impose on these states over the first 10 years of full implementation:
Compared to a world without ObamaCare, state Medicaid spending will decline by 3 percent in California, but increase by 17.1 percent in Florida, 28.1 percent in Illinois, 16.5 percent in New York, and 12.9 percent in Texas over the first 10 years of full implementation.
On a per-taxpayer basis, ObamaCare’s Medicaid mandate is also highly inequitable:
for every $1 in costs imposed on each working-age Texas adult, Floridians and New Yorkers will pay about $1.50, Illinoisans will pay $3.60, while Californians will save a small amount (about 3 pennies).
Gokhale explains that the Kaiser Family Foundation’s projections are lower because they assume that ObamaCare’s individual mandate will not significantly increase enrollment among people who were eligible for Medicaid but not enrolled under the pre-ObamaCare rules. Consistent with other research, Gokhale assumes the individual mandate will encourage people to enroll in Medicaid even if they would not face financial penalties for being uninsured.
Update (3/3/11): The chart and text were updated to reflect corrected numbers.
State Debt Doubles
CNNMoney.com reports on how state governments are digging themselves deep into debt. The story points to Moody’s Investor Service data on “tax-supported” debt, which is bond debt that state taxpayers will ultimately have to pay back.
The article shows the large variations in government debt across the states, and notes that “not every state is ratcheting up its borrowing. Many states have strict laws governing their debt issuance. Some places, such as Nebraska and Wyoming, have virtually no debt.”
I’ve argued that all state governments ought to follow the no-debt approach to state finance. With good planning, capital expenditures can be financed “pay-as-you-go” or out of current revenues. Debt creates bad incentives for politicians and makes it harder for citizens to understand complex state budgets.
The CNNMoney.com story notes that state debt soared 10.3 percent in 2009 as the economy struggled. But I’ve noted that Federal Reserve data shows that debt has soared in good times and bad over the last decade. The Moody’s data tells the same story, as shown below.
State debt outstanding doubled from $230 billion to $460 billion in just nine years, 2000 to 2009.
ObamaCare Is Undermining Economic Recovery, Job Growth
In a recent Wall Street Journal oped, Carnegie-Mellon economist Allan Meltzer explains how ObamaCare is delaying economic recovery:
Two overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future. High uncertainty is the enemy of investment and growth…
Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That’s part of the uncertainty that employers face if they hire additional labor…
Then there is Medicaid, the medical program for those with lower incomes. In the past, states paid about half of the cost, and they are responsible for 20% of the additional cost imposed by the program’s expansion. But almost all the states must balance their budgets, and the new Medicaid spending mandated by ObamaCare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.
Meltzer concludes that the Obama administration is making the same mistake as FDR: “President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it’s harmful now.”
For more on the harm caused by government-created uncertainty, read my colleague Tad DeHaven’s recent posts.
Public Pensions as Property Rights
On Thursday I noted that former California House Speaker Willie Brown said we shouldn’t worry about the cost of government workers’ pensions because “My guess is that the State of California, like most places involved with pensions, is going to cease to pay them.”
My former colleague Andrew Biggs, writing at The American, says Speaker Brown and I are, believe it or not, too optimistic:
In most states, accrued public-sector pension benefits carry an effective property right, either through legal rulings or outright constitutional provisions. As Donald Kohn, the vice chairman of the Federal Reserve Board, put it, “For all intents and purposes, accrued benefits have turned out to be riskless obligations.”
Some states interpret these rights as prospective, meaning that not only does a public-sector employee have a right to the benefits he’s already earned, but he has a right to continue earning benefits at the same rate no matter how financially unsustainable the pension formula may be. These provisions make state pension benefits far more assured than even Social Security, which the federal government can legally cut at anytime.
Plus, he says, the pension shortfalls are even larger than most analysts think.
Resume worrying.
Utah Legislators Call for Fiscal Federalism
Tea partiers take note: at the forefront of any effort to reduce the size of the federal government should be the devolvement of federal programs to the states. Achieving this may seem like mission impossible given the states’ addiction to federal money. However, there are signs that the idea of returning the relationship between the federal government and the states to that which the Founders prescribed is starting to gain some currency.
On Friday, the president of the Utah Senate and the speaker of the Utah House of Representatives penned an op-ed in the Washington Post calling for the federal government to begin the devolution process. The authors want the states to have the right to opt out of federal programs and allow the states to keep the taxes their residents send to Washington to fund them. The states would then be free to fund and manage the programs as they see fit.
The authors call their idea a “modest experiment,” and indeed, it is hardly radical. The 10th amendment to the Constitution is clear:
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.
From the op-ed:
Let’s select a few programs — say, education, transportation and Medicaid — that are managed mostly by Utah’s government, but with significant federal dollars and a plethora of onerous federal interventions and regulations.
Let Utah take over these programs entirely. But let us keep in our state the portion of federal taxes Utah residents pay for these programs. The amount would not be difficult to determine. Rather than send this money through the federal bureaucracy, we would retain it and would take full responsibility for education, transportation and Medicaid — minus all federal oversight and regulation.
Such a notion terrifies proponents of big government because state budgets are generally constrained by balanced budget requirements, debt inhibitions, and the inability to print money. States are also more limited in how much they can abuse taxpayers for the simple reason that citizens can move to a friendlier environment. Indeed, one of the beautiful aspects of returning to fiscal federalism is that it would strengthen this competition that $600+ billion in annual federal subsidies has somewhat neutered.
See this essay for more on fiscal federalism and this Cato Policy Analysis on the problems with federal subsidies to state and local governments.
Update: A C@L reader pointed me to this resolution introduced by Michigan state representative Paul Opsommer, which calls on the federal government to allow the states to opt out of federal highway programs funded by the federal gas tax. The states would be free to fund their own roads with their own gas tax revenues instead of sending money to Washington where its then redistributed back to the states according to Congress’s politicized wishes. As the resolution notes, the federal government uses the leverage it has over transportation spending to force the states to enact policies that they don’t want.
State Budgets and Employee Compensation
Today, Cato released a report on employee compensation in state and local governments. As states struggle to balance their budgets in coming months, they should look to find savings in employee compensation, which represents half of all state and local spending.
The particular issue of excessive state pensions is being probed by newspapers across the nation. Over at Reason, Nick Gillespie discusses the problem in his home state of Ohio. That state’s newspapers teamed up to pen a series of articles on government pensions, which are representative of the growing pension problems in many states.
There has been a parallel series of articles across the nation on “pay-to-play” state pension scandals. These scandals involve Wall Street firms bribing public officials to get a slice of the government’s financial business. There is pay-to-play corruption in California and pay-to-play corruption in New York and many other places.
The solution to both of these problems is the same: moving the nation’s 20 million state and local workers from defined-benefit to defined-contribution pension plans. That way, governments wouldn’t have to hold giant pools of pension investments, the benefit structure of government workers would be more transparent, and policymakers could more easily cut compensation to balance state budgets.
States Are Always Surprised When the Bubble Bursts
Steve Chapman points out in the Chicago Tribune:
The crisis in state budgets is not an accident, and it wasn’t unforeseeable. For years, most states have spent like there’s no tomorrow, and now tomorrow is here. They bring to mind the lament of Mickey Mantle, who said, “If I knew I was going to live this long, I’d have taken better care of myself.”
If they had known the revenue flood wasn’t a permanent fact of life, governors and legislators might have prepared for drought. Instead, like overstretched homeowners, they took on obligations they could meet only in the best-case scenario — which is not what has come to pass.
Over the last decade, state budgets have expanded rapidly. We have had good times and bad times, including a recession in 2001, but according to the National Association of State Budget Officers, this will be the first year since 1983 that total state outlays have not increased.
The days of wine and roses have been affordable due to a cascade of tax revenue. In state after state, the government’s take has ballooned. Overall, the average person’s state tax burden has risen by 42 percent since 1999 — nearly 50 percent beyond what the state would have needed just to keep spending constant, with allowances for inflation.
Would that other journalists would show such good sense when governors and legislators moan about the draconian budget cuts they’re being forced to make, taking their state budgets back to the dark Dickensian days of 2003 or 2005.
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