The Palmetto Insider

As the General Assembly wrapped up its interminable session yesterday, the final budget included more than $25 million in cuts to the Budget and Control Board (BCB).

Meeting today, the board’s members discussed how to respond. Staff layoffs? Drawdown agency reserves? Poach funds from other sources?

After voting on a variety of issues—from approvals of salaries to bond issues—the agency took up the future of the Budget and Control Board itself.

Minutes ago, the board’s members voted unanimously to give Governor Mark Sanford the authority to identify the core functions of the BCB that should be continued, determine how those activities will be funded, and present his recommendations to the board.

Comptroller General Richard Eckstrom raised concerns over the board’s ability to grant the governor authority to determine core functions and funding sources.  “I don’t think the board can delegate away its responsibility,” said Eckstrom. However, Senate Finance Committee Chairman Hugh Leatherman responded, “I think it can do anything it chooses.”

The decision puts the political heat on the governor for the final impact of BCB budget cuts. During the meeting, Sanford acknowledged the political pressure, but said he welcomed the opportunity. It should be interesting: As a lame duck governor, Sanford could recommend sweeping changes and a drastic reduction in the size and power of the board.

The  South Carolina Budget and Control Board is the only agency of its kind in the United States. It wields immense power over state spending and operations, and it’s one of the least transparent agencies in South Carolina government. (Today’s meeting was live streamed over the internet for the first time.)

To learn more, read the Policy Council’s Fast Facts on the Budget and Control Board.

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.

A new report from the Policy Council highlights how Other Funds transfers are being used to keep state spending high – in fact, at pre-recession levels. Consider the following four facts about the proposed FY10-2011 budget:

The proposed FY10-2011 House budget is $21.10 billion. This includes: $8.26 billion in Federal Funds; $7.77 billion in Other Funds; and $5.07 billion in General Funds.

The budget increases Federal Funds by $450 million (6 percent) and Other Funds by $600 million (8 percent). These increases are only partially offset by a General Fund cut of $640 million.

Other Funds, or fine and fee, revenue is the fastest growing funding source in the FY10-2011 budget.

Other Funds revenue and expenditures are consistently being underreported and then (via flexibility provisos) used to supplement General Fund spending. For the FY10-2011 budget, such transfers could exceed $1.6 billion.

The SCPC report includes five recommendations that would bring transparency to the budget debate and accountability to the use of Other Funds.

In addition to reforming the Other Funds budget, however, the state needs wholesale budget reform. According to a report by the National Association of State Budget Officers (NASBO), South Carolina lags behind other states in terms of budget transparency.

The report includes 30 tables listing each state’s status for things like the budget calendar, debt limits, and budget agency functions. While the report does not “rank” each state for each category, it indicates which states use specific good budget practices.

Here are the results:

49 states use multiple budget reporting formats – e.g., by lump sum or organizational unit or object classification – at various stage of the budget process. South Carolina is the only state that uses just one format at every stage.

44 states have a state-federal liaison to analyze federal legislation. South Carolina does not.

43 states include program description narratives in their state budgets. S.C. does not.

37 states appropriate all non-federal funds. S.C. does not.

34 states include all programs in revenue estimates. S.C. does not.

24 states formally review or edit performance measures on a regular basis. S.C. does not.

Most notable in this list is the “budget format” section. In short, budgets are generally formatted in four different ways: by lump sum appropriations; organizational unit; program budget; or object classification/line-item. South Carolina only uses two of these budgeting formats – program budget (agency request, governor’s budget) and object classification (appropriation bill, accounting records).

More formats = more data for taxpayers = greater transparency of government.

Not in South Carolina.

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.

While most South Carolinians were asleep last night, the S.C. House of Representatives worked through the night and passed the state budget. This gives initial approval to the $21.1 billion budget that now heads to the Senate. The total state budget, including federal funds and other funds, is essentially the same amount as last year’s total budget.

Yet, the budget that passed early this morning includes a cigarette tax increase of 30 cents per pack. To learn more, check out the Policy Council’s take on this tax increase.

The Policy Council will provide further analysis of the budget soon and keep you updated as the budget process moves along. Be sure to check out www.scpolicycouncil.com and www.thenerve.org for updates on the budget, as well as our ongoing twitter updates.

Yesterday, the House passed Part IA of the budget – essentially the appropriations used to fund each agency. While much has been made of the supposed “cuts” to the General Fund, it was clear from the nature of the debate that representatives are not serious about cutting government.

For example, legislators boasted that while General Fund appropriations for the Department of Health and Environmental Control is being cut by 1.5 percent, the cuts will not result in a reduction in agency employment or programming. Why? Because these General Fund cuts are being filled (for now) with federal and “Other Fund” dollars.

Instead of having 2 dimes and a nickel, now there are 3 nickels and 1 dime. We aren’t really cutting the budget, just moving money from one pot to another.

Most sections of part IA were simply adopted without any discussion or debate.

When there was dissent, it was often times over trivial issues. We elect our legislators to make hard decisions about how best to spend our tax dollars – and during a recession those choices should be closely debated. But, by and large, that is not what is happening in the House right now.

Yet, some legislators did argue for targeted cuts.

Early on in yesterday’s session, Rep. Nikki Haley questioned balancing the budget using $200 million in Medicaid match money that has yet to pass Congress. She said that working the money into the budget was akin to funding programs with money that isn’t available yet. Rather, she proposed setting priorities with the money the state already has.

Later that evening, Rep. Garry Smith proposed five amendments to eliminate certain agencies and transfer their funding to the Department of Education. Smith argued that during difficult budgetary times, it is appropriate for the Legislature to prioritize – and therefore to decide whether certain agencies or activities are more important that education. The five agencies he singled out:

• Arts Commission
• Museum Commission
• Sea Grant Consortium
• Human Affairs
• Minority Affairs

Each one of Rep. Smith’s amendments was tabled – following heavily contentious (at least for this Legislature) debate between members. After the amendments were ignored, those sections were simply funded entirely as is.

Given the nature of yesterday’s debate, it is clear the House is not serious about making targeted cuts and will continue to let the Budget & Control Board take the heat for making across the board cuts once revenue drops again. The alternative, as discussed here, is a spending cap that will impose a measure of fiscal discipline and legislative responsibility over the budget process.

Does the South Carolina electricity market need privatizing?  The last time South Carolina approved electricity deregulation was in 1997 with House bill 3414.  Yet consider what Texas has accomplished in recent years through privatization.

According to information released by the Texas Public Policy Foundation, privatizing the electricity market has lowered consumer prices, increased reliability, and fostered consumer choice through competition.

• Data gathered from the U.S. Energy Information Administration (EIA) reveals a reduction in prices for Texas residents under a competition-based electricity market.  The report shows, “Today, the average competitive price is 8.71% below the national average.”  The national average refers to the national regulated average.

• Competition has also increased reliability.  For example, private electric companies trying to turn a profit build new generators as their customer base increases.  More generators mean more capacity for stored/reserved electricity.  Reserved electricity is quite valuable during unexpected heat waves that often occur in summer months, especially in Texas. The same would be the case in South Carolina.

• The competition-based market in Texas is far more popular than the regulated electricity market.  In fact, “Almost 82% of consumers have actively chosen competitive rate plans.”

If South Carolina were to follow Texas’s lead, privatizing could lower consumer prices by encouraging competition and increasing reliability/power reserves.

Moreover, by monopolizing the electricity market, the state is directly competing with would-be private entrepreneurs. If state leaders are serious about growing the economy and stimulating free enterprise, they might start by deregulating the electricity industry.

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.”

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.”