The Palmetto Insider

Tuesday’s release of the Legislative Audit Council report on mismanagement and negligence by the S.C. Employment Security Commission was big news in our state. The report lays blame squarely at the commission’s feet for taking the state’s once-healthy unemployment insurance fund to nearly $750 million in federal debt and climbing. (Keep your calculator handy, because the debt is increasing by about $2 million a day.)

Now, let’s be clear about this story. The report by the LAC is news, and The Nerve was first to release a comprehensive story on the findings. But the fact that the ESC has managed to take a once solvent unemployment fund and run it into the ground is not news—at least not new news.

In 2000, the fund had a balance of $800 million. On Jan. 15, 2010, the fund was in debt to the U.S. Department of Labor in the amount of $723.7 million; on Jan. 26, the last time the Labor Department updated its web site, South Carolina’s debt had risen to $747,889,544.00.

Ten years and a swing, from being in the black to drowning in red ink, of more than $1.5 billion.

Eleven days, and another $24 million in the hole.

Thank goodness our legislature was here to alert us to this gargantuan failure.

But the timing could have been better. Perhaps a Tuesday in 2001 when the fund had fallen below its required reserves? How about a Tuesday in 2004 when the unemployment fund had fallen to about half of its required reserves? Or perhaps a Tuesday in 2008, when the recession caused an already tanking trust fund to really go into free fall.

Again, just to be clear, the Legislative Audit Council is a government watchdog working for the General Assembly, and the S.C. Employment Security Commission operates under the direction of – not the executive branch – but the General Assembly. So it should come as no surprise that the second bullet in the LAC’s condemnation of the ESC gives the legislature political cover.  Here’s what it says:

“ESC’s annual assessment reports to the General Assembly did not provide adequate information about the declining trust fund balance. Nor did ESC make recommendations to prevent the trust fund’s decline as required by … the S.C. Code of Laws.”

Our legislators are busy, what with all the hundreds of millions of dollars in taxpayer funded special interest giveaways they’re working on. So maybe it’s understandable that they didn’t see the problem in 2000. At that time the fund reserve was just a smidge under what’s required. Neither did the legislature act in 2003, when the fund reserves had fallen from more than $800 million to around $400 million, nor in 2008 when South Carolina first had to borrow from the Department of Labor.

This is precisely why the people who write the laws and control the purse strings aren’t supposed to be the same people who enforce the laws and write the checks. The General Assembly has taken upon itself the roles of both the legislative and executive branch, in this case and many others in South Carolina.

Yes, ESC deserves blame for mismanaging of the fund and, yes, the commission needs the top-to-bottom overhaul lawmakers say is going to happen. But the “top” of the ESC is the General Assembly, and it’s disingenuous for South Carolina lawmakers to pretend they don’t share responsibility or say they were given inadequate information.

To its credit, or perhaps because the General Assembly wants to distance itself from the whole mess, the LAC’s first recommendation is to make the ESC a cabinet agency. That’s a good first step, especially since the General Assembly hasn’t done its job in managing the commission. But the long-term solution is to allow free market reforms suggested in the Policy Council’s Fast Facts on ESC posted yesterday to reduce the staggering rate – and cost – of unemployment in South Carolina.

Boeing’s fourth quarter earnings came out yesterday and the company earned $1.3 billion.

Seems like South Carolina should be the one getting incentives from Boeing, not the other way around.

Yesterday, the Legislative Audit Council released a report slamming the ESC for mismanaging the state’s unemployment fund – resulting in a massive debt of $736 million.

Unfortunately, this trend is common among many states. Propublica.org released a report earlier this month which tracks the unemployment situation of each state. What did they find?

Already 25 states have run out of unemployment funding and have had to borrow from the federal government, raise taxes, or cut benefits. South Carolina is one of those states that squandered prior surpluses in recent years.

The Nerve was first on the hunt yesterday with an analysis of the LAC report:

Among the most shocking findings detailed in the report:

• “While agency management knew as early as 2001 that fund reserves were inadequate, management did not aggressively pursue changes to benefits, or the tax structure, in order to prevent the insolvency of the trust fund.”
• “ESC’s annual assessment reports to the General Assembly did not provide adequate information about the declining trust fund balance. Nor did ESC make recommendations to prevent the trust fund’s decline as required by … the S.C. Code of Laws.”
• “ESC did not follow (U.S.) Department of Labor (DOL) guidance regarding minimum reserves.” Had the ESC done so, the unemployment fund “would still have a significant surplus.”
• “Employees who were terminated for misconduct, illegal acts or other offenses have been paid more than $171 million in state unemployment benefits during the last three fiscal years.”
• “In 2008, ESC stopped referring claimants for criminal prosecution who had fraudulently obtained unemployment benefits. Claimants defrauded the agency out of $7.3 million” in FY08-2009.

Just because South Carolina is not alone in its mismanagement of funds does not excuse the waste of taxpayer dollars. As The Nerve pointed out last week, this ESC boondoggle has been years in the making. And the key difference here in South Carolina is that the General Assembly, which appoints the members of the ESC, is squarely to blame.

The Legislative Audit Council, which conducts performance-based reviews for the South Carolina General Assembly, this morning issued a scathing investigation detailing mismanagement by the Employment Security Commission.

The Nerve was the first news organization in the state to release a full report on the Legislative Audit Council’s report. For the complete story, visit The Nerve.

The council report charges the commission with a decade of mismanagement, including a failure to run the unemployment fund according to state and federal laws and regulations. While commissioners were squandering reserve funds, the state continued to pay unemployment benefits to ineligible beneficiaries, the report found. Consider the following examples:

• “An employee made unauthorized charges on his company’s credit card, which included motel rooms, hardware and Internet dating charges. He was terminated by the company, but ESC still allowed him to collect $3,586 in unemployment benefits.”
• “An employee was discharged for absenteeism due to his incarceration. The commission allowed him to collect $5,868 in unemployment benefits.”
• “An employee made a job-related threat and alluded to a weapon in his car. Police found a loaded firearm in the employee’s car. He was terminated for cause, but still collected $2,440 in unemployment benefits.”

Last Thursday, The Nerve reported that South Carolina’s unemployment insurance system has been heading for financial disaster for the past decade. According to the story, the ESC has taken the fund from a surplus of $782.2 million in 2000 to a staggering $723.7 million in debt to the federal government. The report estimates the state could incur costs higher than $2 billion to clean up the mess. If the state fails to reimburse the federal government for the debt, South Carolina businesses will see an automatic tax increase. As estimated by state Board of Economic Advisors chairman John Rainey the annual tax increase per worker could run anywhere from $249 to $567.

Hmmm. … Let’s connect the dots.

In 2006, Massachusetts passes massive health care legislation that forces every resident to purchase insurance and also creates public option plan.

Results:

Billion-dollar overruns.

Long waiting periods to see a specialist: “Long wait times in Boston may be driven in part by the healthcare reform initiative that was put in place in Massachusetts in 2006.”

A shortage of primary care physicians.

And very mixed results on access and quality of care.

Not to mention, massive tax increases for middle-class families.

In 2010, Massachusetts voters elect Scott Brown, who campaigned as the 41^st Senate vote that would block ObamaCare.

RomneyCare = ObamaCare = (Tax Increases + Decline in Quality of Care) = Voter Anger

As for real reform, voters in Massachusetts did not so much vote for free-market heath care reform as against the status quo government-run system.

But given that we’ve tried government-run health care, and it’s failed, it’s time to try the free-market alternative.

This is a lesson many American families are beginning to learn. For more on that, see David Goldhill’s profound article in the Atlantic Monthly, “How American Health Care Killed My Father.”

Today on The Nerve, reporter Eric Ward examines the woes of South Carolina’s Employment Security Commission, the agency that manages the state’s unemployment system.

Ward highlights recent problems at the agency, such as paying out more in benefits than it received in contributions for over a decade.

A Legislative Audit Council is set to release its findings on the ESC next week.

Ward writes: “For South Carolina taxpayers – mainly businesses – the cost of cleaning up the wreckage has escalated to hundreds of millions of dollars and climbing, possibly to billions. And, in another sign of business as usual in state government, this mess has the unseemly paw prints of State House politics on it – if not all over it.”

With state lawmakers telling us that they really don’t know (or seem to care) how much the Boeing incentives deal is going to cost taxpayers, it’s worth bearing in mind that the incentives game is a race to the bottom. As detailed in Unleashing Capitalism, numerous academic studies have concluded that economic incentives don’t work. Consider the following:

• A 15-year survey by Kansas State University professor Margery Ambrosius found there is no evidence incentives increase manufacturing activity or employment.

• Researchers Lawrence Litvak and Belden Daniels likewise conclude: “Most state policies thought to promote economic development do not work –  they just cost the taxpayers money. The preponderance of the evidence is clear: state taxes represent a small cost of doing business; state tax incentives and subsidies do not change business decisions.”

• Specific to South Carolina, economists Pete Calcagno and Frank Hefner have also found that “selective tax incentives create distortions in the economy and limit the ability of the private sector to generate economic growth.”

To these studies we can add another, highlighted in a recent Wall Street Journal op-ed. According to the study on tax incentives to high-tech firms in Pennsylvania, state “tax and incentive codes provided ‘little appreciable advantage or disadvantage.’” Here are four highlights:

1) High-tech job creation (or loss) is overwhelmingly driven by events within the state – not by interstate relocations. … Whether positive or negative, the net movement of high-tech firms and jobs across the state’s borders each year is almost negligible compared to the impact of instate activity. Long term, interstate movements have been nearly a wash: over the same period, the state experienced a very small net in-migration of workplaces and a very small net out-migration of jobs.

2) “Globalization is the dominant issue in high-tech job out-migration. … International job flight from Pennsylvania dwarfs domestic job shifting – by a factor of 30 for the years 2001 through 2006.

3) “High-tech deals can be ‘old economy,’ costly and disappointing. … Despite their high costs, the deals are surprisingly fragile, perhaps reflecting higher volatility in high-tech sectors. For example, North Carolina gave its costliest-ever package to Dell, but the computer assembler recently announced that more than 900 jobs are headed offshore after only four years of below-projected employment.

4) “Tax-based incentives are low-impact but high-cost. Cumulatively, our findings – especially our theoretical-firm modeling and our long-term business-establishment analysis – mesh with a large body of national evidence that finds tax reductions, exemptions or credits to be crude tools for economic development. They can only exert a very small marginal influence on corporate investment decisions because other cost factors such as labor, occupancy and other key inputs are far larger than taxes (or tax breaks). Given this reality, for the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted.”

The best way to create jobs in South Carolina is to lower taxes and fees and to enact genuine school choice educational reform. In the meantime, we also need transparency regarding economic sweetheart deals like that extended to Boeing and Sembler.

The Policy Council’s new website The Nerve is already driving the debate in Columbia. In a story on Sunday, The Post & Courier examined the real cost of the Boeing incentives package and used portions of The Nerve’s own reporting from earlier in the week.

Also this weekend, the Sun News editorialized on openness and ethics in South Carolina’s state government and cited the Policy Council’s efforts on  these issues:

The S.C. Policy Council, a nonpartisan think tank that promotes open government and fiscal responsibility, asked a wide swath of state officials for any e-mails from their private accounts to registered lobbyists or the principles of employees that do business with the state. “They all closed ranks,” council president Ashley Landess said. “They basically coughed up nothing.”

Read Policy Council President Ashley Landess’ editorial in Statehouse Report debunking the way our legislative leaders recently spun their policies as “fiscally conservative.” (See “Responsible reforms will stabilize budget,” Jan. 4, The State)

“It’s time for some blunt talk about why their claims of “fiscal conservative policies” are absurd and misleading,” Landess said. “Senators Glenn McConnell and Hugh Leatherman, House Speaker Bobby Harrell and Rep. Dan Cooper credit themselves for ‘holding the line on taxes.’ They don’t point out that they blew through a billion-dollar budget surplus, raised fees, used one-time stimulus money to fund recurring programs and grew spending to the point that it is unsustainable today.”

The Tax Foundation recently released a study detailing why film industry tax credits and incentives are bad state policy.

The report lists 7 different types of film incentives. South Carolina is one of 7 states to offer 5 of the 7 incentives. These are:

• Movie Production Incentives
• Cash Rebates
• Sales Tax Exemptions
• Lodging Exemptions
• Fee-free locations

As the Tax Foundation study demonstrates, film incentives can easily get out of control. In Iowa, for instance, documents released by the governor showed the following “tax credits” given to movie companies:

• A Mercedes and Range Rover for producers to keep
• Contracts amended after completion to increase credits
• Large state-funded payments to relatives of filmmakers

Although this is an extreme example, it represents what can happen if politicians convince themselves that film credits are an unlimited bounty to the state.

As the Policy Council details in Unleashing Capitalism, film credits actually “generate a net loss in revenue equal to 81 percent of expenditures on rebates.” Additionally, “When government spends taxpayer dollars to subsidize a targeted industry the relative tax burden to individuals and businesses will increase.”

Despite research showing why film credits are detrimental to state economies, the growing trend has been toward more incentives. In 2002, 5 states offered movie production incentives – today, 44 states are doing so.

Needless to say, film incentives offered by states have created a boon to the film industry, as rent-seeking increases by parlaying one state against another. According to the Tax Foundation report, states have been offering “bigger and better” packages.

In reality, a film credit indirectly takes money from other taxpayers and redistributes it to the film industry – which is often doing little more than creating temporary jobs.

To see a list of films that have received S.C. incentives, click here.