Tag: state budgets

Is Fiscal Constraint a Bug or a Feature?

A Washington Post profile of Art Pope, political donor and now budget director of North Carolina, finds a flaw in his fiscal management:

For all of his pull, the revolution Pope helped set in motion is not going quite as planned. The tax overhaul, styled in part off ideas promoted by Pope-backed groups, has contributed to tight finances in North Carolina at a time when other states are flush with cash.

Is that bad? Fiscal conservatives such as Pope just might think that budgetary constraints are a good thing, perhaps especially when revenues would otherwise be rising, leading to profligacy. State governments have a tendency to overspend when the economy booms, and then face difficult adjustments in downturns. Limits on overspending, whether constitutional constraints or tax reductions, should be seen as a feature, not a bug, in state fiscal systems.

By the way, this Post profile of Pope, who is a contributor to the Cato Institute, is not exactly positive, but it’s nothing like Jane Mayer’s 2011 profile in the New Yorker, which I dubbed “Snidely Whiplash in North Carolina.”

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.