Bacon's Rebellion

The escalating war of words between GOP legislators and Gov. Timothy M. Kaine over Kaine’s proposed budget is getting some attention in the press. Garren Shipley at the Northern Virginia Daily and the editorial writers at Washington Examiner focus on the $180 million in transportation spending that Kaine wants to defer. The issues don’t appear to have evolved much since we covered them in this blog, but the differences are getting aired.

Meanwhile, Chelyen Davis at the Free Lance-Star gives ink to the unease that GOP legislators have with Kaine’s two-year revenue forecasts.

In a letter to the govenror, House Speaker William J. Howell, R-Stafford, and House Appropriations Chairman Del. Lacey Putney expressed concern that the Governor’s revenue forecasts are not based on the most current expectations of economic performance. Since the November 19 meeting of the Governor’s Advisory Council on Revenue Estimates (GACRE), “the national economy has continued to see wild swings,” while “the sustained decline in the housing and subprime mortgage markets further affect consumer and financial confidence.” The lawmakers continue:

Subsequently, the Commonwealth’s economic and forecasting consultant Global Insight has updated their forecast based on more recent economic data, including assumed GDP growth of less than 1 percent over the next three quarters. In turn, these financial experts have raised the probability of a recession from 30 percent to 40 percent.

Howell and Putney called upon the Governor to reconvene a meeting of the Advisory Council in January to update the budget projections on the basis of the most current data.

According to Davis, Kaine spokesperson Delacey Skinner responded that GACRE met in November, and agreed then to stick with the revenue forecast from August, which reflected the weakening economy. The governor’s office has a regularly scheduled review of the forecast in mid-February, and that it wouldn’t be prudent to call another meeting of GACRE just a month beforehand. Said Skinner: “Calling a special meeting would send a message to the public that we’re panicked, and that would be an unwise message to send.”

Bacon’s bottom line: So, Skinner doesn’t want to send a message that, “We’re panicked.” Personally, I think it would send a message that, “We’re prudent.” Instead, Skinner prefers to send a message that the Kaine administration is content for budgetary deliberations to rely upon what will be, by January, five-month-old data. Given the volatility of the economy, I think the Howell/Putney proposal makes sense.

We wonder why this Blog was overrun with folks praising the citizens of Oregon for passing Measure 37 in 2004, but

Not a peep when Measure 49 rolled back most of the provisions in 2007?

Turns out Measure 37 was in fact paid for by speculative owners outside the logical location of the Clear Edge.

And they were the majority of those who filed claims under Measure 37.

It was never about elderly ladies who lost their retirement savings.

As I recall that was our point at the time.

EMR

Mayor L. Douglas Wilder may have little nice to say about the Richmond School Board or educational bureaucracy, but he is fulsome in his praise of individual educators. In his recent newsletter he lauds Dr. Irene L. Williams, principal of the Fairfield Court Elementary School, located in one of Richmond’s most notorious, poverty- and crime-ridden neighborhoods.

You can’t accuse Donald P. Morgan and Michael R. Strain of being on the payroll of the payday lending industry. They are staff economists of the Federal Reserve Bank of New York. That’s why we need to pay attention when they conclude in a November report, “Payday Holiday: How Households Fare after Payday Credit Bans,” that payday lending is less burdensome on the poor than cutting off their credit.

Do Gooders have trashed the payday lending industry for usurious terms and conditions that allegedly mire poor and working-class citizens in a “debt trap.” Buying that logic, the state of Georgia permanently closed all payday lending in 2004, and North Carolina followed in 2005. (Virginia is still debating the issue.)

Morgan and Strain ask the question: Are poor/working class people better off as a result? The answer: No. In both states, the economists documented that the number of bounced checks, complaints against debt collectors and personal bankruptcies increased in Georgia and North Carolina relative to other states.

The main beneficiaries of the ban, it turns out, are conventional banks. Write Morgan and Strain: “On average, the Federal Reserve check processing center in Atlanta returned 1.2 million more checks per year after the ban. At $30 per item, depositors paid an extra $36 million per year in bounced check fees after the ban.”

Bacon’s bottom line: Poor people don’t need Do Gooders meddling in their affairs to pursue their own economic self interest. Let the payday lenders stay in business. The only legitimate role of government is to ensure transparency — to make sure borrowers understand the terms and conditions of the loans — and to prevent fraud. Otherwise, government meddling doesn’t help the poor, it hurts them.

(Hat tip: Chris Saxman. Photo credit of Advance America: Andrew Bain.)

Once upon a time not long ago, in 2001 to be exact, Virginia’s pension fund obligations were fully funded — 106 percent funded. No longer. According to a new study by the Pew Charitable Trusts Center on the States, Virginia’s obligations for state employees is only 81 percent funded, or about $10 billion short. Additionally, the state is $2.3 billion short on funding “other” retirement benefits.

What’s going on? A couple of things. First, Virginia shifted to slightly more conservative actuarial methodology: assuming compounded returns of 7.5 percent annually instead of 8.0 percent, which is probably wise in the current financial climate. But the study also states, “The state has stumbled a bit in making its full annual contributions toward its long-term obligation. … In the last 10 years, the Commonwealth has frequently made less than the annual required contribution, as set by its own actuaries.”

Virginia’s funding ratio is a hair worse than the national mean — which means it’s nothing to be proud of. In the private sector, monkeying with pension payments is a notorious trick for boosting cash flow. Looks like Virginia has been doing the same thing since 2001. Before cranking up spending on other programs, Gov. Timothy M. Kaine and other lawmakers might consider taking care of core responsibilities first. Twelve billion dollars is a lot of money, even if spread over decades.

Gov. Timothy M. Kaine has done a yeoman’s job squeezing spending out of the state government administration (see previous post), and he’s entitled to reallocate those savings — more than $350 million a year, if I understand correctly — to new priorities. Kaine also deserves a small measure of praise for showing relative spending restraint. The roughly $78 billion biennial budget for the next two years (FY 2009 and 2010) is only five to six percent bigger than the current two-year budget — a growth rate that roughly tracks projected inflation/population growth — and the smallest increase since the recession early this decade.

But the budget package Kaine outlined yesterday has significant flaws.

Rainy Day Fund. Kaine still wants to withdraw $261 million from the Rainy Day Fund, the maximum allowed by the state constitution, to plug a spending hole in the current, FY 2008 budget. Bad idea. Even if the state is legally entitled to do so, the current level of economic hardship doesn’t rise to the level where we should deplete our main safeguard against hard times.

Diverting Transportation Trust Fund Revenues. I didn’t pick this up in the news accounts or in the Governor’s speech, but a statement issued by the Republican leadership of the General Assembly states that Kaine also “plans on diverting $180 million from the Transportation Trust Fund in Fiscal Year 2008 so he can fund new or expanded non-transportation programs.” Excuse me, but didn’t Kaine vow early in his administation to fight for a constitutional amendment to prevent precisely such raids on the transportation trust fund? Excuse me, but isn’t this a beluga whale-sized flip flop? Excuse me, but where is the friggin’ outrage?

$3 Billion in New debt. Kaine has proposed issuing a total of $3.2 billion in new debt — again, according to the Republican leadership. While the higher ed initiative in particular has merit (see previous post), there are limits to how much the state can prudently borrow. The added debt would bring the Commonwealth “to the brink of its debt capacity limit,” says incoming House Appropriations Chairman Lacy Putney. That’s a risky maneuver considering the “exceedingly optimistic” assumptions the Governor makes regarding rebounding budget revenues in fiscal 2010.

I recall the Democrats making wisecracks and waving credit cards in mock outrage when the Republicans proposed borrowing a much smaller sum of money a year or two back to fund transportation improvements. I wonder if they will express any objections to the borrowing binge proposed by their friend, the Governor.

Putney concludes: “If only one of these constructs were central to the Governor’s budget proposal, lawmakers would justifiably question its wisdom and its potential effects. With all of them and more as integral components of his plan, it jeopardizes the Commonwealth’s hard-earned reputation for fiscal responsibility and brings into question the overall soundness and long-term fiscal integrity of the proposal. The Governor’s budget proposal is built on the premise of begging and borrowing to the point of being reckless.”

That about sums it up.

Key sources:
Gov. Kaine’s proposed FY 2009-2010 budget
Governor’s remarks to House and Senate money committees
Briefing by the Secretary of Finance
Reaction of General Assembly Republicans

(Update: I checked with Gordon Hickey, Gov. Kaine’s press secretary, to find out what the story was with the $180 million switcheroo. Hickey says that Kaine proposes moving $180 million in General Fund transportation spending to 2010 when the projects cited in the enabling legislation will come online. The money is not being spent on other priorities, Hickey says: The spending is being deferred. He insists that the money is not coming out of the Transportation Trust Fund. Any communications to that effect are simply wrong.

Before I launch into a criticism of Gov. Timothy M. Kaine’s latest budget proposals in the next post, let me pause to say something nice about the governor. Not only has he increased budgetary transparency (see my previous post), he has labored diligently behind the scenes to improve government efficiency and accountability. The challenge of running the state bureaucracy doesn’t generate newspaper headlines, but the end result of Kaine’s unpublicized endeavors is the freeing up of hundreds of millions of dollars to allocate to more pressing priorities.

Here’s what Kaine noted in his speech yesterday:

We had a head start on identifying savings because of the work we did to address the shortfall in fiscal year 2008. The budget I present to you today carries nearly all of the 2008 reductions into 2009 and 2010, saving $232 million in each year of the new biennium. We found additional biennial savings of approximately $137 million by streamlining operations and reorganizations, thanks to the diligent efforts of our state employees. …

These savings provide us both a cushion in a time of declining revenues and the ability to make targeted investments in areas where Virginia needs to improve.

I have also called for increased accountability in the Commonwealth’s spending. Through my performance management initiative, we have established goals to measure how well our agencies are delivering services. … My budget proposal includes tools to begin collecting outcome data on several of the state’s most critical funding commitments – the Comprehensive Services Act, Community Service Boards, and K-12 education. This information should help our agencies make wise choices that will better serve our citizens. …

I have increased support for the Productivity Investment Fund which provides seed capital to state agencies for innovative ideas that will serve citizens better and more efficiently. The budget also includes language clarifying the use of the Public-Private Education Facilities and Infrastructure Act (PPEA) to encourage the private sector to introduce technology-driven transformational initiatives.

Kaine credits these efficiencies with being able to boost spending for other priorities without raising taxes. This is exactly the philosophy of government I espouse: Pay for new priorities with savings from reinventing, streamlining, consolidating, eliminating or otherwise rationalizing old priorities — not raising taxes.

Through my other work, I had a ring-side seat to watch the state overhaul the way it administers its vast real estate portfolio. On the one hand, one could argue that the changes are long over due — they simply emulate best practices in the private sector. On the other hand, never estimate how difficult it is to achieve structural change in a government/political setting. Believe it or not, state government is blessed with many dedicated employees who do excellent work under often-trying conditions, and my sense is that the change agents are getting strong support from this governor.