The Palmetto Insider

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.

Now and then, it’s illuminating, if not entertaining, to visit recovery.gov and see how the stimulus program is coming along. You can almost smell the aroma of government getting bigger. It smells like barbeque—or some kind of pork.

So here’s something of note for South Carolina. The Palmetto State is home to the single biggest recipient contract awarded thus far under the stimulus program—drum roll, please—from the Department of Energy, in the amount of $1,407,839,884, as of March 24, awarded to our own Savannah River Nuclear Solutions. The Department of Energy owns the Savannah River nuclear site; Savannah River Nuclear Solutions is under contract to run it for the feds.

They’re decommissioning a couple of reactors down on the river—not a cheap project. In addition to shutting down two reactors and other facilities, they have to deal with 474 acres of contaminated soil, remove extremely toxic plutonium-238 and 16,000 drums of depleted uranium oxide, and dispose of nearly 125,000 cubic yards of contaminated soil and other waste material and three million gallons of contaminated water.

Still, the federal stimulus money is supposed to be stimulating the economy, and producing jobs.

So let’s take a look: Total jobs “created or saved” for $1,407,839,884?

800.3, according to recovery.gov.

Talk about your high-paying jobs! Those taxpayer dollars are stimulating our economy down in Aiken at a cost of one million seven hundred fifty nine thousand, one hundred forty dollars and ten cents—per job. Compare this to South Carolina’s per capita income: $18,795.

The folks at Savannah River Nuclear Solutions must be glowing with pride.

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.

Well, not tax freedom exactly, but it’s the day South Carolinians figuratively stop working for state and federal government, and start working for themselves. According to the Tax Foundation, a national policy group, this year, South Carolina observes Tax Freedom Day on April 3. Through a formula that factors in federal, state, and local taxes, the Tax Foundation annually calculates the day on which the average taxpayer has earned an amount equal to what they pay in all those taxes. The date, both nationally and for each state, fluctuates every year, based on income and taxes.

Nationally, Tax Freedom Day arrives on April 9 this year, which means that South Carolina taxpayers are a few days better off that the national average. This is one day later than last year’s Tax Freedom Day, but more than two weeks earlier than 2007’s date.  However, don’t start celebrating, says the Tax Foundation, because Tax Freedom Day does not count the deficit—even though deficits must eventually be financed. Since 1948, when Tax Freedom Day was first calculated, the difference between what governments are spending, and what they’re collecting, has never been as great as during 2009 and 2010.  If Americans were required to pay for all government spending this year (including the $1.3 trillion federal budget deficit) we would be working until May 17 before we earned enough to pay our taxes—an additional 38 days .

South Carolina has similar obligations that will ultimately come due.  Those include our own state deficit, taxpayer obligations to pay for corporate welfare deals, a billion dollars in debt to the feds for the Employment Insurance Commission, government growth that will persist even after the federal stimulus money disappears next year, and plenty more.   A significant financial burden not included in the Tax Foundation’s calculations for South Carolina is fees and fines, which collectively represent more than $7.7 billion out of the $21 billion state budget. That’s $1,540 for every man, woman, and child in South Carolina—so you’ll still be working just to pay our state government for another couple of weeks—or more.

It should come as no surprise that the House easily let pass a new budget proviso (89.112) that takes $15 million from the Insurance Reserve Fund to pay for a new economic incentives plan for the airline industry … that is, via regional economic development entities.

After all, the plan (H 4343) has already passed the House – on an unrecorded vote – and is currently awaiting review by the Senate Transportation Committee.

In fact, Ways & Means Committee Chairman Dan Cooper insured passage of the proviso by separating it from a much more controversial proposal to also take $10 million from the Insurance Fund to pay for tourism promotion (read: “The Heritage Golf Tournament”) in Beaufort County.

Legislators hotly debated that giveaway – because, to paraphrase Rep. Ralph Norman, they might not want to see newspaper headlines asking how lawmakers could cut education funding, but still use state insurance funds to back a golf tournament. In the end, though, lawmakers overcame their fear and the proviso passed anyway by a vote of 69 to 43.

No doubt, Norman is right that it’s not the state’s role to bail out a golf tournament.

So how about the airline industry? Why not a peep asking whether it is the state’s role to “provide more flight options, more competition for air travel, and more affordable air fares for the State of South Carolina”?

Consider that 16 percent of South Carolinians live in poverty – that’s about 716,000 people.  Let’s ask these folks – as well as the taxpayers bankrolling the Insurance Reserve Fund – how they’d like to use this money? How about to fund more charter schools? Or to lower taxes on the working poor? Or to lower taxes for everyone?

It is doubtful that many South Carolinians agree with using taxpayer funds to prop up the airline industry.

But if we’re going to pay for a golf tournament, the same logic dictates that we subsidize the airfare for folks to attend.  And that we also subsidize the planes they fly in (Boeing); as well as the places where they shop (Sembler and Bass Pro Shops).

It seems there is no economic activity – and recent legislation passed by the House may well insure that fact – that is not subsidized by the state government.

State government, though, is not an entity unto itself; it’s not a productive enterprise. So, if everything we do is already being subsidized, why not just cut taxes for everyone and take the politicians out of it?

More to the point, a government with the power to subsidize every economic activity also has the power to tax and license every economic activity (more on that, here). In short, it is a government with the power to control all economic activity.

Yesterday, the House continued to move through the budget, this time going through nearly all of the provisos – Section IB.

Debate started early (around 9:30 a.m.) and ran late (until about 10:45 p.m.) with breaks for lunch and dinner in between.

The section on the Department of Education took up most of the day – with a number of amendments sparking lengthy debates – lasting up until about 6 pm.

After being wined and dined by Boeing during a private dinner for the Legislature, the bulk of part IB was passed with only a few amendments taken up. Among the highlights of the day:

• Rep. Nikki Haley (R-Lexington) proposed an amendment, adopted 74-42, that requires 70 percent (up from 65 percent) of school district per pupil expenditures to be allocated to instructional costs, as opposed to administrative and other expenses. Debate over this bill lasted for several hours as members spoke for and against the change.
• Rep. Thad Viers (R-Horry) proposed an amendment that would have banned taxpayer-funded lobbying on behalf of public higher education institutions. The Policy Council has reported previously on this issue. The amendment was tabled by a voice vote.
• Rep. Robert Brown (D-Charleston) proposed an amendment to allow the Department of Disabilities and Special Needs the right to keep 100 percent of revenue raised from the sale of “excess” property. Currently, the agency (and all state agencies for that matter) must give 50 percent of such proceeds to the Budget and Control Board. The amendment was tabled by a vote of 60-48. To read more about how the BCB is charging “rent” to state agencies, click here.
• Reps. Bill Bowers (D-Hampton) and Walton McLeod (D-Newberry) proposed an amendment to allow local governments and schools to receive a percentage of the profit made by the Department of Natural Resources when it sells trees. The proposal was meant to bring DNR sales in line with that of the Forestry Commission – providing language to require a percentage of proceeds to be contributed to local schools and governments. This amendment was tabled by a voice vote.
• Rep. Bakari Sellars (D-Bamberg) proposed an amendment, which was adopted 57-54, to reinstate a coverage mandate under the state insurance plan to require coverage for abortions in instances of rape, incest, or if the life of the mother is threatened.

Today, the House will be going through Sections 89 and 90 of the budget – general provisos and statewide revenue. Already, they have engaged in heated debate over $10 million to be used to prop up the Heritage Golf Tournament in Beaufort County (initially proviso 89.112). The $15 million being used to prop up the airline industry easily passed review.

Stay tuned for ongoing blog updates … and see our real-time coverage on Twitter.

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.

Dillon County’s government features a legislator who is also a high school football coach. Oh, and by the way, he also is in charge of selecting the county’s school board. It just gets weirder. He’s one of a few South Carolina legislators who can single-handedly override a gubernatorial veto.

Read what Investigative Reporter Geoff Pallay learned only on The Nerve.

Legislators in South Carolina will tell you they are a “Friend of the Taxpayer” because there has been no general tax increase in more than two decades. A general tax increase would be too obvious, and too politically unpopular. What’s happening is that the General Assembly and state agencies squeeze money out of taxpayers through fees, assessments and fines.

How much do these fees and fines amount to?  How about $7 billion—fully a third of the state’s annual budget. If you’ve been keeping an eye on the state budget, like we do, you heard about a series of cuts to the General Fund during the past year. Yet during the same period, the fees and fines category of the budget actually increased by $147 million.

Fees and Fines Facts:

• In 2009, the General Assembly introduced 108 proposals to raise fines and fees – 96 as standalone bills and 12 as budget provisos.

• State agencies are able to increase their own fines and fees without specific legislative authorization.

• The General Assembly essentially exercises “no oversight” over agency fine and fee revenue.

A new report, “Fine and Fee Increases: You’re Next” from the Policy Council lists who is likely to be affected by proposed fine and fee increases. OK, there’s a hint in the title.

The president’s new federal budget is chock full of wild assumptions and rhetoric.

Stating that the administration “steered the economy back from the brink of a depression,” the new budget will “change the way Washington does business.”

Well, much like when the stimulus numbers were fudged and found in phantom districts, this budget seems like more of the same from Washington.

In this fact sheet for South Carolina, the president’s budget claims to be a silver bullet for our troubles.

Apparently, 1.7 million families in South Carolina will receive a tax cut. A shocking number, considering that the latest census figures show only 1.7 million total households in South Carolina. Does that mean every single household gets a tax cut? A quite improbable and implausible scenario to imagine.

Just another example of made-up government figures meant to make their estimates sound better.

The fact sheet further claims that the budget will lead to “lower taxes, better teachers and classrooms, and important investments in our roads, highways, and airports.”

This is just more of the same from a president who has been all talk for his first year+ in office.

What can South Carolinian’s really expect from this budget? More federal spending, higher taxes, more debt for our children, and more local dependence on the federal government.  As it stands, South Carolina’s $21 billion budget includes more than $7 billion in federal spending.