The Palmetto Insider

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.

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.

Note to politicians: Government’s proper role in the free market is to stay out of the way.

Apparently, that message can’t be repeated enough. Case in point: The “Economic Development Competitiveness Act of 2010” (H 4478). This massive piece of government overreaching provides an array of targeted credits and subsidies to special interests.

If you are experimenting with hydrogen vehicles or making wind turbines, for example, you win. Same for companies that turn waste grease into fuel, manufacture lithium ion batteries, or operate a nuclear plant. If, instead, you are like most of  the ninety-seven percent of South Carolina’s employers who run small businesses and account for 50 percent of private sector jobs, you will not be benefitting from this legislation—you will be paying for it.

When H 4478 was introduced, it appears politicians knew it was going to be controversial. That’s because the original bill offered a carrot—the gradual elimination of the corporate income tax—to horse-trade for the expansion in government-manipulated economic development. But that broad-based tax break was cut from the bill. The rationale? Lawmakers said it was too expensive—even though the incremental tax cut would not have been implimented until FY13-2014—at an initial cost of only $16.8 million. A drop in the bucket in budget terms.

But what they left in the bill was hundreds of millions of dollars in tax breaks that will ultimately come out of the pockets of taxpayers and Main Street South Carolina businesses.

The larger purpose of H 4478 is to solidify government’s role in using tax dollars to manipulate the state’s economy via tax credits and subsidies. The legislation is the General Assembly’s version of a “jobs bill” or stimulus package for South Carolina.  … And, we all know how well federal efforts at that have been working.

Simply put, taxpayer funded economic incentives don’t work, and there’s little accountability for how the Legislature doles out this money. Thus, 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 question is: If billions of dollars for special interests isn’t buying economic prosperity, what is it buying?

It is a curious thing that even as legislators complain about massive budget cuts, they have passed an omnibus economic development tax credit act that provides an array of targeted credits and subsidies ostensibly aimed at stimulating South Carolina’s ailing economy. The so-called “Economic Development Competitiveness Act of 2010” (H 4478) is the brainchild of House Speaker Bobby Harrell and a team of high-powered consultants.

According to Harrell’s office, the bill represents a “proactive economic development strategy” that includes such recommendations as eliminating the corporate income tax and restoring funding to the Closing Fund. The strategy, in other words, is to stimulate the economy both by enacting broad-based tax cuts and by doling out subsidies to special interests. Except there are no broad-based cuts that would benefit taxpayers who don’t have well-connected lobbyists.

Indeed, the degree of special interest handouts in H 4478 reminds us of the BAT bill (H 3722) that passed the House and Senate last year … only to die in conference committee.  In any event, Senate leadership seems to have sent up a warning signal regarding the bill, boding ill for any future conference committee and, perhaps, suggesting the bill wouldn’t survive a gubernatorial veto.

Voting no on H 4478, here is what Senate President Pro Tempore Glenn McConnell (R-Charleston) had to say about the bill:

Statement by Senators McCONNELL and BRIGHT

Unfortunately, we were forced to vote against H. 4478. We voted against it even though we believe in what the Bill attempts to do and help with economic development in South Carolina. However, the Bill became a Christmas tree on which many amendments were added on varied subjects such as grease and algae biodiesel, dredging of canals, changes to the State’s hospitality tax, and nuclear power plants. Our State Constitution is very clear that each Bill relate but to one subject. This Bill, as amended, clearly does not. We have all sworn to uphold the Constitution of this State even when it means voting against Bills that are popular and that we support. All this Bill would do, as drafted, is get the State sued, costing our taxpayers money and make some trial lawyers rich. For that reason, we voted “no.”

As we’ve written, one of the current sticking points between the House and Senate budgets concerns film incentives.

The House wants to continue to provide film makers a 20 percent rebate on payroll costs and a 30 percent rebate on all other expenditures (proviso 39.8).

Meanwhile, the Senate plans to eliminate these tax breaks and use the savings for the S.C. Conservation Bank (proviso 89.145). Current incentives would remain at 15 percent, as required by the S.C. Motion Picture Incentive Act. Both chambers are also content to take money from the Motion Picture Rebate Fund to use for the Destination Specific Tourism Program (proviso 39.12).

On one side, the “film community” is arguing the incentives are needed to keep “Army Wives” from leaving Charleston. This seems unlikely: we’re only talking about $1.5 million in incentives – and not all of that, presumably, is going to “Army Wives.” Moreover, if the funding is so essential to keeping the film industry in South Carolina, why is the Legislature transferring money to the Destination Specific Tourism Program?

On the Senate side, no one has really explained why they cut the House proviso. Presumably, no other source of funding could be found for the $1.5 million they want to give the Conservation Bank. Making such choices is called “prioritizing” – it’s what real leaders do. But it could just as easily be only a bargaining chip between Senate and House leaders as they negotiate over their respective budget proposals.

Setting aside the essential question of whether the state should provide such incentives in the first place, we all need to ask whether these incentives are actually creating jobs and prosperity for the people of South Carolina. As our new fact sheet indicates, the answer is no.

According to a recent study by College of Charleston Professor Frank Hefner, taxpayers are actually losing 81 cents for every $1 in incentives provided to film producers. Hefner’s study is posted on the state’s Department of Commerce website, raising questions about why lawmakers keep approving money for a program the department seems to acknowledge isn’t working.

Unlike the revenue impact statements ordinarily conducted by the state’s Board of Economic Advisors, Hefner’s study is based on what is called a cost-benefit analysis. It’s the method used by most businesses. The analysis actually gives some idea of return on investment for tax dollars spent. Yet, as Hefner notes, state analyses usually employ a methodology that ignores the initial cost of targeted subsidies. For this reason, he says, their approach “will always show that public subsidies result in a positive economic impact for the state.”

The way it works is like this: South Carolina spends $10 million in tax dollars to attract “Army Wives” to Charleston. “Army Wives” then results in $1.9 million in direct and indirect tax revenue. Thus state economists claim the tax break generated $1.9 million in new investment – ignoring the initial $10 million investment used to bring the production to South Carolina in the first place.

Politician-speak: “Army Wives” is bringing in $1.9 million

Real life: “Army Wives” is costing $8.1 million

Granted, all this is made more complicated by multipliers and other such things. But that is all the more reason to reform the way we hand out tax incentives in this state.

In particular, we recommend the following changes:

1) Reform the process by which economic incentives legislation is passed by the General Assembly.

2) Create standardized application and reporting mechanisms so that the public can more easily track and monitor economic development assistance.

3) Hold recipients of state aid accountable for meeting specific and measurable job creation/investment targets and provide for ongoing oversight.

If film incentives really are good for South Carolina, then make the film producers prove it by showing us the numbers.

As the House considers whether to concur with the Senate budget, one of the sticking points concerns just how large a tax break the state is going to continue to give the film industry (read: Army Wives, which films in Charleston).

If the House has its way, the incentives will reach 20 percent of aggregate payroll costs for film production companies. This is a 30 percent increase over and above what the state currently provides.

By comparison, the Senate budget directs (proviso 89.145) the state Department of Revenue to transfer $1.5 million from motion picture wage rebates to the South Carolina Conservation Bank. Additionally, the Senate version of the budget reduces proviso-based film incentives of 20 percent for wages and 30 percent on other expenditures to 15 percent for both.

In other words, state law already grants film companies an income tax break on up to 15 percent of aggregate payroll costs for persons subject to S.C. income tax (§ 12-62-50).The Senate budget does not nullify this handout – just nullifies the increase over and above what already exists.

Who pays for this rebate? Other taxpayers. The rebates are taken from the state’s General Fund.

Moreover, state law grants film companies a 100 percent state and local sales and use tax exemption.

As indicated, the House – via proviso 39.8 – also wants to double a separate tax break currently available to film producers. Under current law, the S.C. Film Commission may rebate up to 15 percent of total expenditures (excepting payroll) to qualified film producers. Proviso 39.8 would double this tax break to 30 percent.

Who pays for this? Again, other taxpayers. The rebate comes from an admissions tax of 5 percent applied to theatres, golf courses, and similar venues.

Now, if things were as simple as all that, we would point out that film incentives simply don’t work. As we’ve written here, here, here and here. As demonstrated in Unleashing Capitalism, handing out rebates to the film industry does not lead to long-term economic growth. In fact, these incentives “generate a net loss in revenue equal to 81 percent of expenditures on rebates.”

What does that mean? Well, if the state provides $1 to a film company, that $1 must be taken from the General Fund. But the state’s return on that $1 is only 19 cents. Several other states have made similar estimates that show the government/taxpayers suffer a net loss on film incentives.

Now, whether the General Assembly realizes film incentives don’t work is an interesting question. In any event, they seem intent on using money set aside for film incentives on other things — thus, tacitly acknowledging that these film incentives aren’t all they’re being made out to be.

As House leaders balk at the Senate lowering tax breaks for film producers, both the House and Senate plan to raid the Motion Picture Rebate Fund to use on the Destination Specific Tourism Program.

Thus reads proviso 39.12, which remains intact in both budgets:

39.12.      (PRT: Destination Specific Tourism Transfer)  From the funds set aside pursuant to the Motion Picture Incentive Wage Rebate, for Fiscal Year 2010-11 unexpended funds carried forward from the prior fiscal year shall be transferred from the Department of Revenue to the Department of Parks, Recreation and Tourism and utilized for the Destination Specific Tourism Program.  These funds shall be carried forward from the prior fiscal year into the current fiscal year and be expended for the same purpose.

The Motion Picture Rebate Fund is set to receive $10 million for FY10-2011 – the same amount allocated to the tourism marketing program last year.

Again, who pays? You do – via that 5 percent admissions tax.

Such budget games illustrate why we need real budget reform – especially regarding the use of Other Funds.

They also show that not only taxpayers, but even special interests, need to be vigilant when it comes to deciphering the state budget. It truly is a shell game.

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.

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.