Bacon's Rebellion

James A. Bacon

Paper Cuts Redux

The politicians in Richmond still cite the "$6 billion shortfall" in the last biennial budget to justify raising taxes for the current one. But their spending "cuts" barely went skin deep.

Note: A version of this column ran in March 1, 2004. I have updated it to incorporate criticism and feedback from the Warner administration.

I’m really ticked off. I’m steamed at the governor for making exaggerated claims. I’m mad at pro-tax senators and delegates for repeating the same assertions. I’m furious with Big Business advocates of higher taxes who have bankrolled an expensive public relations campaign spreading the same misinformation. And I’m contemptuous of lazy, lap-dog press and editorial writers for allowing a one-sided presentation of data to go unchallenged.

If you wonder what's gotten me so fired up, see for yourself. Check out the second slide in Gov. Warner’s dog and pony show, “A Budget and Tax Reform Plan,” viewable on the governor’s website. Here's the heart of the Governor's argument justifying a tax increase:

The Warner administration has instituted sweeping reforms to ensure accountability to taxpayers and restore Virginia’s fiscal stability. We have worked with the General Assembly to close a $6 billion shortfall:  

• Eliminated more than 50 agencies, boards and commissions

• Eliminated 5,000 positions from state government

• Cut every agency by an average of 20 percent

• Produced significant savings through government-wide efficiency plans

In an address to the Greater Richmond Technology Council in February 2004, the governor stuck closely to these talking points – and he made quite an impression. Members of the audience were wowed. Golly, the state really has done a lot to cut spending. If downsizing government to that extent doesn’t solve our chronic budget crisis, what will? I guess we do have to raise taxes!

Now, before I dissect this slide to show how it obfuscates budgetary reality, let me say one thing. I’m not singling out Gov. Warner for criticism. Many elected officials, both Republican and Democratic, have been pushing the same line, as have a legion of lobbyists, reporters and editorial writers.  

Among other notables, Sen. John Chichester, R-Fredericksburg, said this to the Virginia Foundation for Research and Economic Education last year:

Having dealt with a $6.0 billion budget problem over a three-year period, suffice it to say that the Commonwealth has “prioritized away” all but the core functions. … The Commonwealth stands leaner and with less flexibility than it has enjoyed in the past.

Got that? After the General Assembly manfully struggled with a $6 billion shortfall, Virginia government now stands lean and mean! There's no recourse now but to raise taxes.

But Chichester, Warner and the rest are wrong, flat out-and-out wrong. Let's take a closer look at the numbers. According to the governor, Virginia has...

"...Eliminated more than 50 agencies, boards and commissions."

I asked Ellen Qualls, the governor's press secretary to list the "50 agencies, boards and commissions" that had been "eliminated." She provided the list of "boards and commissions" reproduced in the right-hand column.

I then asked how much money the Warner administration estimates it saved from eliminating these entities. She responded by e-mail as follows:

"The honest answer is very little since the reason for eliminating most of them was that they had ceased to function and either the past few Governors didn't bother to appoint members to them or the members never met.

"There may have been some incidental savings in consolidating all the individual scenic river boards into one but none had staffs and the members served as volunteers without expenses reimbursed."

So, there's less than meets the eye to "eliminating" all those boards boards and commissions. But everyone knows those things don't have big budgets. How about the agencies the state eliminated? Well, lets see... (These quotes come from a document that Qualls supplied.)

Commission on Local Government – The Executive Director position, a full-time appointee of the Governor, and the office staff were eliminated. The staff assistance to the Commission is now a responsibility of the Department of Housing and Community Development.

Wow, this looks like a real cut. An executive director plus a staff of -- I'm guessing here -- one or two people. Savings? Maybe $200,000?

Department for Rights of Virginians with Disabilities – This Executive Branch department was abolished and the Office of Protection and Advocacy was created as an agency independent of the Executive Branch.

In other words, one "department" was abolished and an independent "office" was created in its place. Savings? Not much.

Department of Veterans Affairs and Virginia Veterans Care Center were consolidated into a new Department of Veterans Services."

A "center" was consolidated with a "department" to create a new department. Savings? Maybe a little administrative overhead. But probably not much.

Department of Information Technology, Department of Technology Planning and the Virginia Information Providers Network Authority were eliminated as Executive Branch entities and the functions were consolidated into the Virginia Information Technology Agency.

Here, three different agencies were consolidated into one. However, the secretary of technology assured state tech workers that none would lose his or her job in the transition! Savings? Back when Cheryl Clark was interim director of VITA, she said that the agency expected to save $10 million in Fiscal 2004. The big savings won't kick in until the next biennium.

At last we're talking real money. But let me remind you, this is the centerpiece of the Warner administration's government reform. I'm sorry folks, but out of an alleged $6 billion budget shortfall, we're talking chump change! Eliminating all those "agencies, boards and commissions" translated into one half of one percent of the budget fix!

"...Eliminated 5,000 positions from state government."

According to Pamela Currey, the total number of state employees dropped from 115,361 at the start of the Warner administration to 110,471 in December 2003, two years later – a net reduction of 4,890.

That sounds like a lot until you realize two things. First, about 3,000 of those jobs came out of the Virginia Department of Transportation. Kudos to Commission Philip Shucet for a job well done. Too bad other agencies couldn't achieve the same level of savings. Secondly, 4,890 jobs in a 110,470-person workforce translates into only a 4.2 percent reduction in head count over two years -- hardly what you'd call a blood letting. I daresay that hundreds of private businesses in Virginia have endured much larger cuts. Just just wouldn't know if because private-sector executives don't scream as loudly.

One final point: Despite the reduction in head count, payroll savings have been marginal. The whole purpose of cutting positions is to control payroll expenses, always an uphill battle when cost-of-living increases are factored into the pay scale.

Drawing upon Virginia Employment Commission numbers, I reproduce here the payroll numbers for calendar 2001, the last year of the Gilmore administration; calendar 2002, the first year of the Warner administration; and the first two quarters of calendar 2003, the most recent data available (as of March 2004 -- editor.)

Source: Virginia Employment Commission, Quarterly

               ES-202 data 

Because of seasonal fluctuations in state employment -- particularly adjunct faculty at state universities -- it is not a valid exercise to compare total wages paid in a particular quarter with the quarter immediately preceding it. However, it is valid to compare a quarter to the same quarter the previous year. Despite eight percent across-the-board "agency" cuts enacted soon after Warner soon after coming into office, year-to-year comparisons show that total wages continued increasing for the first three quarters of the new administration. Part of the problem was that cost-of-living increases offset some of the Warner administration's cuts in head counts.

Total wages did turn south by the 4th quarter of 2002, and continued to do so for the next two quarters. 

Bottom line: Although Warner eliminated nearly 5,000 positions in state government, about 4.2 percent of the head count, total payroll for the first half of 2003 was only 1.1 percent lower than the same period in the last year of the Gilmore administration. As additional data comes in, the comparisons may improve but not enough to change the picture of only marginal reductions in government spending.

"...Cut every agency by an average of 20 percent."

The operative word here is "agency". As Warner conceded in his remarks to the technology council, the number doesn't count spending on education. Nor, elaborates Deputy Secretary of Finance Pamela Currey, does the definition of "agency" spending include any state aid to localities or entitlements to individuals. Basically, the governor is referring to cuts in administrative overhead and other spending accounting for about 20 percent to 25 percent of the total budget.

In other words, the Warner team made administrative cuts that added up to four to five percent of the entire state budget.

In analyzing Gov. Warner's rhetorical strategy, it's worth noting that he engaged in some double counting in his PowerPoint presentation. First he claimed credit for slashing 5,000 positions, and then he told audiences he'd slashed agency spending by an average of 20 percent. What he glossed over, however, is that those two savings were largely one in the same: The way he achieved those agency savings was largely by eliminating the 5,000 jobs!

Some of these "agency" savings represented real reductions in spending, especially the eight-percent agency cuts imposed during Warner's first six months in office, when the governor discovered he had to close a revenue shortfall in the budget he inherited from the Gilmore administration. However deep these cuts may have seemed at the time, they were of an ephemeral nature. Despite all the wailing, gnashing of teeth and cries of irreparable harm to state programs, state spending continued to increase in Fiscal 2003 and 2004.

Here's the trick: Some of the "cuts" represented reductions of the budget submitted by the Gilmore administration but never adopted -- not real cuts in comparison to actual spending in Fiscal 2002.

Let's take a closer look. For your viewing pleasure, we have presented the numbers showing: (a) total state spending for Fiscal 2001/2002, of which the first 18 months took place in the Gilmore administration and the last six months in the Warner administration, (b) Gilmore's proposed budget for Fiscal 2003/2004, and (c) actual expenditures after numerous modifications by Gov. Warner and the General Assembly:

Sources:

Fiscal 2001-2002: Secretariat of Finance

Gilmore 2003-2004, as proposed Dec. 19, 2001: Secretary of Finance budget documents

Warner 2003-2004, Secretariat of Finance; fiscal 2004 expenditures are Warner administration estimates.

By the time it was all said and done, the politicians in Richmond managed to "slash" Gilmore's dotcom-era proposals by about one half percent! Call the ambulance! I've got a paper cut, my finger's bleeding, I'm hemorrhaging!

Despite a recession, an unprecedented "$6 billion shortfall" and the "worst revenue crisis in the state's history," spending leaped ahead by 8.4 percent over two years!

"...Produced significant savings through government-wide efficiency plans"

Here, I'll give Warner some credit. His administration has made a promising start in bringing information-

technology expenses under control, advancing procurement reform, reining in cost overruns in road-building projects and doing a better job at managing state facilities. One day, these reforms will generate real savings for Virginia.

Trouble is, other than the cuts at the Virginia Department of Transportation, these initiatives had virtually no impact on Fiscal 2003/2004 finances! As noted above, Warner's signature issue, the consolidation of IT functions, saved only $10 million in Fiscal 2004. Other programs haven't been in place long enough to have had much impact yet.

Bottom line: The Governor's claim that government-wide efficiency plans produced "significant savings" is not supported by the evidence.

Smoke and Mirrors

All told, the Warner administration claims to have closed a "$6 billion shortfall" -- a combination of revenue shortfalls of approximately $3 billion and unbudgeted but legislatively required expenditures of about $3.1 billion -- over three years. Gov. Warner and the General Assembly offset those numbers with about $3.3 billion in cuts from projected spending.

How did they offset the rest? They beg, borrowed and stole from a variety of sources, including:

• $841 million from the Rainy Day fund

• $420 million in increased "fees"

• About $1.5 billion in one-time revenues and accounting gimmicks such as making major retailers accelerate payments of July sales taxes in June, which allowed the state to book 13 months of sales tax revenue.

In other words, the fiscal wizards who balanced Virginia's budget employed accounting tricks that, if they'd been tried in the private sector would have landed them in court next to Tyco's Dennis Koslowski and Enron's Jeff Skilling.

Yes, Virginia did endure a real recession and a real drop in budgeted revenue. Yes, the Warner administration did make real budget cuts. But the implication that Virginia's political leadership has done everything humanly possible to reduce spending is a fairy tale.

1. Because December 2003 numbers are "preliminary", BLS has not yet published an "average" figure for 2003 average. The number, which I calculated, assumes that the December figures are accurate.