Category Archives: Budgets

Spending Increases, Road Quality Decreases

Source: “Repair Priorities 2019

A new study by Transportation for America and Taxpayers for Common Sense documents the magnitude of the “Growth Ponzi scheme” in the U.S. road transportation system. Between 2009 and 2017, the 50 states collectively added more than 223,000 lane miles to their road networks. At an average cost of $24,000 per lane mile to keep roads in a state of good repair, that means states and localities have pumped up their maintenance liabilities by $5 billion a year.

But the states aren’t keeping up with those costs, contends “Repair Priorities 2019.” Nationally, the percentage of roads in poor condition increased from 15% in 2008 to 20% in 2017.

The problem isn’t a lack of money, argues Beth Osborne, director of Transportation of America. “We’re finding the money for expansion. There’s too little money to do everything, but we’re insisting that we do everything.” Continue reading

“A Dozen Pockets of Extreme and Growing Risk”

Source: Dollarcollapse.com

The economy is chugging along at a 3% growth rate, unemployment is hitting record lows, productivity is surging. The economy looks like it’s in fantastic shape. A friend of mine and long-time Trump hater, normally disinclined to give the president credit for anything, marveled recently that the low-inflation, low-unemployment economy “is as good as it gets.” I hope like heck it stays that way.

But I am an inveterate worry wart. I’ve lived through booms before — the 1980s savings & loan bubble, the 1990s tech bubble, the 2000s real estate bubble. I’ve heard the promises that “it’s different this time.” And I’ve seen the busts that followed. It’s a universal rule that most “experts” did not foresee the meltdowns coming. The same thing may be happening again. Very few are paying attention to the build-up of highly leveraged corporate debt, both in the U.S. and abroad.

I don’t know if the “junk bond” sector will precipitate the next recession. Perhaps the next downturn will originate overseas and spread to the U.S., and a meltdown in junk bonds will merely act as an accelerant to a broader collapse. Whatever the case, the $1 trillion market now represents a significant risk. State and local governments in Virginia need to acknowledge this and other risks lurking in the economy as they go about making spending and taxing decisions. Only a fool would assume that the decade-long expansion, one of the longest in U.S. history, will last forever. Continue reading

Risk and the Fisc

As the Northam administration’s point man in negotiations with the New York bond-rating agencies, Secretary of Finance Aubrey Layne spends much of his time worrying about the Commonwealth of Virginia’s credit-worthiness. The state nearly lost its sterling AAA bond rating last year. It was a close thing, he says. Even now, he adds, Virginia isn’t out of the woods.

Layne sees many things that could go wrong. The economy could slip into recession and projected tax revenues could decline. A stock market crash could boost unfunded pension liabilities by billions of dollars. The politicians in Washington could get serious about dealing with the $22 trillion national debt, curtailing the defense spending that undergirds Virginia’s economy.

The risk that “keeps me up at night,” says Layne, is of a Category 5 hurricane ripping through Hampton Roads. An Old Dominion University study published late last year found that a Florence- or Katrina-scale hurricane would cause $17 billion in wind and water damage and another $25 billion or more in lost economic activity. The state would be on the hook for evacuating and sheltering hundreds of thousands of  residents, cleaning up tens of thousands of truckloads of debris, and repairing state-maintained roads and other infrastructure, even as disruption to Virginia’s second-largest metropolitan economy cost millions of dollars in state tax revenue.

The Commonwealth faces huge risks, both short-term and long-term, but few of those risks are accounted for in Virginia’s $21 billion-a-year General Fund budget. The state’s “rainy day” fund and cash reserves are too paltry to buffer the budget from a fiscal shock of any magnitude. Under many scenarios Layne can contemplate, balancing the budget would require horrendous spending cuts.

“There’s no one looking into the future,” Layne says of the state’s biennial budget cycle. “Nobody’s looking beyond two years.” If revenue shortfalls loom more than two years out, he adds, “the attitude is, we’ll deal with that in the next budget.” Continue reading

Bacon Bits: Highs and Lows

Digital gold rush. How lucrative are data centers for Loudoun County? The prosperous Northern Virginia county expects to collect $200 million in fiscal 2020 from the property tax on computer equipment, up 35% over 2019, according to the Washington Business Journal. Last week, the Loudoun County Board of Supervisors adopted a $3.2 billion operating budget that featured a “significant cut” to the real estate tax rate, an across-the-board pay raise for county employees, and $100 million more for county schools. Data centers are worth roughly $1,000 a year in lower taxes to Loudoun homeowners.

And at the other end of the fiscal spectrum…

Digging out. In the wake of the worst financial crisis suffered by any Virginia locality since the Great Depression, the City of Petersburg is building back its fund balance, The FY 2020 budget of $75.8 million will run a $2.6 million surplus this year and the city is budgeting for $3.6 million next year. The city still has a long way to go before reaching a fund balance of $18 million, healthy enough to fund the General Fund for three months, but it represents a dramatic improvement since FY 2016 when the fund balance collapsed to negative $7.7 million. Tax and utility payments remain high, but at least the city has a functioning government.

And in the “Them That Has Gets” department… Continue reading

Hidden Deficits: Richmond Streets Edition

Source: City of Richmond

The condition of Richmond city roads is getting worse. Sixty-five percent of the city’s streets and roads are rated “fair to poor” or “poor or below,” Bobby Vincent, director of public works, told City Council Monday. Only 35% of streets and roads were rated “good,” according to Virginia Department of Transportation standards. That’s down from 53% as recently as 2014, reports Community Idea Stations.

Bringing roads back to standard would cost $104 million. Mayor Levar Stoney has proposed including $16.2 million more for roads and sidewalks in the upcoming budget, but the funding would come from an increase in property taxes and cigarette taxes which several city council persons openly oppose.

Allowing infrastructure to deteriorate is just a hidden form of deficit spending. That $104 million figure compares to total budget of about $710 million yearly and an annual public works capital budget of roughly $25 million. That’s quite a lot of hidden deficit spending over the years, and the figure doesn’t include spending shortfalls for other infrastructure such as school buildings, water-sewer plant, and other public facilities. Nor does it include the hidden deficits that take the form of pension under-funding.

But don’t assume Richmond is a unique basket case. Do you know your locality’s hidden deficit? Is it growing or shrinking? Is your city or county using the tax bounty of an economic expansion to reduce its maintenance backlogs? I’ll bet you have no clue.

How to Look Fiscally Responsible While Being Fiscally Irresponsible

Governor Ralph Northam wants to boost the retiree health credit for state police, law officers, sheriffs and their deputies. He has included $8.1 million in his proposed FY 2020 budget to pay for a $2-per-year of service increase for state police and a $1.50- to $5-per year increase for sheriffs and deputies.

While the increase in benefits will be paid for, it legislative hearings have revealed how poorly these retirement plans are funded to begin with. Northam’s proposal would add $76 million in liabilities to two plans that are funded at less than 10% of their long-term obligations. House Appropriations Chairman Chris Jones, R-Suffolk, called the benefit increases “fiscally irresponsible.” Continue reading

Pushing the Limits of Virginia’s Debt Capacity

Source: Debt Capacity Advisory Committee

by Richard W. Hall-Sizemore

The Commonwealth has been on a borrowing/building spree for the past few years and, as a result, its options for dealing with capital needs in the future may be constrained.

Since 1991, Virginia has voluntarily limited itself to the amount of tax-supported debt it would incur for capital projects.  This “debt capacity” is measured in terms of the percentage of general fund revenues that need to be provided for debt service on outstanding capital bonds.  The consensus between the legislature and the administration has been that projected debt service on tax-supported bonds should not exceed an average of five percent of general fund revenue over the ensuing ten years. Continue reading

Bacon Bits: Rider U Screws U Know Who

Now that the State Corporation Commission has finally approved Dominion Energy Virginia’s Rider U, mandated by the General Assembly to force us all to pay for underground lines serving just a few customers, let me explain how perfectly this scheme put the company ahead of its customers.  (For case details, the Richmond Times-Dispatch has this good story, picking up some themes from an earlier Bacon’s Rebellion post.)

Set aside discussions of the “Strategic Underground Program” because the merits do not matter for this illustration.  Start with the information that Rider U is a stand-alone line item on your bill, a financial silo on Dominion’s books, with a guarantee that the utility will recover in full the cost of construction with a profit margin over time.  No risk to the shareholders.

Any benefit to the customers, and there will be some certainly, shows up as reduced maintenance and repair costs and fewer interruptions.  Those maintenance and repair costs are covered by the main portion of your bill, the base rates, outside the Rider U silo.   Say it’s a one-to-one ratio, and the $70 million spent putting lines underground saves $70 million over five years in repair costs.  The fewer interruptions also add base rate revenue outside the silo.

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Northam Budget Priorities: Financial Reserves, Medicaid

Allocations of anticipated new tax revenue in Governor Ralph Northam’s proposed Fiscal 2019-20 General Fund budget.

Thanks to economic growth and windfall tax revenues, Governor Ralph Northam expects Virginia to spend $2.1 billion more in its next biennial General Assembly budget. He proposes setting aside 44% in financial reserves and spending the rest. He does not propose giving anything back to Virginia taxpayers, according to documents released by the Department of Finance today. Continue reading

Will Yellow Jackets Come To Richmond?

Gilet Jaune

I keep wondering when the new French fashion rage, the yellow safety vest or gilet jaune, finds its way across the Atlantic.  The next few weeks may provide some motivation in Virginia, because the General Assembly returns with financial pressures high and consensus in short supply.

Tuesday morning the 2019 General Assembly sees its opening ritual, with Governor Ralph Northam standing in front of the combined money committees to outline his financial plans.  The speech is probably written, the cartons of printed budget bills probably on a truck heading for the State Capitol, and the on-line posting has undergone its final edit.

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State Basic Aid for Schools Still Below Recession Level

Source: Joint Legislative Audit and Review Commission

Virginia spent about $6 billion in FY 2018 to fund the state’s constitutionally mandated K-12 standards of quality (SOQ), representing an increase in both total spending and spending per student every year since 2011, according to data published by the Joint Legislative Audit and Review Commission (JLARC). However, while the state now spends more money on support for K-12 education than before the 2007 recession, adjusted for inflation, spending per student was $649 less on average.

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(Fiscal) Winter Is Coming

Congressional Budget Office projections of federal government annual budget deficits.

Let me set the scene by reviewing a few numbers. The federal deficit is on course to hit $1 trillion annually by Fiscal Year 2020. With retiring Baby Boomers swelling Medicare, Medicaid and Social Security expenditures, deficits will increase inexorably for decades. The U.S. national debt stands at $21.7 trillion. As deficits pile up and interest rates rise, the national debt expressed as a percentage of the GDP, 78% today, will reach 96% by 2028. CBO projects that interest payments on that debt will increase from $263 billion in 2017 to $915 billion by 2028, putting increasing deficits on autopilot that no amount of budget cutting can offset. Continue reading

Fairfax Supervisors Face County’s Monster Pension Crunch

Fairfax County Board of Supervisors Chair Sharon Bulova

Once upon a time, way back in the year 2000, Fairfax County’s general-employee pension plan was amply funded at 109% of projected needs. But the funding ratio dropped severely during the last recession and has been hovering around 70% in recent years. Today unfunded pension liabilities for Virginia’s largest local government are roughly comparable in size to that of the Virginia Retirement System, which which state employees and many local government employees participate.

Taxpayer groups are sounding the alarm and, astonishingly, the Board of Supervisors is actually studying proposals to address the shortfall.

County officials have proposed a range of tweaks to the pension plans for public safety workers and general employees. (School teachers have their own plans not controlled by the county board.) Among the changes: The minimum retirement age would be bumped from 55 to 60, the retirement-eligibility formula would increase age + years served from 85 to 90, and the final salary-averaging period for calculating retirement-payments would be increased from three to five. The changes would apply only to new employees hired on or after July 1, 2019, reports Inside NoVa.

Said Board Chair Sharon Bulova (D): “The Board, all of us, have felt this is a contractual, really, issue. If you joined the county under certain expectations and you’ve based your retirement plans on what you believed would be the deal when you came to the county, we are not changing that for current employees.”

Sean Corcoran, president of the Fairfax Coalition of Police Local 5000 described the proposed pension changes as “a completely contrived crisis.” Others speaking for county employees warned that the plan would create a new class of “second-class employee” and would hurt morale and recruitment.

But taxpayer advocates said the proposed reforms were just a start.

Arthur Purves, president of the Fairfax County Taxpayers Alliance, said while the county’s population increased 20 percent since 2000, inflation-adjusted salaries for county employees rose 35 percent, health-insurance payments went up 194 percent and pension costs increased 244 percent.

County real estate taxes since 2000 have increased three or four times more than the inflation rate, said Purves, who blamed compensation increases as the culprit.

The proposed pension cuts for new employees “are only a small and necessary start,” he said. “You need to look at raises.”

McLean Citizens Association president Dale Stein said county pension borrowing went up $600 million during the last three years and added officials were basing their calculations on average annual returns on investment of 7.25 percent, while returns over the past decade averaged just 5.9 percent.

“We strongly urge the Board of Supervisors to ensure a strong, competitive compensation package for all county employees,” Stein said. “In making those packages possible, the realistic question is, ‘Where in the heck is that money going to come from?'”

The Inside NoVa article did not say how much the proposed changes would reduce the unfunded liabilities.

Bacon’s bottom line: You can keeping kicking the can down the road but eventually you run out of road. The time to act is now. Relatively small changes today can fix a problem that is still a couple of decades away from a full-blown crisis. Failure to enact reforms, however, will make necessary changes all the more painful in future years.

Whispers of the “R” Word

Source: World Economic Forum

With the stock market taking a beating, all of a sudden economists are uttering the “R” word — recession. JPMorgan Chase & Co. has put the odds of a U.S. recession beginning within 12 months at one in three — up from an 8% probability a year ago, reports the Wall Street Journal.

Central Banks in Europe, Japan and the United States are walking back quantitative easing policies designed to fight the past recession, and interest rates are rising. Germany and Japan both reported negative growth in the past quarter, and the Chinese economy is slowing. The expansion of global trade has diminished to a crawl. The dollar is increasing in value, putting developing countries that went on a borrowing binge — in U.S. dollars — under heavy pressure.

The U.S. economy remains strong for the moment. But if developing nations start going Venezuela on us, it’s not entirely clear which banks, hedge funds, and other investors might go belly up, launching investors worldwide into risk-avoidance mode and sending cascades of fear ripping through the global economy in unpredictable ways — just as the subprime-mortgage fiasco did in 2007. The governing authorities did not foresee the last recession, and it’s like that the masters of the universe won’t see the next one coming until it’s upon us. One thing you can count on: With global debt as a percentage of global GDP at record highs, the unwinding of trillions of dollars of banking, corporate, government, and consumer debt will be frightful.

As I reported three weeks ago, Secretary of Finance Aubrey Layne conducted a sensitivity analysis of the Virginia budget to see what would happen if a recession comparable to the last one occurred. General Fund revenues would decline from $21 billion a year by $9 billion a year over three years. Admittedly, no one is predicting such a scenario… at the moment. But we would be fools to ignore the possibility, given the fact that the Commonwealth has set aside reserves utterly inadequate to help it through a 40% downturn in General Fund revenue. The impact on state governance would be catastrophic.

Against that backdrop, Virginia is flush with revenue right now from better-than-forecast economic growth and a series of potential windfall gains resulting from federal tax cuts, a Supreme Court ruling on Internet sales taxes, proposed entry into a regional carbon cap-and-trade system, and a Medicaid tax on hospitals. The big question is, what do we do with this money? Do we crank up new spending programs? Do we give some of the money back to taxpayers? Or do we build up our financial reserves to spare Virginia some of the trauma stemming from a possible reprise of the last recession?

Medicaid Is The Story With State Budget

New hospital taxes collected from Virginia private hospitals in this budget cycle, and the federal matching Medicaid dollars they draw down. The larger portion covers higher payment rates, not coverage of new patients.

The General Assembly’s key money committees gathered in their annual end-of-year financial retreats last week to talk about Medicaid.  Sure, the state’s multi-billion-dollar budget delves into plenty of other areas that were mentioned, and the Amazon location announcement grabbed headlines, but the meetings were about Medicaid.

The explosive and uncontrolled growth of Medicaid is all but eliminating any new dollars for those other areas of state responsibility, and existing dollars are under pressure.  There is no point in talking about anything else.  The opportunity for tax reform due to windfall revenue may be short-circuited by Medicaid.  If the rosy projections of new state money from Amazon come to pass, every dollar may be needed for Medicaid.

Every year the Joint Legislative Audit and Review Commission (JLARC) does this dry report about the growth in state spending.  The simple bottom-line fact it has demonstrated over and over is that Medicaid is squeezing everything else out.  It looks back at a ten-year period and during the ten years leading up to and including 2017, 60 percent of all General Fund growth went to for Medicaid.

JLARC: 60 percent of the growth in state spending over ten years has gone to Medicaid (Department of Medical Assistance Services). The was before the 2018 expansion.

At the beginning of the period the state’s allocation to localities for public schools was the top expenditure, but it dropped down to second by Fiscal Year 2017.   During that same ten-year period, from FY 2008 through 2017, the Department of Education didn’t even make the list of the ten agencies with the highest growth in General Fund dollars.

Right behind Medicaid’s 60 percent of the new money over the decade was the Treasury Board (debt payments) and the Department of Behavioral Health and Developmental Services, the other state agency providing major direct medical services to citizens.  A similar chart from the 2009 report, looking at 2000-2009, had Medicaid getting 19 percent of the growth revenue, and the Department of Education 39 percent.  A healthy share of growth dollars going to education may never happen again.

Medicaid (DMAS) and Department of Education have switched places on JLARC’s latest report on state spending. This includes state and federal shares.

The figures in the JLARC report, of course, do not include the impact of the expansion of the program to an estimated 375,000 more recipients by July 2020.  Nor do they include the $463 million in cost overruns announced since the budget was adopted (several months late, remember) in the existing pre-expansion program.  Those will not show up in a JLARC look-back report until the 2020 report on Fiscal Year 2019.

That would be after the next election.

The state’s economy is improving and an additional $600 million or more in tax dollars are expected this year and next, the committee staffs reported, but about 75 percent of those new dollar will be needed for that overrun.

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