Category Archives: Budget

Your Federal Tax Dollars at Work

The fog of government

The fog of government

And I thought the City of Richmond was incompetent for its inability to close out its financial books in a timely manner!

Heed this opinion from the federal Government Accountability Organization (GAO) on Uncle Sam’s financial statements for 2014 and 2015: “Certain material weaknesses in internal control over financial reporting and other limitations on the scope of … work resulted in conditions that prevented GAO from expressing an opinion on the accrual-based consolidated financial statements.”

Three major departments — Defense, Agriculture and Housing & Urban Development, controlling 34% of assets and 19% of spending — accounted for the most questionable financials, according to Government Executive MagazineBut accounting issues pertaining to Medicare cost control also prevented GAO from expressing an opinion on sustainability financial statements on HHS’ Statement of Social Insurance on accounts worth about $27.9 trillion.

Bacon’s bottom line: The federal government will run a $544 billion budget deficit this year…. we think. It could be more, it could be less. What’s a few billion dollars?

(Hat tip: Tim Wise.)

Threading the Needle on Long-Term Debt

Virginia_tax_supported_debt

Graph credit: Virginia Debt Capacity Advisory Committee

by James A. Bacon

Virginia has more than tripled its tax-supported debt over the last decade, according to the December 2015 report of the Debt Capacity Advisory Committee, but the state still has enough capacity to support the issuance of another $603 million per year in added debt in Fiscal years 2016 and 2017 without undermining its AAA bond rating.

Long-term debt is necessary to pay for long-lived assets such as public buildings, university facilities and transportation projects, but higher debt payments, a fixed expense, make it difficult to respond to economic downturns and address other budgetary needs. It has been Virginia’s policy to limit debt payments to 5% of blended revenues.

While other states have been somewhat constrained in their borrowing in recent years, Virginia has continued to add to its debt. Net Tax-Supported Debt (NTSD) as a percentage of personal income increased to 2.8% — higher than the national median and 19th highest among the states.

debt_comparisons

Graph credit: Virginia Debt Capacity Advisory Committee

Against this backdrop, Governor Terry McAuliffe has proposed issuing $2.43 billion in bonds for higher-ed R&D initiatives, Virginia ports, corrections, state parks and the environment. Assuming the bond issuances are staggered over four years, they would soak up the state’s projected added bond capacity over that period.

Complicating matters, McAuliffe has an appetite for even more spending that requires long-term financing. The administration’s signature transportation initiative is a $2 billion upgrade to Interstate 66, a key transportation artery in Northern Virginia. The project as currently envisioned is dependent upon highly unpopular tolls and toll-backed debt to finance the project. Unless offset by the maturation of old transportation debt, issuing bonds for the project could accentuate the crowding out of other priorities. As the committee report states:

Currently, debt service on debt paid by the TTF (Transportation Trust Fund) exceeds 5% of TTF revenues. Accordingly, to the extent the 5% measure is exceeded, capacity derived from the general fund is being utilized. This does not mean that general fund dollars are supplementing debt service payments on TTF debt; rather, it means that capacity derived from the general fund is being used to keep overall capacity for all tax-supported debt under the 5% target.

The General Assembly money committees have more than budgets to discuss this year.

Tax Credit Scholarships Educate 1,400 Kids and Save Virginia $3 Million

St. Andrew's School in Richmond provides free educations to low-income students, predominantly minorities with a boost fro the Education Income Scholarship Tax Credit Program.

St. Andrew’s School in Richmond provides free educations to low-income students, predominantly minorities, with a boost from the Education Income Scholarship Tax Credit Program.

by James A. Bacon

When backers of the Education Improvement Scholarship Tax Credit were promoting their idea of giving philanthropists a 65% tax credit for donations to scholarship foundations, they predicted that the program would spur private-school scholarships and save the state money. Their logic was simple: For every 65 cents it lost in tax revenue, the state would save 90 cents in state aid to localities it didn’t have to pay.

But simple ideas often clash with messy reality. Among other potential complications, some recipient students might have enrolled in private school even without a scholarship. Other students might receive scholarships from more than one foundation. Now that the scholarship program has been in effect for three years, how does theory compare to actuality?

Pretty well. In 2014-2015 the tax credit helped nearly 1,400 kids from low- and moderate-income families attend private school. At the same time, it saved the Commonwealth of Virginia nearly $3 million in funding to localities. Those are the conclusions, based on actual donation, tax-credit and scholarship reports, reached in a legislative policy analysis by Christian Braunlich, past president of the Virginia  State Board of Education and vice president of the Thomas Jefferson Institute for Public Policy.

Here’s what the key numbers look like:

scholarships

But the Old Dominion can do better. While Virginia has raised $6 million in scholarship money through its tax credit, Florida raised $358 million to help nearly 27,000 low-income students, Georgia has raised $58 million to assist 13,000 students, and Pennsylvania has raised $100 million to benefit 38,000 students. True, all three states are more populous than Virginia, but the key differentiator is that they offer tax credits of 90% to 100%.

Hiking Virginia’s tax credit from 65% to 90% would generate an additional 3,800 scholarships in Virginia, and increase the size of the scholarships, Braunlich projects. The state still would fare no worse fiscally than if the tax credit didn’t exist. Meanwhile school districts would be able to devote the same local and federal funds to a smaller number of students.

Bacon’s bottom line: Let’s expand the tax credit. I’d be interested to hear arguments against it, but I suspect critics will sing the old refrain that helping children attend private school will hurt public schools by depriving them of resources (downright false) or “cherry picking” the best students (highly debatable and irrelevant). The underlying motive, of course, is to preserve the public school monopoly and protect the interests of all those who feed at that trough. Commitment to the educational establishment trumps the welfare of low-income children.

Boomergeddon Update: Deficits Rising Again

Source: Congressional Budget Office

Source: Congressional Budget Office

by  James A. Bacon

Blame who you want for this sad state of affairs — it’s always the other guy’s fault, right? — but after six years of shrinking federal government deficits, red ink is on the rise again. And unless Congress enacts significant budget reforms, deficits will get worse every year pretty much forever until the wheels fall off the bus.

The chart above comes from a new report from the Congressional Budget Office (CBO), which, to my knowledge, is not funded by the Koch Brothers. What should be really scary is that the forecast is based upon the assumption of slow-but-steady economic growth (about 2% annually) over the next 10 years — without a recession, a totally improbable supposition. The current business cycle, though anemic, is seven years old, and the global economic situation is a mess. When a recession does occur, revenues will decline, spending will climb and deficits will shoot higher.

Some will comfort themselves from the chart above by observing that CBO’s projected deficits for the next 10 years are no worse than the deficits of the Reagan/Bush I era. That’s true, assuming we don’t have a recession, in which case it won’t be true. But such thumb-sucking ignores the fact that we have a $19 trillion national debt, which, as a percentage of the economy, is higher than at any time since the Korean War. It ignores the fact that the percentage of the budget on auto-pilot (entitlements and interest) will be far higher, which will give Congress far less latitude to cut spending should it need to. It ignores the fact that the Federal Reserve Board today is pursuing a highly stimulative, near-zero interest policy today, in contrast to the slam-on-the-brakes interest policy of the early 1980s. And it ignores the fact that the 1980s-era economy had greater growth potential than our economy today with its aging workforce, debilitating tax code, over-regulation and seriously impaired global economy.

What does this imply for us mere mortals residing south of the Potomac? President Obama and Congress made a pact with the devil to jack up discretionary spending in the latest budget, thus easing the pain of sequestration. But long-term, the prognosis for Virginia’s federally dependent economy is grim.

discretionary_spending

Expressed as a percentage of the economy, federal discretionary spending (which includes defense spending) will continue to shrink as mandated spending and interest payments hog new revenue dollars. That bodes ill for the military-intelligence-homeland security complex in Northern Virginia and Hampton Roads.

Bacon’s bottom line. First the uncontroversial: Virginia needs to ramp up its efforts to diversify its economy away from federal spending. Next, the controversial: Put state and local finances (including pension obligations) on a tighter leash. And then, the super-controversial: Don’t trust federal funding promises for anything. What Uncle Sam giveth, Uncle Sam can taketh away. And that includes federal dollars for Medicaid expansion.

A Step toward A World-Class Education? What a Joke!

bureaucratic_wasteland

Bureaucratic wasteland

by James A. Bacon

Virginia is gearing up for its biennial budget extravaganza, and Governor Terry McAuliffe has the chance to put his stamp on state spending priorities without meddling from previous or succeeding gubernatorial administrations. Yesterday he announced his plan for increasing spending on K-12 education by $1 billion over the 2016-2018 budget.

Key initiatives include:

  • Adding roughly 2,500 instructional positions — about one per elementary school and two per middle and high school — at a cost of $139 million.
  • Funding the cost of re-benchmarking the Standards of Quality (SOQs, not to be confused with Standards of Learning, SOLs) by $430 million.
  • Providing $50 million to divisions based on free-lunch population to be spent flexibly.
  • And committing $41 million for a “cost of competing” adjustment in areas with high living costs.

Said McAuliffe in making the announcement: “With thoughtful, bold ideas like the ones I am proposing, we will get back on the right track and ensure that we are laying the foundations for the New Virginia Economy. … I believe that if we want to have a world-class economy, we need a world-class education system, and this is where it starts.”

Bacon’s bottom line: The budget proposals may indeed be “thoughtful,” in the sense that a lot of thought went into them, but I would hardly call them “bold.” This is just stuffing more money into the same old educational model, tweaking the margins and packaging it with lofty rhetoric. To suggest that these changes will put Virginia on the path to a world-class education system is to engage in fabulist thinking.

teacher_collaborativesYou want bold? I’ll give you bold. Take the $5.5 billion in aid to public education given to school systems, and instead of empowering the bureaucratic status quo, empower parents of school children by giving them vouchers worth $4,000 per child. (The $5.5 billion averages out to $4,300 per child for the current school year, but if vouchers were given to every school child, they would cover children now attending private school as well as public school students; to stay budget neutral, the voucher per student would have to be smaller.)

Thousands of families that can’t afford private school tuition at $6,000 to $10,000 per child (and much more for elite institutions) could stretch their budgets and send their kids to private schools if they had a $4,000 voucher.

Of course, anyone who wanted to send their kids to public school would be free to do so. Local governments would continue supplementing their public school budgets with local and federal funds. Public school students would come out ahead from the arrangement because, to the extent that more kids attended private school, public schools would have fewer kids to educate — and more money per kid.

Virginia would experience a surge in experimentation. We would see educational marketplaces arising to match students with schools, teachers, tutors and teaching collaboratives. Lines would blur between school-based education, online education and home schooling. Free from red tape and bureaucracy, teachers could be freer to practice their profession as they choose — directly accountable to their students and students’ parents, not to bureaucrats and arbitrary standards. Bad teachers would lose clientele. Great teachers would prosper.

Will anything like this ever happen in Virginia? Of course not. We can’t even pass a decent charter school bill. But as a mental exercise, it’s useful to remind ourselves how hide-bound we are in our thinking, how timid we are in our actions, and how totally unserious we are about giving our children a world-class education.

$1 Billion in Bonds for R&D Initiatives

Virginia Tech robotics competition team

Virginia Tech robotics competition team

by James A. Bacon

Governor Terry McAuliffe has unveiled a $2.43 billion bond package, about $1 billion of which will go to Virginia colleges and universities for technology initiatives.

“The bond package represents the largest research-oriented capital investment in the Commonwealth’s history as well as the largest state investment,” states the press release issued by the governor’s office. “The chief focus of this bond package will be strengthening research and workforce development in high-demand fields at Virginia’s four-year institutions of higher learning and community colleges.”

Stated McAuliffe in making the announcement at the Virginia Commonwealth University (VCU) Medical Center yesterday: “If we are going to build a new Virginia economy, we must make smart investments in research, higher education, veterans, public safety, tourism and environmental stewardship that will yield returns for decades to come.”

The proposed bond issue will allocate $100 million over two years in “competitive grants for research activities,” and $40 million over two years “in cash incentives for research and matching funds to secure federal grant funding.” Funds will be used to renovate research labs, purchase equipment and attract top talent to higher education institutions. The state will leverage the funds through public-private initiatives and by focusing on centers of excellence.

“The goal of the research component of this initiative is to put Virginia on the map as the best place in the nation for entrepreneurs to start their businesses and design the next generation of revolutionary products,” states the announcement.

Another $850 million will go to new buildings, labs, classroooms and renovations at VCU, VirginiaTech, Old Dominion University, the University of Virginia, Longwood University and several community colleges.

Bacon’s bottom line: The top priority of any bond package is to fit within the financial parameters — debt service accounting for no more than 5% of total revenue — required to maintain Virginia’s AAA credit rating. I presume that McAuliffe scaled the size of the $2.4 billion proposal to the bond-issuing capacity that will be freed up by retirement of old debt and the anticipated growth of state revenue projected over the next two years.

As for funding priorities, McAuliffe’s instincts are right — we need to invest in the industries of the future, not prop up the industries of the past. The assumption underlying his initiative is that pumping money into university buildings, labs and research programs will help build the industries of the future. Such a conclusion seems intuitively obvious but bears examination. As we move in for a closer look, questions arise:

(1) To what degree is R&D lab space and equipment a constraint on recruiting research scientists (and the grant money they bring with them) to Virginia universities? Is McAuliffe proposing the R&D equivalent of shell buildings used to entice manufacturers? Build it and they will come?

One could make the argument that the hard part in building an R&D program is recruiting star scientists, not building buildings and labs for them. Say Virginia Tech, UVa or VCU could land a research scientist who would bring $10 million in federal or industry research dollars with him. Surely it would be a relatively modest a challenge to find him (or her) lab space and equipment in short order. Might there be other ways to recruit star research scientists — to pay them more, for instance, as Texas has used a bond issue to do.

(2) To what extent will higher R&D spending at Virginia universities result in the local commercialization of technology, creation of opportunities for local entrepreneurs and local job creation? Tech, UVa and VCU all can point to anecdotal success stories, and each can point to research parks that have filled up with tenants. But add it all up, and what does it amount to? Do Blacksburg, Charlottesville and Richmond have the support resources — tech-savvy management, early-stage capital — required to leverage R&D into spin-off jobs in the local economy?

Northern Virginia has Virginia’s most advanced technology sector, the deepest technology management bench to recruit from, and the most advanced venture capital sector. If spinning off entrepreneurial opportunities is a key part of the mission, wouldn’t it make sense to build the R&D capacity of Northern Virginia’s largest institution of higher ed, George Mason University? GMU doesn’t even get broken out in the list of universities receiving funding support. What the heck is going on? Continue reading

Meanwhile, Virginia’s Debt Service Has Doubled

Source: "State Spending: 2015 Update"

Source: “State Spending: 2015 Update”

Debt service on bond issues, mainly for higher education and transportation, has been a major driver of state spending over the past 10 years. The repayment of interest and debt has increased in absolute numbers and as a percentage of total blended revenues — from $385 million (or 2.57% of revenues) in FY 2005 to $836 million (or 4.51% of revenue) in FY 2015.

Spending on debt service remains below the 5% cap recommended by the Debt Capacity Advisory Committee in order to protect Virginia’s AAA bond rating, according to the recently published “State Spending: 2015 Update.” But it still represents a long-term obligation that cannot be pared during economic downturns, thus limiting to some degree the state’s ability to respond to recessions.

Fortunately, Virginia’s debt bears no comparison to the federal ponzi scheme. The interest charges on state bonds are fixed. Payments will not increase unless state authorities choose to issue new debt. Uncle Sam is in a very different situation. Much of the $18+ trillion in federal debt consists of short-term notes (two years or less) that benefit from extremely low interest rates. However, should interest rates rise, a substantial portion of the federal debt will be rolled over at higher interest rates in short order. So even if the feds didn’t run annual deficits of $400+ billion a year for now until forever, the debt burden would increase.

Bond indebtedness does not account for other long-term obligations, such as real estate leases and, most worrisome, unfunded pension obligations. Virginia has made progress in bringing its pension obligations under control, although budget pressures could tempt the General Assembly to short-change budget contributions in the event of another recession.

— JAB