Bacon's Rebellion

James A. Bacon

Paper Cuts

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

It’s all over but the shouting. In the Great Tax Reform Debate of 2004, the House of Delegates has capitulated by passing a budget that would push spending and taxes up -- way up. All that remains is for the House, the Senate and the Governor’s Office to agree on the fine print. Will spending in fiscal years 2005/2006 increase by 10 percent, 11 percent or 16 percent? Will taxes increase by $500 million in the next biennium, $1.2 billion or $3.5 billion? Who will pay: big business, the wealthy, or the rest of us?

So, congratulations to all you who think state government needs our money more than we need it -- you won! I ask only one thing: Can we be honest now? If nothing else, can we dispense with the farce that Virginia state government has been starved of funds, and just come out and admit that – whoopee!! -- the era of Big Government is here?

I went soft on the spending issue last in my last column (“Questions for the Governor,” February 16, 2004 ) when I critiqued the PowerPoint presentation that Gov. Mark R. Warner had taken on the road to promote his tax plan. Warner made a superficially plausible case that he’d chopped state spending to the bone during the recent budget crisis, and I largely gave him a pass. But I began thinking about some of the assertions he made, and I decided to go back for a second look.

Now that I have, I’m really ticked off. I’m steamed at the governor for making misleading 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. I’m contemptuous of lazy, lap-dog press and editorial writers for allowing the one-sided presentation of data to go unchallenged. And I'm disappointed in myself for having been gulled, even momentarily, into overlooking the obvious.

If you wonder what's gotten me so fired up, you can 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 what it says:

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 his address to the Greater Richmond Technology Council two weeks ago, 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-Stafford, 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, and they're spreading their wronghoods far and wide. The reality couldn't be more different.

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 has 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 this fiscal year. 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!

(By the way, kudos to Qualls for forthrightly supplying me this information. She easily could have put me off. Her candor stands in refreshing contrast to the House of Delegates, the champion of the anti-tax movement, which wants to exempt itself from the Freedom of Information Act! If there's been a redeeming aspect to the Warner administration during this tax debate, it's been its willingness to share information.)

"...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 translates into a 4.2 percent reduction in head count over two years, a not insignificant accomplishment given the civil-service like protections afforded state employees. But there may be more to the story. There are two factors to consider.

First, agency heads can play a lot of games when forced to cut costs – and one is hiring contract employees off the state books. The state hasn’t tracked the number of contract employees until the Warner administration, to its credit, started taking head counts. Trouble is, the first count didn’t take place until June 2003, when 4,809 contract employees were listed. So, we'll never know the extent to which, if at all, agency heads offset the loss of on-the-books employees by hiring temp workers or contract employees.

Second, payroll savings have been marginal. The whole purpose of cutting head count 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.

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 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 partial 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, these initiatives had virtually no impact on Fiscal 2003/2004 finances! As noted above, Warner's signature issue, the consolidation of IT functions, is expected to save only $10 million this year. Other programs haven't been in place long enough to have had much impact yet.

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, much of it in administrative 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.

Just imagine you're the bond analyst at Moody's whose job is to track Virginia's fiscal integrity. You see a $6 billion revenue shortfall. You see continued increases in spending, and "cuts" amounting to one half of one percent of the spending proposed by Gov. Gilmore. You see politicians making up the rest through budgetary hocus pocus. Is there any wonder that Moody's put the state's AAA bond rating on the watch list? 

The fiscal wizards who balanced our budget with 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, tell us there's nothing left to cut. But they're wrong. They're just looking in the wrong places.

Here's the problem: Legislators scrutinize the budget agency by agency, line item by line item. Every program seems justified. As Sen. Ken Stolle, R-Virginia Beach, challenged members of the Republican Party state central committee earlier this month who balked at higher taxes, what would they propose to cut? (See Peter Ferrara's story, "Heading for Divorce," in this issue.)

That may have been an effective rhetorical ploy, but it's no way to run a government. The frontier in streamlining government isn't slashing programs, it's identifying redundant business functions that cut across the welter of state secretariats, agencies and departments. These expenses are largely invisible to legislators viewing agency-centric budget presentations. But with the proper analytical tools, the state should be able to trim a billion dollars or more per year in spending without harming programmatic spending one iota. This process-based analysis of the state budget is still in its infancy.

Warner and Chichester, to their credit, want to put a halt to the accounting shenanigans. But no one, it seems, is willing to slow the surge in spending. Until Virginia's political class figures out how to do that, it's only a matter of time until the drum beat begins again for another round of tax hikes.

-- March 1, 2004

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.