The Palmetto Insider

A job is a job. That’s what you sometimes hear. And it’s marginally better for an unemployed worker to get a job with the government, or paid for by government, than to have no job at all. After all, a government worker is earning wages—and not drawing unemployment. And government employees pay taxes—in effect, subsidizing their own jobs.

Right?

Except that the rest of a government worker’s salary is paid for by taxpayers working in the private sector.

And, as government grows, and demands more tax dollars—now and in the future—you need more and more private sector dollars to pay for those government workers and government spending. Some government spending finds its way to the private sector, but once again, those funds must be paid for with tax dollars.

You might call it “robbing Peter to pay Paul.” Of course, the more you take from Peter, the less he has to pay whoever is working for him. Eventually, Peter has nothing to spend on investment in the community or paying someone’s salary.

And that’s the end of the free market and its ability to generate wealth for everyone. Government does not, and cannot, generate wealth—except for itself. At the point where government pays for everything, and everything Peter earns goes to government, you call it “socialism.” Not hyperbole, just a fact.

Here in South Carolina, the public sector is growing faster than the private sector, and the private sector is shrinking in relation to the public sector. In terms of state hiring alone (recall that federal and local hiring is expanding even faster than state-level employment), the ratio of private sector employment to state employment went from 15.74 in January 2005 to 14.46 in January 2010. In practical terms, instead of having almost 16 workers subsidizing each government employee, we’re down to 14 and a half.

In fact, since the start of the recession, private sector employment in South Carolina has declined by 8 percent. Meanwhile, public sector employment increased by 7 percent. Put another way, the private sector has shed 5.3 jobs for every public sector job created—a 12.5 percent decline in the relative size of the private sector compared to government.

We’re all looking for signs of an economic recovery, but more jobs paid for with tax dollars and a shrinking private sector labor force is bad news for South Carolina.

New government unemployment statistics paint a misleading picture of an economic recovery for South Carolina.

The U.S. Bureau of Labor Statistics says unemployment in South Carolina fell to 10.7 percent for June—down from a record 12.5 percent in January. But the way government counts unemployment figures fails to account for tens of thousands of workers who have simply fallen off the unemployment rolls, says a new report from the South Carolina Policy Council. What’s more, these employment figures are inflated by a dramatic increase in public sector employment in the state, including temporary positions as census takers. (During the 1930s, the government did not include government relief jobs in employment statistics.)

Here’s the real employment story in South Carolina:

• Since June 2009, more than 34,000 workers have withdrawn from South Carolina’s job market.
• From January to June 2010, the state’s labor force shrunk by 24,376 jobs.
• From January to May 2010, total public sector employment in South Carolina increased 3.66 percent.
• Since December 2007, private sector employment in South Carolina has declined by 130,100 jobs, or 8.09 percent.
• By comparison, since December 2007 public sector employment has increased by 24,500 jobs, or 7.19 percent.

Put another way, the private sector has shed 5.3 jobs for every public sector job created.

In the long run, increased government spending will ultimately have a detrimental impact on private sector job growth in South Carolina. Not only will the federal stimulus package likely lead to a state tax increase, it will also result in 24,000 to 35,000 lost private sector jobs.

These job losses will occur because government spending does not stimulate private sector growth, but limits it—precisely because government spending is fueled by taxes imposed on the private sector.

It’s not exactly breaking news that the Connector 2000 Association, the nonprofit operator of the Greenville Southern Connector, filed for bankruptcy today.

An article on the bankruptcy in tollroadnews.com gives a succinct breakdown of why the project failed:

“The highway on the southern/southwestern fringe of the city only made sense as an access and development road. The road is too indirect to provide any time savings for long-distance traffic which has stuck to the free interstates. To provide an alternate to I-85 it needed to cross the Saluda River in its western portion to provide a much straighter shot easterly for traffic from Atlanta. It was designed however as an access road to local commercial developments – most of which never happened. …

“The road opened Feb 27, 2001. First tolls were collected March 13, 2001.  It continues in operation using toll revenues to pay for operational expenses. Traffic at 12k or so vehicles/day would barely justify a 2-lane signalized road, let alone a 4-lane expressway.

“No equity investment is involved since this was one of a bunch of not-for-profits that were all the rage as ‘innovative finance’ in the 1990s. They got a special tax advantage and were called 6320s after the tax exemption clause that treated them as a kind of charity.

“All these unsound no-skin-in-the-game ventures have now crashed.

“They were championed by a former federal highway administrator Bob Faris, a former VDOT commissioner Jim Atwell and other prominent officials who came to believe their own salesmanship. ARTBA the DC lobby group were cheerleaders.

“And they were eagerly embraced by a road development crew – a motley crew of consultants, engineering firms, financiers and construction firms – who made their money in the development, design and construction and had no interest in the viability of the roads as ongoing businesses.

“The Greenville Southern Connector was ill-conceived as an interstate standard expressway. Designers, engineers, lawyers, consultants and construction companies made their money in the development and construction and left the resulting mess to Connector 2000 Association a phony public-private entity without any real owners. So much for ‘innovative finance’ as touted by ARTBA and other DC lobby groups.

“Lehman Bros NY which collapsed in Sept 2008 was the principal promoter of Southern Connector bonds.”

In short, the Southern Connector is another failed example of why government driven economic development – via targeted tax exemptions – does not work. The project was only sustainable because no one – except taxpayers – had real “skin in the game.”

A better model for building roads is to use public-private partnerships to build FOR-PROFIT toll roads. Under this model, the state would save millions by contracting out development and maintenance to private developers. Such developers would be more likely to make sure their investments yielded a sound return – precisely because it would be their money on the line.

To read more about how public-private partnerships can build better roads, at a much reduced cost, in South Carolina, click here.

In a move that surprised even lawmakers who were prepping for a veto override of H 4478, Governor Mark Sanford has chosen to sign the “Economic Development Competitiveness Act of 2010,” H 4478 drafted by House Speaker Bobby Harrell and a team of consultants. Sanford will  join Harrell, with whom the governor is generally at odds, and Department of Commerce Secretary Joe Taylor for a H.4478 signing ceremony today in Greenville.

H 4478 became flypaper for all sorts of narrowly drawn special interest deals (so much so that senators voting against the measure questioned its constitutionality).  But its real purpose is to empower the Legislature to grant more special interest deals

In caving in to special interests on the bill, government leaders are ignoring not only the will of the people, but ample evidence that government manipulated, taxpayer funded economic development does not work—and is a bad investment of tax dollars.

• Government driven economic deals don’t work, and government is a poor economic investment planner.
• Special interest economic development deals hurt South Carolina’s economy.
• Special interest deals lack transparency and accountability.
• Mega-deals like Boeing end up costing taxpayers more, and more.
• Lobbying by special interests (as well as government funded organizations) creates conflicts of interests and wastes tax dollars.

Those messages continue to be lost on South Carolina’s politicians.

The legislation is the General Assembly’s version of a “jobs bill,” and we all know how well federal efforts at that have been working: In spite of having spent more than $1.5 billion on economic incentives over the last few years, South Carolina’s employment and income levels continue to be among the worst in the nation.

The “Economic Development Competitiveness Act of 2010” (H 4478) passed out of conference committee today. The bill passed in spite of lawmakers’ concerns about there not being caps – or accountability – regarding how tax credits authorized by the bill will be awarded. That speaks volumes about the state’s economic development polices – and reminds us why we need transparency for taxpayer-funded economic development deals.

As we’ve written, H 4478 contains millions in incentives for various special interests, ranging from alternative energy producers to start-ups to waste-grease biodiesel producers. Left out are independent business owners seeking broad-based tax relief.

Next up, both chambers will vote whether to concur with the conference committee version of the bill. Then, all eyes will be on the governor. Will he veto a bill that even Senate leaders have called a “Christmas tree”?

Meanwhile, keep watching to see what the Legislature does with the governor’s budget vetoes, as well as retail incentive legislation that seems headed toward conference committee.

A recent article in The Nerve  reveals that the S.C. Joint Bond Review Committee has authorized another $4.1 million in taxpayer dollars to prop up Innovista, a ghost town of office space in downtown Columbia. The request will be taken up for final approval when the Budget & Control Board meets later this week on Thursday.

On top of that, Innovista may also be one of the special interests benefitting from a proposed new tax credit (H 4778) for developers of incubator buildings for start-ups. You can track the progress of such legislation on South Carolina Votes.

Innovista is the University of South Carolina’s 500-acre research campus, rolled out in 2005. It was going to be a surefire driving force for the area’s economy. Five years and more than $140 million later, it is mostly unoccupied, and has failed to attract the private sector investment upon which the project was sold to taxpayers.

Innovista was billed as a center for research and technology—the government’s attempt to artificially create a technology “cluster” in the state capital. Unfortunately, but predictably, building office space and dubbing it a “research campus” doesn’t mean private sector tech companies are going to flock to Innovista. State governments have previously used cluster theory to rationalize taxpayer funded incentives for a variety of questionable technologies, such as hydrogen-fuel vehicles.

But the empty offices of Innovista offer stark testimony to the fact that industry clusters, like Silicon Valley in California, arise organically, not because lawmakers want them to.

In case you have been asleep at the computer today and missed it, Southwest Airlines announced plans to open service to Greenville and Charleston in 2011.

The dates are left uncertain, but the press release from the company was quite clear on one thing:

No government subsidies are needed to make this decision.

The airline included this disclaimer in the opening sentence of its release – likely in response to the controversy surrounding a proposed $15 million subsidy for the airline industry under consideration by the legislature.

It is great to see that a new business is relocating to South Carolina. Private investment = more jobs = more wealth.

But what is even more promising is Southwest’s candor that it’s coming to South Carolina because it makes good business sense – not because of a political handout.

Typically, this should not be a newsworthy event. But in light of the Boeing deal, and the attention that Sembler has received – economic subsidies are a hot topic these days. Of course, as we predicted, Boeing would have come to South Carolina even without the almost-$1 billion in incentives it is receiving.

Still, legislators refuse to believe that lowering taxes and reducing regulatory burdens are better public policy than handing out targeted tax breaks. So, Midlands legislators raised a fight last week in the legislature about incentives being given to Greenville/Charleston – and not their airport in Columbia.

That battle raises the point – government should not be involved in paying off businesses to locate to one location versus another.

The fact that Southwest has chosen to expand into South Carolina will hopefully dispel the notion that the government must give out incentives to businesses in order to attract new firms. This has been the modus operandi of the legislature in recent years — evidenced by the growth in economic incentives spending from $32 million in 1994 to more than $500 million in 2008.

With luck, the legislature will take notice of the message Southwest has heard – people don’t want to see their tax dollars being used to pick winners and losers in the market.

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.