The Palmetto Insider

Drudge is reporting today that private sector payments, as a share of personal income, have reached an all-time low. By comparison, government payouts are at an all-time high.

This graph from the Mercatus Center illustrates the trend in vivid terms:

The steadily rising red line represents government transfer payments.

The steadily declining blue line represents private sector pay.

Here, in South Carolina, the trend is the same – and has been for a very long time.

As our new report on federal per capita spending notes:

In the FY10-2011 proposed Senate budget, federal funding reached an all-time high of $8.258 billion, compared to an overall state budget of $21.151 billion. But if federal funding in the state budget is up owing to one-time stimulus dollars, South Carolina’s status as a “recipient” state is not new. According to the D.C.-based Tax Foundation, “South Carolina has been a ‘recipient state’ since at least 1981, ranging between $1.19 and $1.36 in federal spending received per dollar of taxes paid.

In economic terms, South Carolina is a “free rider.”

… except there’s no such thing as a free ride. Either high government spending is going to cease – in practical terms, no federal bailout for South Carolina’s next budget. Or, we’ll pay for such spending by printing more dollars – which could translate into inflation, and higher prices, for years to come. (Essentially, our children will pay tomorrow for the free ride we are taking today.)

Earlier this week, Gov. Mark Sanford sent a letter to the General Assembly detailing some of his concerns about a state budget bloated with extra spending and additional fine and fee increases.

The letter highlighted several items in the budget the governor is implying he will veto if it comes across his desk. Some of the problems he sees are as follows:

• Maybank Money – This is money that is to come from stricter tax collection enforcement. Two problems here: 1) using nonrecurring dollars to fund core services; and 2) the money may not materialize. Last year, stricter enforcement efforts generated $48 million. The House budget plans on getting $45 million more this year. But the Senate increased that figure to $90 million. Agencies that would receive funding from this bounty include: $35 million for Aid to Subdivisions (local governments); and $11 million for the Department of Education (for school bus fuel). But what happens if this funding doesn’t materialize?
• New fees are a major part of the budget, especially the Senate budget. All told, there are about $45 million in new fees. Among those: $22.7 million in driver’s license fees that will go to Public Safety; and a $50 filing fee for courts that will generate $16 million for the judicial branch.
• Senate Operations funds are slated to increase by roughly $4 million. During a time when teachers may be furloughed, it seems inconsistent for the Senate to increase its own funding by almost 70 percent.

The governor’s letter also mentioned the $175 million in increased money from the federal government (Part IV of the budget) that will further place the state in a deep budget hole next year. A new twist, here, though, is that the money may not be approved by Congress.

Other budget problems not mentioned by the governor include:

• The Budget and Control Board budget received a $1.9 million increase in the Senate budget.
• Flexibility proviso, 89.87, authorizes an additional $1 billion in government spending – money that is not technically allocated in the budget. The Senate budget allows agencies to use Other Funds to make up for General Fund shortfalls – dating back to FY08-2009 levels ($6.7 billion).
• The ongoing raiding of Other Funds dollars to maintain general agency expenditures and fund special projects.

South Carolina Comptroller General Richard Eckstrom announced the launch of a new transparency initiative that tracks the use of state-issued Bank of America charge cards today at the Statehouse. The new information housed on the Comptroller General’s website, categorizes the purchases by state agency and by cardholder name within that agency.

Prior to this new feature, agency use of charge cards was disclosed simply as a payment to Bank of America and did not show where the charge was made. Now anyone can go online and see exactly what vendors were paid with the charge cards.

This new portion enhances the government transparency portal that the Comptroller General launched on his website more than two years ago after the Governor issued an executive order requiring cabinet agencies to post spending online. Eckstrom has also assisted multiple local governments and school districts in posting their spending online.

Of all charges made on the Bank of America cards, nearly two-thirds of them came from institutions of higher education. Unlike other state agencies, institutions of higher learning are not required to post their spending on the Comptroller General’s website.

According to Eckstrom, the 15,000 state-issued Bank of America cards charge $16 million worth of goods and services to the state each year. Eckstrom encouraged the public to access the records and hold their government accountable.

*Click Here to Review Purchases Made by State Charge Cards

Don’t believe everything you hear in the media about the budget. The Senate officially took up the budget yesterday, and there have already been many proclamations about the dire state of revenue.

In reality, as the Policy Council reported yesterday, the Senate budget is actually higher than the House version. And both budgets are higher than last year’s appropriation bill. The only part of the proposed FY10-2011 budget that’s smaller is the General Fund, and the cuts are more than offset by increases in federal money and revenues from fines and fees in the fast-growing Other Funds budget.

The Total Senate budget ($21.161 billion) increases spending by $60 million from the House version ($21.101 billion):

• General Fund: Increases from $5.068 billion in the House-passed bill to $5.086 billion — a net change of about $18 million.
• Other Fund: Increases from $7.765 billion to $7.807 billion – an increase of $42 million.
• Federal Funds: Remain the same at $8.268 billion

Let that sink in.

Lawmakers are talking about budget cuts, but the total budget bill allows for more government spending than last year’s budget bill.

This is because Senators are only talking about the General Fund – the “$5 billion spending bill. But the General Fund is the smallest slice of the budget pie. The total budget includes more than $15 billion in supplemental funding to the budget in the form of Other Funds and Federal Funds budgets. A large portion of that money comes from fee and fine increases – which have been driving increased government spending for years.

The focus on the General Funds budget creates misleading impressions about state spending. “We’re going to be living on a 1995 standard when we should be living on 2010 standard,” said Clarendon Sen. John Land in a statement to the media.

One assertion made by a local media outlet is that, “The deepest cuts will come to education, not just to K-12, but to higher education as well, which will see funding levels at their lowest in 25 years.”

Perhaps some digging should be done on the true state of those budgets. Here are the facts:

Higher ed funding — as portrayed in the Summary Control document – is $664 million. The General Fund will then reduce $91 million in funding. But that is more than offset by $117 million in additional funding from the federal stimulus program, and increased enforcement of tax collections.

Add it up, and higher ed spending increases by $26 million.

The K-12 budget is a similar story: Using last year’s agency base of $1.9 billion, the Senate budget would increase K-12 spending by $90 million. This number comes from a $103 million General Fund cut, $13 million increase from Department of Revenue enforcement, $176 million from the stimulus, and $3 million from increased Federal Medical Assistance Percentages.

The General Fund is indeed down, but the total budget – the numbers that we should be talking about – are up.

Several amendments were introduced yesterday that would start prioritizing spending – an important step toward greater budget transparency and accountability.

Time will tell as to whether Senators can follow through on prioritizing spending – like getting out of the golf course ownership business – and ensuring funding goes to core functions of government.

Read The Palmetto Insider, The Nerve and SC Policy Council for updates on the budget debate.

While last year’s budget focused on the use of Federal Funds to balance the budget, this year’s budgetary battles may well focus on the use, and misuse, of Other Funds. In particular, flexibility provisos in the budget are being used to facilitate the transfer of more than $1.5 billion in targeted fine and fee revenue  — to supplement apparent cuts to the General Fund budget.

Read more about that here.

But at least the use of stimulus funds had a semblance of transparency – in that we had a good sense of how much each agency would receive in Federal Funds revenue. This year’s budget balancing gimmick will be less transparent — and more misleading to taxpayers.

We have highlighted what’s wrong with the House budget, but the Senate budget also has its share of problems.

As the Senate takes up the FY10-2011 budget, lawmakers should demand an open and honest debate — in particular, regarding the backdoor use of more than $1.5 billion in Other Funds revenue to supplement General Fund spending.

This transfer of funds is being made possible by Senate proviso 89.87, which could effectively increase General Fund spending from its current level of $5.1 billion to $6.7 billion.

89.87 General Flexibility Proviso

This is the general flexibility proviso that allows agencies to use restricted and earmarked (Other Funds) dollars to “maintain critical programs previously funded with general fund appropriations.” The House version of this proviso allowed agencies to spend up to the prior fiscal year (FY09-2010) appropriation. But the Senate version changes this baseline to FY08-2009. This apparently minor edit would increase spending by roughly $1 billion over the House budget, draining Other Funds by a proportionate amount.

Here are the appropriation figures from the two fiscal years:

2008-2009: $6,735,714,190

2009-2010: $5,714,023,234

In essence, proviso 89.87 allows agencies to dig through reserved and earmarked funds to bump spending up to $6.7 billion.

Such maneuvers explain why South Carolina so desperately needs budget reform. The General Assembly should be debating the true $21 billion budget – instead of pretending to pass a $5.1 billion version and then using a proviso to open the door to $1.6 billion in additional expenditures.

You’ve got to wonder just what’s going on at the state capital. Yesterday the Senate gave final approval to a 50 cent cigarette tax increase, generating an estimated $136 million—but costing thousands jobs according to warnings from economists.

At the same time, the Economic Development Competitiveness Act, quietly giving the General Assembly a free ride to …

1. Pass out more taxpayer money to buy political power.
2. Line the pockets of special interests.
3. Perpetuate a failed policy of state-driven economic development.
4. All of the above.

… passed the Senate Finance Committee.

Then we learned that our state government, due to an accounting error, is nearly $60 million further in the hole than they thought. That means more budget cuts in the last quarter of this fiscal year and in next year’s budget as well. More motivation to enact all manner of tax increases and new fees and fines.

At least we can look back as how our lawmakers voted … just kidding.  Only 14 percent of House and Senate votes have been recorded this session. So forget trying to find out how your elected representatives stand on these issues.

To recap:

• More taxes
• More Lost Jobs
• More Government Control Over the Economy
• More Fuzzy Accounting
• Less Transparency

A banner day for the Big Government powerbrokers running our state.

Next week, the Senate will be debating the full budget. The Senate Finance Committee has already met and published its list of provisos, amended and new, based on the House budget.

Here’s a quick look at the good and the bad: 3 good; 1 bad. But don’t be misled … the bad far outweighs the good. Read on to learn more:

The Good

1)     89.112 – The Senate is striking the House’s proposal to provide a $10 million loan to Beaufort County for the Verizon Heritage Golf Tournament. As reported in The Nerve, this is a controversial and wildly inappropriate use of taxpayer funds.

2)     80A.7 – This proviso allows the Budget & Control Board (BCB) to eliminate any government position left vacant for 12 months. The House budget would suspend this requirement for FY10-2011. The Senate amendment allows the BCB to continue the practice. Government should be maximizing efficiency – and if an agency has survived for more than 1 year without a certain position, chances are it can continue to do so.

3)     89.dm – A new addition by the Senate Finance Committee, this proviso requires that after each quarterly deficit review, any agency likely to have a deficit must submit a plan within 14 days that would minimize or eliminate the deficit. If there is no feasible plan, the agency has 30 days to notify the BCB of the situation. This proviso should encourage more transparency and accountability among agencies.

The (Really) Bad

1)     89.87 – This is the general flexibility proviso that allows agencies to use restricted and earmarked (Other Funds) to “maintain critical programs previously funded with general fund appropriations.” The House version of this proviso allows agencies to spend up to the prior fiscal year appropriation level (FY09-2010). But the Senate version changes this to FY08-2009. This one change would increase spending by roughly $1 billion, draining Other Funds by a proportionate amount.

Here are the appropriation figures from the two fiscal years, according to the Budget and Control Board:

– 2008-2009: $6,735,714,190
– 2009-2010: $5,714,023,234

The House budget is roughly $5.1 billion. But this proviso, in essence, allows agencies to dig through reserves and other funds to bump spending up to $6.7 billion. This is about as un-transparent as legislators can get. The General Assembly should be voting on the true budget – not passing a $5.1 billion version and then providing vague wording that could open the door to $1.6 billion in additional expenditures.

Stay tuned for more budget coverage as the General Assembly comes back to Columbia next week.

In a budget year where House legislators ignored the opportunity to make targeted cuts to a number of nonessential services of government – State Museum, Arts Commission and Human Affairs to name a few – at least one fund is seeing a sizeable reduction.

Local aid to subdivisions – tax dollars shifted directly to localities – has been cut from $244 million to $216 million.

And while some localities will likely cry foul about the reduction – the reality is many local budgets have continued to grow despite the state cuts.

Moreover, discouraging localities from depending too heavily on state revenue is a good thing, just as the state should not be as dependent as it is on federal funds.

If municipalities are growing beyond the revenue they bring in, the appropriate response would be to scale back on spending. As the Policy Council has written, it is irresponsible to fill recurring spending holes with nonrecurring money – like federal dollars at the state level or state appropriations at the local level.

House Ways and Means Chair Dan Cooper defended the cut during the House’s recent budget debate, arguing that localities did not need the state funding – as evidenced by a 3 percent increase in government hiring at the local level during the previous year.

But why not apply the same logic to  the rest of government? For instance, by lowering fines and fees that result in excess revenue for agencies. Or, even better, implementing zero-based budgeting with the aim of reviewing the effectiveness of each appropriation.

About 500 people showed up for a March 18 debate in New York that addressed the notion, “Do Not Blame the Teachers Unions for Our Failing Schools.” The debate, sponsored by IQ Squared, asked the audience to vote electronically for or against the concept—once before the debate, and again after.

In other words, if you think the unions are to blame, you would vote against the motion. Two teams of three addressed the issue, for and against.

Before the debate, 24 percent of the audience agreed with the idea that teachers unions are not to blame for our failing schools, and after the debate, 25 percent thought unions are blameless.

Strikingly, however, while 33 percent of audience members were undecided at the beginning of the debate, and 43 percent did blame unions, the number of undecided fell to only 7 percent by the end of the debate, and 68 percent of the audience blamed unions for failing schools.

Not a great result for the teachers union side—it appears that most of the undecideds decided that teachers unions look out for union members first—kids a distant second. If you’d like to see the debate, it can be found in its entirety here.

There are solutions to the problems we face in our schools, many articulated by panelists at the debate, including greater school choice and weighted student funding.

As we predicted before session began, there was a fair chance the General Assembly would try to raise the cigarette tax this year. The House has already passed a 30-cent per pack tax increase via a budget proviso. (To read our review of the new House budget, click here.) The measure would theoretically expire after a year and need to be reauthorized in subsequent budgets.

Raising the stakes, the Senate passed on second reading a 50-cent per pack tax increase.

The increase is the cornerstone of a bill (3584) passed last year by the House as part of a half-hearted lurch toward free market health care reform. The House proposal would have offered subsidies to Medicaid clients to purchase health insurance on the free market. Instead of subsidies, we argued for deregulation. Still, injecting even subsidized market forces into Medicaid would have been better than nothing.

The House measure, however, stalled – primarily owing to objections by Senator John Land who strenuously argued we should give the revenue “all to Medicaid.” “It’s hard to argue against that,” added Land. Look at that again, “all to Medicaid.”

And that has been the story ever since. Abandoning any pretense of tying the cigarette tax increase to health care reform, the House proviso passed as part of the 2010 budget allocates the new tax revenue to a Medicaid Reserve Fund (oh, and also, agricultural marketing; and the General Reserve Fund; and the General Fund, too).

The refrain was picked up by The State as well, which asserted that without the tax increase Medicaid services could be cut. As we wrote last month, though, the real reason the cigarette tax was being increased was to subsidize the state’s ever-growing economic development commitments.

And so it has come to pass.  The Senate gutted the original House bill, and the new revenue will be used for:

• $5 million in annual funding to the Medical University of South Carolina for cancer research;

• $5 million in annual funding for a smoking prevention fund;

• More money for agricultural marketing (five hundredths of a cent of the surtax on each cigarette);

• And, wait for it … $3.5 million for the I-95 Corridor Authority.

Last of all, remaining revenue will be deposited into a Medicaid Reserve Fund.

For those of you who haven’t heard, the I-95 Corridor Authority would be charged with carrying “out economic development and educational improvement activities, which in the opinion of the authority, “will improve the economic conditions in its member counties.” Grants from the authority would be distributed to counties located within 30 miles of I-95 that have a population less than 40,000.

The new agency would be authorized to enter into whatever partnerships or contracts would further its ends, and could also acquire and purchase whatever property it might consider necessary.

As it turns out, Senator Land is cosponsoring the legislation that would create the I-95 Corridor Authority. Hear his passionate plea to use funding, that would otherwise go to Medicaid, for the I-95 economic development project.

As Land notes, though, farmers in his district fear the tax increase will cost them jobs – if not their very livelihoods.

And, indeed, it will. Economists estimate the tax hike will kill 4,100 jobs and reduce real disposable income for South Carolinians by more than $200 million.

Never mind that. Clearly, lawmakers believe their own economic development plans will produce more fruit than letting the free market work. In other words, they believe more taxes and more government intervention are a better strategy for attaining prosperity than is more freedom, more choices and more individual initiative.

To find out more about how well that’s working, click here.