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.

One of the most frustrating aspects of monitoring the veto process in the Legislature is that even once a veto is sustained, a vote may be retaken on the same veto, resulting in an override. As The Nerve reported regarding last year’s veto process:

Last year, for example, the governor issued 47 line-item budget vetoes. In the end, the House sustained 17 of those vetoes, and the Senate sustained another four. But the first time around, the House sustained 24 and the Senate sustained 12, only to go back and reconsider seven and eight vetoes, respectively.

This year, legislators followed the same strategy – if on a more modest level. Out of 107 vetoes, the House sustained 51. However, this number does not include 3 vetoes that were initially sustained and then overridden: 

1)      Veto 1: The governor argued here that two nonmandatory student assessment programs administered by the Department of Education duplicate assessment tools currently in use. The veto was initially sustained by a vote of 70 to 48; and then overridden by a vote of 78 to 33. This was the first budget veto taken up by the House. Subsequently, the chamber sustained all but 1 of the governor’s first 13 vetoes, perhaps seeming to bolster observations that legislators are running scared.

2)      Veto 39: This veto pertained to S.C. State University’s Community Leadership and Economic Development program, funded at roughly $369,000. In our recent analysis of the governor’s vetoes, this veto was described as one of several that aimed to transfer economic development initiatives from higher educational institutions to the Department of Commerce. The governor noted that “this program … is not consistent with S.C. State’s PSA’s core function of enhancing our state’s agricultural and natural resources.” The veto was initially sustained by a vote of 56 to 54; then overridden by a vote of 85 to 28.

3)      Veto 94: This veto concerned $200,000 appropriated to the Department of Agriculture as part of the American Recovery and Reinvestment Act – i.e., the two-year federal stimulus. Generally, the governor vetoed expenditures on programs not related to education and law enforcement. (After all, that’s why we accepted the money in the first place … right?) This veto was sustained by a vote of 70 to 44; then overridden by a vote of 87 to 25. A handful of other vetoes regarding the use of stimulus funding on noncore services were sustained, but the majority were not.

Several vetoes were also sustained upon a revote apparently intended to bring about an overturn. These include vetoes 40, 43, 74 and 89. In one case – veto 6, regarding consultant fees within the Commission on Higher Education – the veto was overridden, sustained upon a revote, and then overridden again.

Meeting on June 17, the Senate overrode 29 of 56 of the remaining vetoes already overridden by the House. The Senate will reconvene on June 29 to take up the final 27 vetoes.

In an unusual twist, the governor has asked the Senate for a do-over on its vote to increase its own operating budget by $4.3 million. By contrast, the House upheld the governor’s veto of its own $1.2 million staffing/operating budget increase. Will the Senate do the same? If so, it’ll be one do-over that finally goes the governor’s way.

CLICK HERE to download the Policy Council’s exclusive, vote-by-vote breakdown showing how the House voted on each veto. 

CLICK HERE to download the Policy Council’s exclusive, vote-by-vote breakdown showing how the Senate has voted so far on each veto.

Remarkably, the House voted to sustain 51 of 107 of Governor Sanford’s vetoes. Over the history of Sanford’s term, 88 percent of his vetoes have been overridden, so this is regarded as a victory for the governor, and perhaps for taxpayers hoping for an indication from lawmakers that this year’s budget can’t be just politics as usual.

But the most striking difference between the budget as debated by the Legislature and the rationale for the governor’s budget vetoes is that the governor actually offered a rationale, as explained in our latest policy piece.

Broadly speaking, the governor used the following criteria in issuing his vetoes:

• Eliminate duplication
• Set budget priorities
• Balance the budget (as required by the state constitution)
• Encourage privatization and private investment
• Use existing resources more efficiently
• Save money for future Medicaid expenses
• Reduce administrative expenses
• Eliminate waste

South Carolina legislators enjoy a monopoly of power, so they don’t behave as if they have to give taxpayers reasons for what they do. They just do it and dare the governor—and taxpayers—to tell them otherwise.

It seems, though, that that is precisely what is beginning to happen.

Are lawmakers afraid to override the governor’s budget vetoes? That, at least, is the message one gets from reading Cindi Scoppe’s latest editorial. Apparently, the cause is a “tea party tsunami” being ridden by the presumptive gubernatorial favorite, Nikki Haley. According to Scoppe, legislators need to overcome their fears and override the governor’s vetoes.

Let’s take a look at her reasons:

Not doing so “would be irresponsible at best.” A moral failing, in other words. Or, to use, Brad Warthen’s even more righteous plea, legislators must overcome the “fear to do the right thing.” Odd language considering that one veto the House had no problem overriding yesterday was an ethics disclosure bill (H 4542) that includes the governor – but not legislators.

State agencies would suffer “serious damage” if the governor’s vetoes are allowed to stand. This is “because [of] all the cuts state agencies have sustained.” What cuts? This year’s budget is the largest in state history.

Granted, General Fund spending is down, but Other Funds and Federal Fund revenue is way up, accounting for 37 percent and 39 percent of the total budget, respectively.

Rick Brundrett’s analysis of the governor’s vetoes ably dispatches Scoppe’s arguments – anticipating many of them on a point-by-point basis. As Brundrett notes, 10 agencies (including the House and Senate themselves) are in line for budget increases. These agencies account for many core functions of government and include the Department of Public Safety, the Judicial Department, and the Department of Social Services, as well as 10 public colleges and universities.

Scoppe mentions, in particular, the State Museum and the Budget & Control Board (BCB) as two agencies that would be “damaged” by the governor’s vetoes. (Never mind that the museum wants more money for a questionable new expansion project.) The governor is asking for a cut of $1.64 million from the museum’s operating budget. But consider that legislators are also docking the State Museum $ 1.8 million (proviso 31.11) in rent payments to the BCB. Eliminate the rent payments and the museum can easily make up its operating budget. As for the BCB, the governor pointed out that they are currently sitting on $1 billion in carry-forward funds, including about $60 million in unrestricted accounts.

Moreover, the budget permits agencies to supplement General Fund cuts with Other Funds revenue. Thus, proviso 89.87 authorizes agencies to use earmarked/restricted accounts funded with fine and fee revenue to increase spending to FY08-2009 levels (i.e., $6.736 billion). That’s a potential increase of $1.621 billion.

Finally, Scoppe questions the governor’s “insidious … repeated implication that by vetoing what he considers frills, he will cause the money to be spent on ‘core services’ of government.” Here, Scoppe might have a point, if it were actually true, that any of the governor’s vetoes would reduce core government services. But that’s not the case, as demonstrated above.

No doubt, Scoppe is right that the Legislature should implement strategic, targeted cuts. But this point ignores the fact that lawmakers have purposely crafted the budget so as to prevent making such cuts.  For example, they are appropriating federal FMAP dollars to fund health services and agency operating expenses. It’s the old strategy of complaining about cuts for the elderly and the blind, while using the money to fund wasteful and ineffective programs, like hydrogen and Innovista.

If the Legislature were truly afraid of the “tea party tsunami,” they wouldn’t have included these items in the budget in the first place, or approved a budget that increases spending at record levels while again neglecting to pass commonsense reforms, such as an effective spending cap, zero-based budgeting and indexing tax brackets for inflation. They also wouldn’t have voted themselves a $4 million-plus agency pay raise.

Thus, regardless of what happens with the governor’s vetoes, Scoppe will likely get her wish for a tax increase. (Already, hidden taxes from fines and fees are on the rise.) Increasing taxes, though, won’t lead to more responsible budgeting … just more waste, higher business costs and a lower standing of living for South Carolinians. We truly wish lawmakers were afraid of these consequences, but clearly they are not.

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.

Government in South Carolina is not only too big, it’s too long. The General Assembly is baaack, from June 15 to June 17, to take up the governor’s vetoes. That’s five months, and one of the longest state legislative sessions in the nation. A new Policy Council Issue Brief examines how a shorter legislative session would cut costs and streamline government.

By contrast, the Texas Legislature meets only once every two years, for a maximum of 140 calendar days. A few states place no limits on the length of the legislative session, but most have decided that 60 to 90 calendar days is plenty.

Regardless of the length of the legislative session, nearly all states require a recorded roll call vote before a bill can become a law. In South Carolina, some lawmakers have opposed efforts to require roll call voting by saying it takes too long. Somehow, running South Carolina is so much more complex than similar states with shorted legislative sessions that lawmakers here think they don’t have time to cast votes on the record.

“Parkinson’s Law” states that work tends to expand to fill the time allotted for its completion. That might seem to be the case in South Carolina, based on the flurry of activity that takes place in the waning days of the session. In reality, most of that activity is political strategy—bills quietly set aside to let the debate settle, with hopes of a last minute end-run. In any event, giving the Legislature more time legislating hasn’t proven to be beneficial to citizens of South Carolina; just more time for more mischief.

The long legislative session also means many creative, qualified individuals can’t afford the time it takes to serve in the General Assembly. It’s one reason the old guard stays in power for years—decades even.

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 came as a mild shock that the General Assembly did not pass any new fine and fee increases this session – at least as part of the provisos section of the budget (and at least as far as we could find).

Readers of our Best/Worst 2009 will recall that last year the General Assembly passed no fewer than 12 provisos that raised fines and fees, along with 11 fine/fee increases as standalone legislation.

Of course, the Senate tried. Provisos 37.14 and 37.15 would have raised watercraft fees and hunting/fishing license fees, respectively.

Likewise, the Senate attempted to increase drug court fees (proviso 89.141). This was in addition to legislation (H 3161) that would have increased a variety of court fees by $24 million. The proposal was vetoed by the governor.

Before taxpayers breathe a sigh of relief, though, we should point out that the current budget sets the stage for significant fine/fee increases in future years.

As explained in our recent report on the Other Funds part of the budget, lawmakers have habitually used earmarked fine/fee revenue to sustain high levels of General Fund spending.

The current budget, in fact, contains several flexibility provisos (cf. 39.14; 65.7; 80A.38) that enable state agencies to use earmarked and restricted revenue to supplement general agency funding. The worst of these, which we have repeatedly discussed, is proviso 89.87. As we wrote earlier this week:

This proviso authorizes agencies to use earmarked/restricted accounts (i.e., Other Funds) funded with fine and fee revenue to absorb General Fund cuts. This practice, in itself, is objectionable, but this proviso also allows agencies to increase spending to FY08-2009 levels (i.e., $6.736 billion). Thus, in theory, the proviso permits agencies to increase spending by $1.621 billion.

In other words, the proviso permits agencies to draw down Other Funds revenue by as much as $1.6 billion. That’s for one fiscal year alone.

So what happens when these earmarked/restricted accounts become exhausted? (Each fund, i.e., the Tire Fund, is supposed to contain dedicated revenue allocated toward special projects.) To begin with, the General Assembly will likely drain nonessential funds to replenish essential funds. (For more on that, see this Nerve story.) Second, they’ll cry wolf and raise fines and fees.

So in spite of not passing any fine/fee increases in the state budget, the legislature is still spending through existing fine/fee revenue. Only next year, taxpayers will be watching for such hidden tax increases.

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.”

In spite of handwringing and complaining about budget cuts, the General Assembly has just passed the largest budget in state history. Consider:

• The total budget for FY10-2011 is $21.149 billion: $8.268 billion in Federal Funds; $7.766 in Other Funds; and $5.115 billion in General Funds.
• The new budget is almost half a billion dollars more than last year’s authorized budget of $20.695 million.
• It is $290 million more than the FY08-2009 authorized budget, which was $20.859 billion before mid-year cuts reduced the budget to $19.97 billion.

In other words, this is the largest budget in state history. Clearly, record federal spending is driving the increase. But the Other Funds part of the budget, which is derived from fines and fees, has also substantially increased

For FY10-2011, Other Funds accounted for 37 percent of the total budget, compared to 39 percent in Federal Funds and 24 percent in General Funds. For FY09-2010, Other Funds appropriations were $7.175 billion; and $7.028 billion for FY08-2009. Given previous patterns, it is also likely that Other Fund revenue has been significantly underreported (by about 7 percent).

Overall, the state budget has increased by 2 percent over last year. Federal funding is up by 6 percent and Other Funds are up by 8 percent. General Fund appropriations are the only part of the budget that decreased, going from $5.174 billion in FY09-2010 to $5.115 billion, a 1 percent decline.

Exclusively looking at the General Fund budget leads to a misreporting of state spending trends and fosters a lack of transparency. The real story with this year’s budget is not that spending has gone down, but that it’s going up.