Topic: Tax and Budget Policy

Puerto Rico Continues to Ignore Congress

Puerto Rico came to Congress last year because it desperately needed some sort of help: after a decade of deficit financing, it is now $72 billion in the hole. It owes much of that money to traditional individual investors and savers across the United States, who have lent it money over the last decade, and even more to current and future pensioners.

The law that Speaker Ryan pushed through Congress, PROMESA, was meant to be that help. It provided the island’s government with breathing room to get its fiscal act together and authorized an Oversight Board to oversee its finances and–crucially–give it the political cover to make difficult decisions and negotiate with its many creditors.

Unfortunately, neither the government nor the Oversight Board have followed the law and, as a result, it looks destined to fall short of meeting its goals of restoring fiscal responsibility on the island and returning Puerto Rico to the capital markets.

To date, neither the Board nor the Puerto Rican government has had discussions with its creditors on the either the development of the fiscal plan or any process for debt negotiations. Instead, their activities have culminated in the Oversight Board certifying a fiscal plan from the Commonwealth that falls short of–or outright ignores–requirements in PROMESA. The plan does relatively little to reform what’s broken in the Puerto Rico government, including wayward spending and bloated pension system, and instead achieves short-run fiscal solvency via significant haircuts for the creditors that, in violation of the statute, do not comport with the lawful or constitutional priority of Puerto Rico’s obligations.

In response, a group of creditors that owns over $13 billion of the island’s debt recently sent a letter to the members of the island’s Oversight Board asking it to reject the government’s fiscal plan. The signees are a diverse group, including general obligation bondholders, COFINA bondholders, a bond insurer, and others who do not always share the same perspective. However, they all agree that the plan is so flawed it cannot be considered a serious starting place for debt negotiations. Key among their objections is that the fiscal plan clearly violates PROMESA by both ignoring the law’s explicit call that it “respect the lawful priorities or lawful liens” that exist. The plan does this both by making debt subordinate to every single other government expense and by muddying the clear seniority of the various different creditor groups.

Some bondholders are clearly senior. For instance, the island’s constitution promises that the government will use “all available resources” to pay the holders of general obligation bonds before anyone else. That assurance allowed Puerto Rico to borrow that money at a low-interest rate relative to riskier revenue-backed bonds.

Others expect dedicated revenue pledges to be respected. For instance, COFINA bonds, created to offer deficit borrowing capacity beyond the constitutional limit on general obligation debt, are backed by revenue generated by the island’s sales tax. Whether that diversion of resources was legal remains to be seen, but Puerto Rico managed to increase its borrowing capacity by promising these bondholders first dibs on this revenue stream.

Tucker Carlson & Peggy Noonan Mimic Piketty & Saez

In a recent Wall Street Journal column defending Obamacare 3.8% surtax on investment income on joint returns above $250,000, Peggy Noonan ends by quoting Tucker Carlson’s Fox News interview with Paul Ryan which questioned the now-suspended health plan’s elimination of that surtax:

“Looking at the last election, was the message of that election really, ‘We need to help investors?’ I mean, the Dow is over 20,000. Are they really the group that needs the help?…“The overview here is that all the wealth, basically, in the last 10 years, has stuck to the top end. That’s one of the reasons we’ve had all the political turmoil, as you know. And so, kind of a hard sell to say ‘Yeah, we’re gonna repeal Obamacare, but we’re gonna send more money to the people who’ve already gotten the richest over the last 10 years.’ I mean, that’s what this does, no? I’m not a leftist, it’s just—that’s true.”

Six Sobering Charts about America’s Grim Future from CBO’s New Report on the Long-Run Fiscal Outlook

I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

CBO Projections: Unhealthy Basis for Health Policy

In the political hullabaloo over efforts to shift costs of health care to someone else, the argument for keeping Obamacare’s compulsory insurance and ever-expanding Medicaid enrollment relies naïvely on notoriously comical Congressional Budget Office (CBO) 10-year “projections.” 

CBO claims the initial House Republican plan would eventually cause 3 million to “lose” health insurance simply because they would no longer be fined up to 2.5% of income for not buying a policy designed by and for politicians. This not a loss, but a gain – in freedom of choice.

CBO claims the GOP plan would “lose” another 14 million by not expanding Medicaid enrollment as rapidly as Obamacare hopes to. The federal government pays about 57% of the cost of Medicaid for poor people, but 90-93% (until 2022) to the 31 states that provide Medicaid to those earning up to 138% of the poverty line. That has added 17 million to the Medicaid rolls, and enriched big health insurers and Kaiser Permanente.

Finding Victims for Trump Budget Cuts

A Washington Post story today about one of President Trump’s budget cuts reflects what can be called victim journalism. The story focuses on the proposed ending of federal funding for the Appalachian Regional Commission (ARC), which provides subsidies for economic development in selected states. The reporter presents an interesting narrative about some ARC beneficiaries, but does not provide the balance needed to judge the overall value of the program.

The story presents individuals in Appalachia as victims, and federal money as the only savior. It does not focus on personal responsibility, local government policies, or federal program failures. The reporter does not mention any studies examining the ARC’s overall effectiveness, or whether auditors have done a benefit-cost analysis to see whether the program’s benefits outweigh the costs.

However, the main problem with the Post story is a lack of appreciation for the federal structure of American government. Statements like this bewilder me: “The federal funding [for ARC] often goes toward repairing essential services rural towns cannot afford on their own, such as fixing broken sewer systems…”

Sewer systems are indeed an essential local service. As such, they should receive a high priority in state and local budgets. If sewers in Appalachia are not being fixed, then state and local governments are failing at a core responsibility. Reporters should ask why that is.

The ARC sprinkles about $150 million a year across 13 states, from New York to Mississippi. Combined state and local spending in those states (excluding federally funded spending) is more than $800 billion a year. So the supposedly crucial ARC spending represents less than 0.02 percent of the region’s own government spending. If the ARC were eliminated, those governments could easily fill the small void with their own money.


Addendum

Let’s drill down on Kentucky, which was the focus of the Post story and is in the center of the ARC region. If all the ARC money were spent just in Kentucky, it would still be only 0.5 percent of the roughly $30 billion in state/local spending in that state.

The Post story claims “so much of the Appalachian commission’s budget — $146 million in 2016 — goes toward infrastructure projects…” Assuming that is true, why doesn’t Kentucky have room in its own budget for infrastructure such as sewers? Looking at Census data for state and local governments in Kentucky suggests why. Total capital spending on sewers and solid waste was $234 million in 2014, but spending on “public welfare” was $8 billion and spending on government worker salaries was $10 billion.

GOP Responses to Trump Budget

President Donald Trump’s budget issued last week would cut $54 billion from nondefense spending. Budget director Mick Mulvaney did a nice job assembling an array of sensible cuts, as I discuss in this CNN op-ed and this blog.

Recipients of handouts and pro-spending activists are not happy with the proposals. But many of Mulvaney’s proposed cuts are for local activities, such as housing and schools. If programs are important, then local governments can fund them with their own taxes, which would be a more efficient, transparent, and democratic fiscal approach.

Some GOP members of Congress are not happy about the cuts either. Republicans generally consider themselves to be fiscal conservatives. But for some members, their oft-expressed concerns about deficits might be just philosophical musings, not a guide to their actual policy positions:

  • Senator Rob Portman (R-OH) responded to Trump’s cuts by coming to the defense of federal funding for Lake Erie restoration, which he called “critical.” Yet the senator’s official website complains about the federal “spending spree, piling up new deficits onto our massive debt … Washington’s fiscal irresponsibility passes the problem to future generations.”
  • Representative Michael Conway (R-TX) opposes farm subsidy cuts, saying “Agriculture has done more than its fair share” in restraining deficits. (That’s not true—farm aid has risen in recent years). Yet on his website, Conway says, “Our nation is in a budgetary crisis … As a CPA and fiscal conservative, I am committed to working with my colleagues to cut spending and put our fiscal house in order. Congress does not have a blank check; it is vitally important that we balance the federal budget.”
  • Senator Lisa Murkowski (R-AK) complained about the Trump budget as well. She “attacked plans to cut or eliminate programs that help the poor pay heating bills, provide aid for localities to deal with wastewater and subsidize air travel in rural areas like her home state of Alaska.” Yet her website says, “Senator Murkowski believes one of the most essential functions of Congress is to pass a balanced budget that sets a responsible spending plan for federal government services. For too long, the U.S. government has been spending more than it takes in and borrowing large sums of money to make up the difference. To set the nation on a more stable financial path, it is critical for Congress to set sustainable funding levels for the federal government, reduce overall spending levels.”
  • House appropriator Hal Rogers (R-KY) complained about Trump’s proposed cuts to foreign affairs activities. Yet his website says that he will “remain steadfast in fighting against government waste and any bills that increase the government’s reach on your dime.” As it turns out, foreign affairs has greatly increased its reach on our dime, and so Trump’s proposed cuts make a lot of sense.

President Trump recently signed an Executive Order requiring agencies to eliminate two regulations for each new one imposed. He should ask members of Congress to be similarly responsible on spending. For each proposed spending cut they disapprove, they should identify and pursue two similar-sized cuts elsewhere in the budget.   

Puerto Rico’s Half-Hearted Stab at Fiscal Reform Threatens the Island’s Long-Term Prospects

Puerto Rico Governor Ricardo Rossello and Federal Oversight Board Chairman Jose Carrion III will be in Washington this week to testify before Congress on the progress the Commonwealth has made since President Obama signed The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law last summer. At the time, the press heralded the legislation as a bipartisan achievement and a legislative victory for House Speaker Paul Ryan, but that declaration of victory is beginning to appear a bit premature.

Eight months later, and six weeks before the bill’s stay on litigation expires, Governor Rossello and Chairman Carrion are expected to put forth a rosy picture of the situation on the status of PROMESA. However, it’s clear that the island’s government is headed in the wrong direction, precisely because the Commonwealth has failed to adhere to the tenets of the law.

The intent of PROMESA was to help Puerto Rico resume economic growth and achieve fiscal solvency after a decade of recession and budget deficits. Once that occurred the next goal was the eventual return to capital markets: since its default on general obligation bonds—which the island’s constitution explicitly guarantees—Puerto Rico has been shut off from capital markets.

PROMESA attempted to facilitate negotiations with the island’s many creditor groups. One way it did so was by imposing a stay on any litigation related to the island’s default on its secured bond payments. The stay expires on May 1st. It also created a court-supervised debt restructuring mechanism under Title III of the Act, which congressional leaders and the Oversight Board intended to be used only if negotiations with creditors prove fruitless.