Budgeting for a Sequester

Numbers between $17M and $25M are being reported as the cost of the sequester to Rhode Island state government spending. However, if a few state departments did nothing more than stay within their original FY2013 budgets, and the funding tentatively intended for their overruns could be intelligently redirected, the impact would only be about half of that amount.

Let's begin by noting that, for the most part, the various departments of RI government are exhibiting a reasonable degree of budgetary discipline. In other words, according to the Governor's proposed budget document for FY2014, most departments won't spend more than they were appropriated for FY2013 (in Rhode Island, we take our fiscal successes wherever we can find them).

However, at least one government department is an exception to this: the General Assembly. The Rhode Island General Assembly was appropriated $37.2M from the state's general revenues for fiscal year FY2013, a 10.5% increase over the previous year. In the Governor's revised budget for FY2013, the GA is appropriated $40.4M from general revenues, an overrun of $3.2M (8.6% more than their appropriated amount). If the state legislature does nothing more than stay within its original FY2013 appropriation (this is not a cut; they still get their 10.5% increase over the previous year), it would free up $3.2M to be spent on areas impacted by the sequester. Since the money saved would all come from general revenues, the legislature could pretty much spend it wherever it wanted to (just like it could choose to spend on itself, while other programs are being impacted).

The Information Technology section within the state's Department of Administration also spends more, according to the Governor's revised FY2013 budget, than it was allocated in the original. The revised budget allocates an extra $930K from general revenues to finish the year. However, it should be noted that DoA Information Technology (unlike the General Assembly) was budgeted very conservatively at the start, with FY2013 costs for personnel and operating expenses initially budgeted for about $1.8M less than the previous year. Maintaining their general revenue at its original FY2013 level still leaves 3% more for personnel and operations than originally appropriated.

The last area of noticeable budget increase is one of the largest, though it is not under state government control alone. This area also reveals something about priorities in government budgeting. As you may have heard, the executive branch of Rhode Island government is planning to set up an Obamacare "Health Benefits Exchange". In the original FY2013 Rhode Island budget, $22.2M was allocated for initial set-up expenses, all paid for with Federal dollars. In the Governor's revised budget, the cost of setting up a Healthcare Benefits Exchange jumps by 30% to $28.8M, still all from Federal funding. If costs were limited to their original FY2013 budget amount (and, once again, being asked to stay within an approved budget is not a cut), it could free up about $6.6M to be applied to other human service programs. 98% of Health Benefits Exchange spending in FY2013 is on "personnel", so no assistance program would be adversely affected, and the salary-spending plans from the Governor's "revised" budget could be resumed just 3 months from now, on June 1, at the start of the new fiscal year.

Asking these 3 programs to stay within their budgets for this year could free up about $10.8M to replace sequestered monies. That leaves a gap of somewhere in the vicinity of $6.2M to $14.2M to be closed (down from the original $17M to $25M).

Federal dollars allocated to Rhode Island state government, minus two programs 1) the Health Benefits Exchange, already accounted for above and 2) support for the Department Labor and Training, which was temporary and is in the process of being phased out, was $2.39B in FY2012. In the Governor's revised budget for FY2013 (which we'll assume doesn't include the sequester), that amount increases by $140M, to $2.53B. If we pick the larger of the sequester estimates and don't include DLT or Health Benefit Exchange programs, in conjunction with the three proposals suggested above, the rest of Rhode Island government would have to adjust to the sequester by spending "only" $125M more in Federal dollars than they did last year

Or, if it is decided that General Assembly spending on itself and that spending on healthcare bureaucratic cost overruns is more important than everything else, the sequester would mean that Rhode Island only gets to spend about $115M more in non-Health Benefits Exchange, non-DLT Federal dollars than it did last year. Hmmmm. Maybe I buried the lede on this one.

Anyway, with competent fiscal management, managing the "austerity" of a $115M budget increase should be feasible. We'll see how how well Rhode Island is able to handle it.

The Governor's 2014 Budget for Rhode Island in Historical Perspective

Here is the recent history of Rhode Island state government expenditures updated to reflect the Governor's proposed budget for 2014, made possible in part by the fast work done by the State of Rhode Island Budget Office to make the complete budget available on the ri.gov website.

As always, actual dollar amounts spent (or, in the cases of FY2013 and FY2014, to be spent) are presented first.

The next chart takes the spending amounts from all sources and adjusts them for inflation, based on data available from the Department of Labor and Training (and with 2% inflation is assumed for next year). The most distinctive feature of this chart is that FY2014 potentially represents a fourth consecutive year where state expenditures will be relatively stable relative to inflation, following more than a decade of nearly linear, year-by-year spending growth.

The amount of state government funded by general revenues (basically state taxes) does continue to grow in the Governor's proposed budget. If the totals in the Governor's proposed FY2014 budget are ultimately outlaid, Rhode Island general revenue spending will have grown by about 2.5% per year faster than inflation over the first three years of the Chafee administration.

The last chart shows the Rhode Island state budget's Federal funding. The spike in "General Government" that occurred in FY2010 that has been gradually drawn down since then falls largely under the heading of grants and assistance offered by the Department of Labor and Training -- presumably unemployment insurance related. It is interesting to note that increased spending under "human services" makes up much of the difference this fiscal year and next.

The Unmentionable Solution to the Fiscal Cliff

Watch public policy even for a short while and the trick becomes evident. Whether we're talking my hometown of Tiverton, Rhode Island, (population 15,780) or the federal government, the maneuver is to claim increasing amounts of power and make sure that's the one thing not on the table when something has to give.

Thus, we get massive government interwoven like a terrible tumor around the vital organs of our economy. When the predictable illness follows, the two operations suggested, as if in opposition, are cuts on the spending side and increases on the revenue side.

Either, we're told, is apt to drive the patient into shock. The government can take money out of the economy through taxes, or it can stop putting money into the economy via cuts. That's not much of a choice.

Continue reading on the Ocean State Current...

Sequestration Cuts....aren't

Veronique de Rugy (h/t) explains the supposed "cuts" in sequestration:

The sequester is an automatic budget enforcement mechanism triggered when the Joint Select Committee on Deficit Reduction fails to enact legislation to reduce the deficit by $1.2 trillion over the sequestration period. Instead of simply passing appropriated funds to the agencies, the U.S. Treasury “sequesters” the difference between the cap set in the BCA and the amount appropriated.

Changes in spending from sequestration result in new budget projections below the CBO’s baseline projection of spending based on current law. The federal government would spend $3.62 trillion in the first year with sequestration versus the $3.69 trillion projected by CBO. By 2021, the government would spend $5.26 trillion versus the $5.41 trillion projected. Overall, without a sequester, federal spending would increase $1.7 trillion (blue line). With a sequester, federal spending would increase by $1.6 trillion (red line).

While the sequester projections are nominal spending increases, most budget plans count them as cuts. Referring to decreases in the rate of growth of spending as “cuts” influences public perceptions about the budget. When the public hears “cut,” it thinks that spending has been significantly reduced below current levels, not that spending has increased. Thus, calling a reduced growth rate of projected spending a “cut” leads to confusion, a growing deficit, and an ever-larger burden for future generations.

So don't believe the hype from government, contractors or others. There will still be more borrowed money for everyone. Ain't that just great?

Rhode Island's Decidedly Non-Austere State Budget History: (Third and Final Update)

As the state budget goes before the full Rhode Island House today, here are a few graphics showing how this year's spending fits into the longer-term pattern of Rhode Island state spending. This first graph shows a slight breather, in terms of current dollars, in the continuing growth in state budgets that has been occurring for over a decade. ("Current dollars" is the formal economics term for amounts spent at the time they were spent, e.g. when your grandparents you that the newspaper only used to cost a nickel, they are telling you what the price of a newspaper was in current dollars).

One point however, related to the recent news about layoffs at the Department of Labor and Training: If you examine the DLT budget, you will find its Federal funding dropping $112M between this fiscal year and next, from about $224M to $112M -- following a jump up from about $70M to $330M between fiscal years 2009 and 2010. So in terms of current dollars, all of the "austerity" in this year's budget could be accounted for by reductions in Federal dollars that were known to be temporary from the beginning.

Chart 1:

Chart 2:

Using inflation numbers published by the Department of Labor and Training, spending totals from the past can be expressed in terms of "2012 dollars" (I assumed 2% inflation between this year and next year, for which there is no definitive data available, since it hasn't happened yet). The inflation adjusted totals show the continuation of a pause in the growth of inflation adjusted spending that began in FY2011, if this budget is held to(*), which follows $2 billion in spending growth above the level of inflation that had occurred over the previous decade. Calling this year's budget an "austerity" budget assumes that automatic faster-than-inflation growth in government spending is the norm.

(*) The state actually overshot its originally passed FY2012 budget by about $400M, though a large portion of that came from Federal money, and none was attributed to the state's general revenues.

Chart 3:

The next graph shows the inflation adjusted Rhode Island government spending from general revenues (basically state taxes). The first budget approved during the Chafee administration grew spending by about 3%, adjusted for inflation, relative to the final budget approved during the Carcieri administration.

And if inflation over the next year is in the 2%-3% range, the growth of spending adjusted for inflation will also be in the 2%-3% range (or, more properly, in the 3%-2% range). In terms of current dollars, general revenue spending is budgeted to grow by about $150M next year, or 5% relative to this year, as part of the some-call-it-"austerity" plan.

Chart 4:

The final chart presented in this post shows the Federal dollars included in the Rhode Island budget. Notable features on this chart are the spike resulting from the financial meltdown and associated stimulus, and a suggestion of what a future normal level of Federal spending might look like.

Figures compiled from data available from:

• The Rhode Island House of Representatives Fiscal Staff report on the FY2013 RI Budget.
• Previous year's gubernatorial budgets, archived by the RI Dept. of Administration's Budget Office.

Ted Nesi's Interview with David Skeel on the Basics of Municipal Debt

3 points about Ted Nesi's WPRI-TV (CBS 12) interview with University of Pennsylvania Law Professor and bankruptcy expert David Skeel are worth immediately noting:

1. In the first half of the interview, Prof. Skeel advances that same argument, based on current law, that we at Anchor Rising have been making from a wider historical perspective for a while now -- government has no inherent authority to make promises to trade away that which it does not possess...

   DS: The question is if a city or a state makes a pension promise, but does not fund the promises – which has been true in many states in recent years – what exactly is protected in the event of a default or of bankruptcy? A lot of people assume that what’s protected is the full promise, even if there’s no funding behind it.

   Although this is certainly not free from doubt – this is unchartered territory in many respects – my view is that there’s a good argument that what’s protected is the amount of money that’s been set aside. Pension obligations are a form of what we refer to in the law as a property right, and other kinds of property rights are protected up to the value of the property that’s set aside for them. So if somebody has collateral for a transaction, we treat that promise as sacrosanct up to the value of the collateral.

   This portion of the discussion should be of particular interest to those who want to invoke the "police power" as being central to the solution to Rhode Island's government-financing crisis. In particular, a strong case can be made that the future is best served not by expanding the police power to new circumstances, but instead by enforcing the proper limits on the government's appropriations power, an idea implicit in Prof. Skeel's argument, i.e. the government cannot legitimately promise everything because it does not own everything.

2. Towards the end of the interview, Prof. Skeel explains that one possible first-cut common-sense response to the idea of a bond default -- if there's a real price to risk, then bondholders should understand that there's a real possibility of not getting every payment -- is essentially correct...

   TN: The argument I always hear back here is that Rhode Island governments can’t operate without being able to borrow money, and that without this protection we could be cut off from the bond markets. What do you make of that argument?

   DS: I disagree with the assumptions underlying the argument, which is that if you don’t completely protect bondholders all possibility of borrowing will disappear. I just don’t think there’s evidence of that. The bond market view tends to be if you do anything that prevents us from getting 100 cents on the dollar, the world is going to come to an end. And my view is, there’s just no evidence of that. The evidence is really to the contrary – healthy municipalities will pay less and have better access to the bond markets than sick ones, and the restructuring of one city is a lot less likely to have contagion effects on other cities in those states than people in the bond market tend to believe.

   I just don’t find these kinds of arguments compelling. For instance, Greece is restructuring its bond markets severely right now – the bond markets have not shut down in Europe.

3. Finally, Newt Gingrich and Rick Santorum would like the media and academia a lot more, if every interaction between media and academics covered the details as clearly and concisely as this interview does.

Balanced Budget Amendment Coming up For a Vote in Congress

Part of the deal made earlier this year to increase the Federal debt-ceiling included taking votes in both the House and the Senate by December 31 on a balanced budget Constitutional amendment. The House is expected to take its vote by tomorrow. The main provisions of the the version of the amendment expected to be considered are...

1. A requirement that the President submit an annual balanced budget to Congress.
2. A 3/5 vote requirement, to spend more in outlays than is taken in and receipts in any given year (with borrowed money not counted as "receipts", nor repayment of debt principal counted as an outlay).
3. A 3/5 vote requirement, to raise the debt ceiling.
4. A requirement that any bill to raise revenue be approved by a rollcall vote.

The complete text of this year's amendment is below the fold.

Rhode Island residents may be particularly interested in the differences, which are not major, between the current proposal and the balanced budget amendment that Senator Claiborne Pell voted in favor of in 1986…

1. In the current version, votes to raise the debt ceiling or to deficit spend in a given year must be by roll-call.
2. The exemption of borrowed money and repayment of debt principal from receipts and outlays wasn't in the 1986 version.
3. The 1986 version expressly allowed the President to submit an alternate budget where outlays exceeded receipts, in addition the balanced budget.
4. The 1986 version allowed balanced-budget requirements to be waived "for any fiscal year in which a declaration of war is in effect". The current version extends that to any year where the U.S. is "engaged in military conflict".

I'd prefer the narrower 1986 language limiting the waiver specifically to a declaration of war, and the alternate budget provision was a reasonable idea, but none of the changes make the current version of the bill unworkable, and its spirit remains the same: look at what it would take to balance the budget each year; do not assume borrowing to cover debts is automatic; make sure that votes on decisions to raise taxes, to borrow money, and to spend more than can be collected are recorded, so that the citizens have the information they need to hold Senators and Congressman accountable for their actions.

Despite the fact that this is a very mild version of a Constitutional-level budget balancing process, prepare to hear arguments from the fiscally-insane wing of the Democratic party that boil down to the idea that the Federal government cannot possibly function if the President uses a part of the Federal bureaucracy at his or her disposal to consider how to balance the budget, and that it's unreasonable to require a 3/5 vote of Congress when the government wants to spend more than it takes in.

Continue reading "Balanced Budget Amendment Coming up For a Vote in Congress"

Claiborne Pell Was a Fiscal Extremist, According to Today's Democrats -- He Supported a Balanced Budget Constitutional Amendment

In September, Rhode Island State Democratic Chairman Edwin Pacheco staked his party to an aggressive stand against adding a balanced budget amendment to the United States Constitution, characterizing such an amendment in an official press release as "extreme economic policy". But support for Federal spending-with-no-ending has not always been the singularly dominant position amongst Rhode Island's Democratic leaders that it is today. At a previous time when the Federal budget deficit had grown to unprecedented levels, at least one prominent RI Democrat gave his unambiguous support to a balanced budget constitutional amendment, in a year when it had a realistic chance of passage. That Democratic leader was United States Senator Claiborne Pell.

In 1982, Senator Pell voted against a balanced-budget amendment that passed the Senate by a vote of 69-31. (The amendment later failed to pass in the House).

By 1986, Senator Pell had changed his position and voted in favor of sending a balanced-budget amendment to the states for ratification. The amendment lost by a single vote, 66-34 (2/3 required for passage). The amendment that Senator Pell voted for -- and that the present chairman of the RI Democratic Party would presumably find "extreme" -- read...

SECTION 1. Total outlays of the United States for any fiscal year shall not exceed total receipts to the United States for that year, unless three-fifths of the whole number of both houses of Congress shall provide for a specific excess of outlays over receipts. The public debt of the United States shall not be increased to fund any excess of outlays over receipts for any fiscal year, unless three-fifths of the whole number of both houses of Congress shall provide, by law, for such an increase.

SECTION 2. Any bill to increase revenue shall become law only if approved by a majority of the whole number of both Houses of Congress by rollcall vote.

SECTION 3. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that fiscal year in which total outlays are not greater than total receipts. The President may also recommend an alternative budget in which total outlays exceed total receipts, which shall be accompanied by a detailed explanation of the need for such excess.

SECTION 4. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect.

SECTION 5. The Congress shall enforce and implement this article by appropriate legislation.

SECTION 6. This article shall take effect for the fiscal year 1991 or for the second fiscal year beginning after its ratification, whichever is later.

In 1992, Senator Pell reiterated his support for adding a balanced budget amendment to the US Constitution, voting in favor of a non-binding sense-of-the-Senate resolution calling for its passage.

By 1994, Senator Pell had changed positions once again and voted against two separate versions of a balanced budget amendment offered that year. During the floor debate in 1994, the Senator explained how his thinking had evolved over the preceding decade. Here is an excerpt, from the C-SPAN archives...

The intensity of the debate on the balanced budget amendment--and to a degree my own reaction to it--varies in proportion to the magnitude of deficits in the Federal budget over the last 12 years...

[In 1986] we were 2 years into the second Reagan administration and deep into a period of institutional deadlock between an executive branch that would not agree to fund programs and a legislative branch that often was not disposed to cut them. The deficit that year had risen to $221 billion.

The Senate that year narrowly failed to approve a balanced budget amendment, notwithstanding the fact that many of us--myself included again--this time felt that the institutional deadlock was approaching such drastic proportions that a constitutional solution might be the only way out of our dilemma...

Then, in 1992, things began to change for the better....As a percentage of gross domestic product, the fiscal year 1995 deficit is projected at 2.5 percent, down from 3.5 percent for fiscal year 1994. And it is expected to stabilize at 2.3 percent for fiscal year 1996-99. This is a significant figure because it shows that the deficit is very small relative to overall economic activity and the economy thus has substantial capacity to absorb the effects of deficit spending, albeit at levels which for other reasons certainly must be reduced.

Today, annual deficits run-up by the Federal government are much larger than the figure of $221 billion cited by Senator Pell in his explanation of his vote in favor of the 1986 balanced budget amendment. 2011 will be the third year in a row where the Federal deficit exceeds $1 trillion dollars, with no return to 1986 levels anticipated (in inflation adjusted dollars) in the next five years projected by the Office of Management and Budget.

In 1994, Senator Pell believed that the projected lowering of annual deficits to 2.3% of GDP made a balanced budget amendment unnecessary. Today, deficits are much larger than 2.3% of GDP and are larger as a percentage of GDP than they were when Senator Pell voted to send a balanced budget amendment to the states. 1986 had been the 3rd year out of 4 that the Federal deficit exceeded 5% of GDP (and in the 4th of those years, it was 4.8%). 2012 will be the fourth consecutive year that the deficit exceeds 7% of GDP (though OMB does project that it will be down to 3.3% of GDP by 2016 -- if you believe that the economy is going to grow by 23% while the percentage of revenue collected in Federal taxes jumps from 15% to 19% between 2010 and 2016).

Senator Pell thought that "institutional deadlock" was a problem in government during part of his tenure in office. This, at least, is something in common with current Rhode Island Democrats. In August, Rhode Island First District Congressman David Cicilline sent out a fundraising letter explaining his vote to raise the Federal debt ceiling as a response to "partisan gridlock". The difference, of course, is that Senator Pell believed that institutional deadlock made it necessary to strengthen constraints on Federal spending, while Congressman Cicilline believes that partisan gridlock justifies autopilot spending increases and unrestrained Federal borrowing -- and contemporary Democratic leaders like Edwin Pacheco believe that the kind of serious consideration Claiborne Pell gave to balancing the Federal budget is "extreme".

Walter Russell Mead on Rhode Island as Athens on the Pawtuxet

You could pick almost any combination of paragraphs from today's post by Walter Russell Mead at the American Interest and come up with an insightful excerpt that describes Rhode Island's problems. Here are the 3 1/2 I will choose...

Because Rhode Island listened to timeserving blue politicians too long, and union leaders and public sector workers lost their grip on any mathematical realities beyond the numbers at the ballot box, the pension system grew more and more out of control. State and local governments lurched into a crisis. Vote yourself a raise, vote yourself a pension: why not...

Let’s be crystal clear about this. To tell a 50 year old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late. Telling those pretty lies is exactly what Rhode Island’s establishment has been doing for some time; it is what Ostrich Party legislators, trade unionists, journalists and governors are still doing across much of the country.

Reasonable reforms could have made things much less painful, but the unions typically threaten to destroy the careers of any politician who tampers with the pension system until the truck actually starts falling over the cliff...

Polarizing politics and demonizing state and local government workers is not a good idea. It is unfair for one thing; it is bad politics for another. Toxic blue model legacy costs are the problem: rigidly bureaucratic government structures, unrealistic costs, years of underfunded pension plans, regulations that choke growth and initiative, outdated progressive ideas about how change works — these are the roots of our problems, not the middle school teacher down the street or the retired post office worker living modestly on a pension that may be underfunded but is hardly a bonanza...

Needless to say, read the whole thing.

Even if it's Amazing, It's not fair, so I hate everything

Trying to figure out this Occupy thing? Right now, this seems to explain it the best (h/t):

Remember this bit by Louis CK (thanks for reminding me, Will)?


Protest song!


...a sultan and student both have iPhone 4s...it's not fair

Overall, much of the logic seems to go something like this (h/t):

ADDENDUM: I put this is all under our "On a lighter note...." category because there is humor in the unknowns surrounding the Occupy movement. Still, there are serious questions that haven't been answered.

Now, a movement that started with no concrete goals as a simple protest of power must decide what to do with some power of its own. Can a leaderless group that relies on consensus find a way for so many people to agree on what comes next? Can it offer not only objections but also solutions? Can a radical protest evolve into a mainstream movement for change?

Unfortunately, from what I have heard of the solutions, they roughly approximate the tongue-in-cheek poster above. In writing about the recent passing of Steve Jobs, Kevin Williamson illustrated that there is a dichotomy:

The beauty of capitalism — the beauty of the iPhone world as opposed to the world of politics — is that...[w]hatever drove Jobs, it drove him to create superior products, better stuff at better prices. Profits are not deductions from the sum of the public good, but the real measure of the social value a firm creates. Those who talk about the horror of putting profits over people make no sense at all. The phrase is without intellectual content. Perhaps you do not think that Apple, or Goldman Sachs, or a professional sports enterprise, or an Internet pornographer actually creates much social value; but markets are very democratic — everybody gets to decide for himself what he values. That is not the final answer to every question, because economic answers can satisfy only economic questions. But the range of questions requiring economic answers is very broad.

I was down at the Occupy Wall Street protest today, and never has the divide between the iPhone world and the politics world been so clear: I saw a bunch of people very well-served by their computers and telephones (very often Apple products) but undeniably shortchanged by our government-run cartel education system. And the tragedy for them — and for us — is that they will spend their energy trying to expand the sphere of the ineffective, hidebound, rent-seeking, unproductive political world, giving the Barney Franks and Tom DeLays an even stronger whip hand over the Steve Jobses and Henry Fords. And they — and we — will be poorer for it.

And to the kids camped out down on Wall Street: Look at the phone in your hand. Look at the rat-infested subway. Visit the Apple Store on Fifth Avenue, then visit a housing project in the South Bronx. Which world do you want to live in?

(Non)Funding of the American Jobs Act: "Paid For" Doesn't Mean Someone Else Will Find the Cuts!

Usually, when Democrats on the national level propose something that is misguided, irresponsible, stupid or - worst of all - presuming of stupidity on the listener's part, it goes in one ear and out the other. As this item from the President's speech Thursday night is all of the above in truckloads, however, there simply isn't room to let it pass.

And here's the other thing I want the American people to know: the American Jobs Act will not add to the deficit. It will be paid for. And here's how:

The agreement we passed in July will cut government spending by about a trillion dollars over the next ten years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I'm asking you to increase that amount so that it covers the full cost of the American Jobs Act.

So it's funded not because the President found a new "revenue" source or because he himself made room for it in the budget by identifying cuts. It's funded because he assigned someone else - i.e., Congress - the task of making the requisite budget cuts???

He goes on to say,

And a week from Monday, I'll be releasing a more ambitious deficit plan -– a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.

Again, absolutely no specifics at this point. But you go ahead, Congress, and identify half a trillion in budget cuts for my initiative. That way, you can get the political blame for those cuts and I'll get the praise when the initiative is implemented.

This is not the proposing of responsible policy or the sharing of a vision. It's the exposition of a fantasy, pure and simple. No amount of Presidential spam

After the president’s jobs speech before Congress Thursday night, his staff sent out 39 e-mails to reporters, each declaring that yet another Obama ally “backs the American Jobs Act,” as the subject lines boasted.

The e-mails came within a 1-hour, 5-minute period between 8:32 p.m. and 9:37 p.m. That’s an average of one every minute and 40 seconds.

can make it otherwise.

Who Pays for Past Mistakes

Generational warfare: It's bound to happen here in Rhode Island with the pension crisis. It's also happening nationally on the budget deficit debate with the new Super Congressional panel set to convene. Education Policy wonk Rick Hess offers his perspective:

You're either with the kids or with those rushing to the ramparts to defend retiree entitlements. So, which is it?

Consider the President's vague calls last week to spend billions more on school construction and preserving school staffing levels (which would've been more compelling if he had offered any inkling as to how we might pay for it). Obama finds himself unable to do more than offer marginal, dead-on-arrival programs because the feds have spent more than half the budget just mailing checks to retirees, covering health care bills, and paying interest on the accumulated debt. Everything else—schools, financial aid, the FBI, defense, transportation, the environment, NASA, foreign aid, you name it—has to make do with what's left.

As Julia Isaacs at the Brookings Institution has pointed out, the federal government now spends about $7 on seniors for every $1 it spends on children....Do we really think it's a good idea to spend half of all non-interest spending on making retirement ever more comfy?

Past or future? Which will it be? He provides an important breakdown of we pay for current Medicare spending:

[T]oday's retirees have contributed taxes that amount to less than half their Medicare outlays. Today's Medicare payroll tax doesn't fund Medicare--it funds only Part A (hospital expenses). Premiums cover just 25 percent of Part B (doctor treatments and visits). And premiums for Bush's Medicare drug program (Part D) cover just 10 percent of the cost. The rest of the hundreds of billions in outlays for these programs is vacuumed out of general revenue. (See here for a good breakdown on Medicare funding.)

And Social Security:

Social Security has the government reflexively spending hundreds of billions to mail out monthly checks to the wealthiest segment of the population, without an ounce of thought as to whether that's the best use of borrowed funds (the famed Social Security "trust fund" being, you know, nonexistent). The Social Security Administration reports that more than 20 percent of those 65+ have incomes over $65,000 a year. In a nation where median household income is in the $40,000s, is it really radical to rethink how much we mail to these households every month?

As for taxes:

Toss in all of the tax deductions that President Obama called for eliminating this summer, including the corporate jet deal, and you address another $400 billion over 10 years, or less than 2 percent of the shortfall. So, just keeping the deficit from exploding will involve all those taxes and trillions more in cuts. Those demanding substantial new spending then need to raise hundreds of billions beyond that, through additional cuts or tax increases....Even with hefty tax increases, protecting existing entitlements ensures that we won't have much available for schools, colleges, or anything else.

He urges education advocates to step up to the plate and take on the AARP and similar groups so that more money can go towards kids and education.

In short, it's possible to get our house in order, free up dollars for schooling, and shift dollars towards youth. But doing so requires facing down the massive, intimidating seniors' lobby.

Shared sacrifice involves asking Baby Boomers and retirees to step up and, you know, sacrifice. It doesn't mean holding harmless the generations who voted themselves free stuff through the good times and doesn't rely almost entirely on raising taxes and curtailing benefits for the under-40 set.

Hess' bailiwick is education and his goal is to increase funding for it. Regardless of whether you agree or disagree with Hess' priorities, his argument helps to lay out the choice that needs to be made: should the people who benefited or made the mistakes in the past be held most accountable for those mistakes? Or should their kids and grandkids?

The Protest Against the Debt Ceiling Deal

Yesterday, MoveOn.org and several like-minded local groups held a protest at the statehouse. According to Philip Marcelo of the Projo, the theme was opposition to the debt-ceiling deal signed into law last week.

Immediately following the Tax Day Tea Party rally this past April, commentary was offered, in this and other forums, that not enough people had attended for the event or its message to be considered significant. (The commentary was usually offered from people who wouldn't agree with the Tea Party's message no matter how many people attended, but I digress.)

For purposes of comparison, I stopped by yesterday's protest, to compare crowd sizes. Here's the debt ceiling protest...

The photograph above was taken at roughly the same angle as this photo from this year's April 15 rally...

But back to yesterday (both literally as well as metaphorically, in terms of policies being advocated). Let's move in a little closer...

...and a little closer still...

...to get a more detailed picture of the "crowd".

So what do the people who have confidently claimed that the Tea Party rally was too small to be considered as a reflection of a movement of mainstream importance have to say about the debt-ceiling protest?

One other note: At the time I arrived, one of the protesters was reading a message from First District Congressman David Cicilline, written specifically for this event. As the 2012 campaign progresses, it will be interesting to see if comparable (or larger) size events receive similar personal attention from Congressman Cicilline, or if organizations arguing against major Federal spending reforms hold a special place in the Congressman's heart.

Majority of Americans Understand What Government "Cuts" Really Mean

I've complained about the "cuts" game played by the government. I'm happy to learn that most people get it:

Congress and presidents have been playing the “spending cuts” game for years, but most voters know what they’re really talking about.

Sixty-two percent (62%) of Likely U.S. Voters understand that when Congress mentions future spending cuts, they’re really saying the growth in government spending will be less than planned. A new Rasmussen Reports national telephone survey finds that just 19% think it means spending next year will be lower than this year’s. Twenty percent (20%) aren’t sure which is right....

Interestingly, those who are pushing hardest for government spending cuts are the ones who are most aware of what those cuts really mean. Two-out-of-three Republicans and voters not affiliated with either party – 67% - recognize that congressional promises of spending cuts mean the growth of spending will be less than planned, but just 51% of Democrats share that awareness.

Why does the government call these reductions cuts? (Hey, I know you know, but I never tire of this explanation!)

The federal government has been using a process known as Current Services Budgeting since the 1970s to report spending changes. That means the “baseline” for spending is assumed to include all the spending growth that is already built into the federal budget. Much of that growth comes from what the Congressional offices call “uncontrollable spending,” which includes entitlement programs and accounts for the vast majority of all federal spending.

To see the impact of Current Services Budgeting, assume that government is projected to grow by 10% from one-year to the next. If that spending grows by just 5%, Congressional scorekeeping would consider that to be a 5% cut. However, in the real world, an increase in spending by 5% is an increase in spending no matter how you spin it. To be precise, the official numbers would consider that to be a reduction in “current services” but politicians have long since lost that distinction.

Yup, to them and the mainstream media it's a cut.

What Was Standard and Poor's Expecting to Happen?

This is from Page 3 of the official statement from Standard and Poor's on their downgrade of the US credit rating...

Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.

I suppose you could say that the Republicans had the Ryan plan and the Democrats had the "Cicilline plan" (borrow today and let somebody else worry about it tomorrow), but the Ryan plan never got close to passing in its original form and the "Cicilline plan" is hardly comprehensive. Ultimately, any change away from business as usual brought about by the debt-ceiling and budget deal will be a result of, not in spite of, the Tea Party standing their ground during the sometimes contentious legislative process.

Over the past several years, I've heard the opinion offered in multiple discussions that we will know that the government has become serious about fiscal reform when it creates the kind of commission used to decide on military base closings to develop a plan. The distinctive feature of the base-closing process is that the work of the commission must be approved or rejected in its entirety; this week's budget-deal was a full step in that direction, with its creation of the "super-committee" to create an unamendable deficit reduction program (along with an enforcement mechanism of automatic budget cuts in many Federal departments if the committee fails to act, or if a balanced budget is not passed by both Houses of Congress).

Obviously, the base-commission structure wasn't any factor in the Standard and Poor's analysis. So what exactly is in the "comprehensive fiscal consolidation program" that the S&P analysts thought Congress fell short of?

How Surprising is it that the Dow Dropped After the Debt Ceiling Deal?

I saw a headline from a CNN newscast from last evening that read "Dow Drops Despite Debt Deal". With the disclaimer that you don't want to attribute too much significance to a single day's movement in the stock market, I don’t see the drop as paradoxical or even random.

The first chapter of any book on technical finance will tell you that stocks and bonds move in opposite directions. When "the market" feels investment opportunities in businesses are likely to pay off, money moves towards stocks and away from the assumed safety of bonds; when "the market" feels there are fewer good business investment opportunities, money moves towards bonds.

The down-to-the-wire debt ceiling negotiations jumbled the traditional logic and created a perception that bonds weren't as safe as usual. The eventual deal mitigated the worries.

So, if I may borrow Justin's juxtaposition from a previous post, it would not be surprising if a restoration of confidence in the ability of the Federal government to make its debt payments on time led “the markets” to wager that investing in the government's ability to tax is once again a better bet than actual investment in productive enterprise.

Who says that markets are rational all of the time!

Beating the "Budget Cuts" Horse Unicorn

I know I've beaten and flayed this particular horse unicorn (a unicorn is a mythical creature, just like actual government "cuts"), but I continue to stress that there are no "cuts" in the recent deficit deal because it undermines the hyperbolic sturm und drang being propagated by liberals like Froma Harrop who are calling Tea Partiers "terrorists" for supposedly "holding America hostage" while demanding "cuts": Again, and slowly, there are no "cuts" to the budget in the deficit ceiling deal.

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

That is the reason that the ratings agency Standard & Poor’s and its rivals still are threatening to remove the United States from their lists of risk-free borrowers, although the other agencies, Moody’s and Fitch, both said Tuesday that they would watch and wait for now.

That from the NY Times. Reason's Jacob Sullum gives a bit more detail:

The debt deal, which authorizes the federal government to borrow another $2.1 trillion on top of the $14.3 trillion it already owes, supposedly includes "$2.5 trillion in cuts." But as Sen. Rand Paul (R-Ky.) emphasizes, those are cuts from a projected baseline in which the national debt grows by $10 trillion during the next decade, which means "the BEST case scenario is still $7 trillion more in debt over the next 10 years."

Paul also notes that the vast majority of the "cuts" are not scheduled to take effect for years, raising serious doubts about whether they will happen at all. "Why do we believe that the goal of $2.5 trillion over 10 years…will EVER be met," he asks, "if the first two years' cuts are $20 billion and $50 billion?"

Well, you might say, the debt deal is only the first step. But even at their boldest, House Republicans do not envision a federal government any smaller than it is now. Under the supposedly radical budget plan approved by the House in April, Cato Institute budget analyst Chris Edwards calculates, federal spending would rise by 34 percent during the next decade, compared to the 55 percent preferred by Obama. The budget would not be balanced until 2030, while the role of the federal government would be essentially unchanged.

Imagine the rhetoric if Tea Partiers were able to enact real cuts? Maybe we'll find out after 2012.

Debt Ceiling Deal Passes House

The debt ceiling and budget deal has passed the House, with Congressmen James Langevin and David Cicilline both voting in favor.

Keith Hennessy has a good summary of what's contaned in the deal, available here (h/t Instapundit).

Is this the Debt Ceiling Deal That Will be in the News Tomorrow?

Kathryn Jean Lopez of National Review Online has posted an outline of a debt ceiling and budget process deal that Speaker of the House John Boehner sent to the Republican caucus this evening.

History Will Begin to be Made this Week

This is very likely going to be a memorable week in the history of self-government and public finance.

In addition to the Federal debt-ceiling issue which needs to be resolved by Tuesday in order for the Federal government to be able to keep paying everything it owes without resorting to various less-than-scrupulous financial gimmicks, the receiver for Central Falls may make an announcement as early as tomorrow that he is filing for bankruptcy. As Philip Marcelo wrote in today's Projo...

The square-mile city would be entering uncharted waters as federal municipal bankruptcy has been rarely tested nationally.

Central Falls is not sui generis; it is an advanced case of a situation faced by many cities and towns across the United States, and what happens with CF is going to contribute very visibly to a body of legal, policy and political knowledge about what to do and/or what to avoid when twenty-first century communities run out of money needed to pay for decisions made over preceding decades.

But the most important thing to keep in mind is that nothing ends this week. The reckoning (to use Matt Allen's word) of the fiscal crisis created by the political and social changes of the past 45 to 80 years, depending upon if you want to place the beginning of the problem with the New Deal or the Great Society or somewhere in between, is just beginning and what our society will look like as a result, for better or for worse, will be decided more by the reaction to this week's decisions than by the decisions themselves.

Finally, one symptom visible in Central Falls of the problem that is nationwide is captured beautifully by the quote from freshman state Rep. James McLaughlin in the Projo's CF story...

"They’re going to file for bankruptcy," said state Rep. James N. McLaughlin, a Democrat who represents a portion of the city and is opposed to [filing for bankruptcy]. "All avenues have not been exhausted. It is a rush because they do not have any money."

If our politics keeps producing a large number of elected officials who believe that just because we have no money doesn't mean we're bankrupt, we're basically doomed.

No Debt Ceiling Vote Tonight

Various sources tweeting from Captiol Hill are saying there will be no debt ceiling vote tonight.

Robert Costa from National Review Online: Top GOP member confirms no vote tonight, still working on whip count and changes. Weary mood among leadership. Not lost, but no slam dunk

However, there's some kind of activity with the House Rules committee scheduled for later tonight...

Chad Pergram from Fox News: Rules Committee will convene around 11 pm, per sr. House source.

UPDATE:

An apparent correction of the above, the House Rules committee will meet at 11:00 am tomorrow, concerning the debt ceiling bill, not at 11:00 pm tonight...

Chad Pergram of Fox News: Rules to meet at 11 am...to give them the ability to write a new rule tomorrow to govern a tweaked bill. No idea what tweaks are.

Understanding the Debt Ceiling

0. Just like any other organization, the Federal Government is subject to laws of economics, probability and mathematics that it can’t change.

1. Every organization, including the Federal Government has a cash flow, related to but different from an annual summation of revenues and expenditures. For example, your local bridge club may have $600 in revenues and $600 in expenditures for the year, but if the revenue comes in at a rate of $50 per month and $300 has to be paid for the big event in February, the bridge club needs to find a way to get extra revenue up front.

2. Of course, if you have $600 in revenues and $800 in expenses each year, your organization has more than just a cash flow problem; it has a structural imbalance in its budget. Eventually, the organization will run out of money to pay for anything. If no one is watching carefully, the structural imbalance will show up as a cash-flow problem in the bridge club’s day-to-day operations, even though the problem is bigger than just the cash-flow issue.

3. On August 2, 2011, according to all reasonable estimates, the Federal Government’s cash flow will go negative, i.e. there won’t be enough money in the U.S. Treasury to cover the government’s debts. A group called the Bipartisan Policy Center, which was founded by a respectable mix of graybeards and who seem to be doing reliable and understandable work, has published a day-by-day analysis by major line item of what is expected to come in and what is scheduled to be paid out in August.

4. The anticipated August cash-flow crunch does not mean that the Federal government will immediately default on its loans. Working from BPC numbers, the government is expected to have $172.4 billion in cash available in August after the 2nd, while interest payments on debt will amount to about $29 billion. In total, the Federal government is expected to have enough money to pay only 56% of what it owes in August. Raising the debt-ceiling would allow the government to borrow the money to cover the immediate cash-flow problem. For how long would be determined by how high the limit is raised.

5. If the debt ceiling is not raised, we are into uncharted territory. Does the Federal government pay off bills in some kind of "order that they come in" until the money runs out, or does Congress or the executive branch make decisions about who gets paid?

6. If you examine the historical numbers in the bipartisan report (pg. 13), you see that the cash-flow deficit (minus borrowed or other up-front money) in this particular August is not significantly different from previous recent Augusts. This means that if the only thing that happens in the next couple of weeks is a raising of the debt ceiling, government will just keep paying out more than its takes in, until the same cash-crunch as a symptom of a structural imbalance recurs, but with an even larger debt. Borrowing forever and never paying it off cannot be infinitely sustained, even by the government; see point 0 as to why. Raising the debt ceiling in isolation, aka the David Cicilline Providence plan of keep-borrowing-then-run-away, is not a viable solution.

7. According to the BPC’s numbers and various news reports, the $111 billion dollars in spending cuts in the “cut, cap and balance” plan passed by the House (but rejected today by the Senate) – even if it all could be implemented in a single month, which is doubtful -- would patch less than one month of the government’s current cash flow problem (score one for commenter jgardner03). However, the fact that big spending cuts would be needed to bring the budget into balance is not a reason to say nothing should be cut.

8. Here’s the outline of a possible solution I would tend towards at the moment: Raise the debt ceiling enough to cover the next six-months of cash flow for the government, in conjunction with the $111 billion “cut” in spending and implementation of the GDP-based spending “cap” passed by the House. Then, over the next six months, Congress would work on a program to start hitting the spending caps, and to pass a balanced budget amendment. No further increase in the debt ceiling would be on the table, unless one or maybe both of the preceding were passed by Congress.

What is Cut, Cap and Balance?

The Republican "Cut, Cap and Balance" plan for addressing the tendency of government budgets to increase towards infinity passed the House yesterday. President Obama has said he would veto at least an earlier version, and Rhode Island Representatives James Langevin and David Cicilline both voted against it.

Title I of the bill is the cut, which would be an immediate cut in the 2012 Federal spending total Various news reports place the size of the cut at $111 billion. The direct language in the bill says that spending on Social Security, Medicare, veterans’ benefits, net interest on the debt would be exempt from cuts, and spending on the global war on terrorism would have its own cap.

In March, Brian Riedl of the Heritage Foundation, using numbers from the Office of Management and Budget, estimated a total of $3.7 trillion in outlays to be made by the Federal government in 2012 (including interest on the debt). According to his numbers, the exempted programs account for about $1.8 trillion, which means that the $111 billion in cuts will have to come from a total of about $1.9 trillion from the remaining programs, a cut of about 6%.

Title II is the cap: An annual federal spending cap, as a percetange of total GDP, would be phased in. The schedule would be...

21.7 percent for fiscal year 2013;
20.8 percent for fiscal year 2014;
20.2 percent for fiscal year 2015;
20.1 percent for fiscal year 2016;
19.9 percent for fiscal year 2017;
19.7 percent for fiscal year 2018;
19.9 percent for fiscal year 2019;
19.9 percent for fiscal year 2020;
19.9 percent for fiscal year 2021.

If I understand blogger and former director of the President's National Economic Council Keith Hennessy correctly, the caps would be enforced by (almost) across-the board reductions in Federal spending needed to hit the targets, if an initial budget was submitted that exceeded them. It is "almost" across the board, because payments for military personnel accounts, TRICARE for Life, Medicare, military retirement, Social Security, veterans, and net interest would be exempt from the automatic reductions.

Title III is the balance: An increase in the debt-ceiling of the United States would be triggered by the passage of a balanced-budget constitutional amendment by both houses of Congress. (It would not become the law of the land, of course, until ratified by 3/4ths of state legislatures after that).

Arguably, the "balance" is a radical approach to the problem, at least in a procedural sense -- asking for a constitutional amendment to solve an immediate problem is a tall order. But that issue aside, what's radical about the "cutting" and "capping" provisions?

"Rhode Island's Rising Pension Tide": Some Questions for Gary Morse

At the conclusion of the Providence Republican City Committee's event on "Rhode Island Rising Pension Tide" last Thursday, I was able to ask presenter Gary Morse (no relation) a few questions about specific numbers and predictions for the future.

Question: I've heard the claim made the pensions are superior to 401(k)-type plans, because aggregating all of the money into one place allows for a higher rate of return. Is that true or not?

Gary Morse: "...if you had invested in a balanced portfolio, when you came in as a teacher in 1980, you would have outperformed the investment rate that you got from the state..."

Audio: 39 sec

Q: Earlier in your talk, you mentioned the lowering of the discount rate from 8.25% to 7.5%, and some skepticism about 7.5% being accurate...

GM: "...the State Treasurer's office polled their investment advisors, and they said there's only about a 42.5% chance that they're going to make 7.5%..."

Audio: 35 sec

Q: Knowing both the numbers as you do and being aware of the politics of the situation, if there was one thing, one message that you could give to everyone who is participating in this debate and make sure that they really knew, what would that be?

GM: "The message is, we needed an inspector general..."

Audio: 1m 4 sec

Q: What is a reasonable expectation that people should have about the planned legislative session fall where pension issues are supposed to be addressed?

GM: "I don't think we are going to see anything substantive come out of the General Assembly this fall".

Audio: 34 sec

Debt Ceiling Stand-Off: What Does Compromise Look Like When We Already Borrow 43 Cents of Every Federal Dollar Spent?

This staggering item stands out from Mark Steyn's (characteristically excellent) column of today.

When the 44th president took office, he made a decision that it was time for the already unsustainable levels of government spending finally to break the bounds of reality and frolic and gambol in the magical fairy kingdom of Spendaholica: This year, the federal government borrows 43 cents of every dollar it spends, a ratio that is unprecedented.

What an absurdly irresponsible and dangerous position this and the prior Congress and President have placed us in.

President Obama, around the same time he made it clear that he would cut social security checks for seniors and the infirm before he would cut funding for high speed rail (and other boondoggles) or welfare benefits for the healthy, called for compromise.

Setting aside that legislative "compromises" got us to this point, how can there be talk of compromise when 43% of your annual operating funds are borrowed? Doesn't any kind of "compromise" still leave us in the area of unsustainable spending?

"Rhode Island's Rising Pension Tide": The History that Makes the Future

At a forum sponsored last evening by the Providence Republican City Committee, Gary Morse (no relation), the primary advisor to 2010 Republican Gubernatorial candidate John Robitaille on the subject of pension issues, delivered a talk titled "Rhode Island's Rising Pension Tide". The Providence Republicans promised that this would be a non-partisan forum, and Mr. Morse delivered.

Mr. Morse used a significant portion of his speaking time to go into serious detail about the evolution of pension law and of pension systems in the US, and the resulting constraints that will shape the possible choices as we move forward...

1. The meaning of "the discount rate" and its value.	Audio: 1m 11 sec
The troubles with the discount rate, including spiking.	Audio: 1m 54 sec
How much does spiking cost the taxpayers?	Audio: 32 sec
2. The changes to pension law and pension practice that occurred in 1991 and 2006.	(1) Audio: 1m 19 sec; (2) Audio: 1m 56 sec; (3) Audio: 2m 58 sec
3. How what has happened in a place called Pritchard, Alabama could impact Chapter 9 bankruptcy proceedings in a place called Central Falls, Rhode Island.	Audio: 2m 45 sec
4. Some suggested reading, if you're interested in how the courts might decide the pending Council 94 lawsuit.	Audio: 42 sec
5. The role that debt played in the Suez crisis of 1956, and its parallels to today.	Audio: 1m 45 sec
6. A not-very-rosy prediction for everyone's future.	Audio: 1m 32 sec

Liveblogging “Rhode Island’s Rising Pension Tide”.

Good evening. I will be liveblogging the presentation being made by Gary Morse (no relation) this evening on the subject of Rhode Island’s pension problems, sponsored by the Providence City Republican Committee…

Gary Morse speaking:

Rhode Island is number 50 in unfunded pension liability.

Mr. Morse wants to dispel the notion of the greedy state worker and the greedy teacher.

Retirements pre-1990 in the private sector were much better than in the public sector.

In 1985, Bank of America created a cash-balance pension plan. The structure, however, violated age discrimination laws.

As a result, one sentence was added to Federal law, making BoA’s practice legal. After this law was passed, companies began replacing their defined benefit pension plans with cash-balance plans.

The big money was in rolling people from defined benefit plans into the new cash benefit structure. People were told they would get their pensions, if they made it to age 65 -- and then bunches of them get laid off in their 50s.

In 2006, the Federal government allowed anyone to convert a pension plan into a cash-balance plan. Benefits are not based on the final three years, but what you’ve earned over your entire career.

Still, up until 2007, public private pensions were clearly better than public sector deals. (Backfill: The correction here was a pure typo)

Actuaries are overlooking the effects of end of career spiking in their calculations.

The discount rate will go even lower than 7.5%.

Spiking of 10% in the final years leads to a 25% bigger taxpayer contribution.

(The MERS plan disallows spiking, by the way. That’s why it is in better shape than other pension plans).

Mr. Morse discusses Central Falls.

Based on the case of Pritchard, Alabama, it is possible that CF pensioners could not receive their checks for a year or more. In CF there is almost no money in the pension fund. A judge can terminate their payments, after they declare chapter 9.

What will the headlines read, if retirees have their pensions terminated? Will the GA step up and find the money for them? What ever the answer is, CF will likely be the precedent.

I’m pausing, while Mr. Morse is taking various and sundry questions…

Pension liability is 10% of GDP GDP per-capita in Rhode Island. The US average is 4%. (Backfill: Thanks to the speaker for pointing out my error here)

So what can we do about this problem?

If Rhode Island had maintained a basic pension system without the extra perks, this problem would not have been created. The system needs to be stripped down to a basic pension plan.

End spiking.

We have to assume slow investment growth, and adjust the discount rate accordingly.

There isn’t enough money in the Rhode Island economy to carry our current debt load.

Mr. Morse is taking more questions from the audience. More detail to follow...

It's the cuts, stupid

It's tedious to follow the debt ceiling/budget deficit wrangling, I know. Around here, we have the ProJo trumpeting tax increases as the "obvious fix" and telling the Republicans "to do what grownups do" while explaining that "the health-care reform law passed last year would have begun to kick in its projected savings for the government" by 2015. Just trust Obama, right? After all, he's proposing $3 in cuts for every $1 in tax increases (or something like that). Really (and a second source)?

Sen. McConnell has been in talks with Obama and Democrats. We wanted to do something serious and big. Yesterday, he asked point blank how much the Biden-led deal would actually cut from next year's budget. Sen. McConnell has been in talks with Obama and Democrats. We wanted to do something serious and big. Yesterday, he asked point blank how much the Biden-led deal would actually cut from next year's budget. The answer he received was $2 Billion, and it's all smoke and mirrors. In exchange, [Democrats] want $1 Trillion in tax hikes. It's not the kind of deal we're at all interested in. We won't accept guaranteed tax hikes in exchange for fantasy future spending cuts. It's not going to happen. We're going to fight like hell to do what we've said we want: Real spending cuts and caps, a vote on a Balanced Budget Amendment, and real entitlement reform. ">The answer he received was $2 Billion, and it's all smoke and mirrors. In exchange, [Democrats] want $1 Trillion in tax hikes. It's not the kind of deal we're at all interested in. We won't accept guaranteed tax hikes in exchange for fantasy future spending cuts. It's not going to happen. We're going to fight like hell to do what we've said we want: Real spending cuts and caps, a vote on a Balanced Budget Amendment, and real entitlement reform.

Got that? $1 trillion in tax hikes now and $2 billion in budget cuts. Yeah, seems fair.

Providence used as example of how "Compensation Monster [is] Devouring Cities"

Steve Malanga looks at the national problem of cities in over their heads (particularly because of pension promises) and uses Providence (and New Haven, CT) as examples:

Cities are also running out of fiscal alternatives to deal with their deficits. Like states...many cities have used one-shot revenue deals, hidden borrowing, and other gimmicks to bolster their finances. The weak economy has lasted so long, though, that these techniques have been exhausted. To balance its 2010 budget, for example, Providence, Rhode Island, borrowed some $48 million (using its fire stations and headquarters as collateral); it also drained most of its reserve fund, which shrank from $17 million to $2 million in just one year. Moody’s Investors Service and Fitch Ratings subsequently downgraded the city’s bond ratings by two notches, essentially ending its ability to use fiscal gimmicks. But Providence still faces a budget squeeze because its retiree costs amount to 50 percent of tax collections.

Nationally, the rate of growth of such local expenditures outpaced state and federal:

Local governments also helped bring on their current budget nightmares by carelessly expanding hiring and wages in recent boom years. In the decade leading up to the 2008 financial crash, the number of workers for cities, towns, and schools increased 16 percent, even though the country’s overall population grew just 12.5 percent. Wages also increased, and, of course, the hiring frenzy made those pension obligations even worse. The result: over the same decade, the total in wages and benefits that public schools paid to teachers and noninstructional staff (to take one category of public-sector worker) jumped an amazing 72 percent, despite moderate increases in student enrollment.

As Ted Nesi highlighted, albeit over a longer period, local government payrolls increased while state payrolls went down. Some argue that the cuts in state jobs have led to the increases at the local level. But, looking at Nesi's chart, it's obvious the local growth doesn't equate to the state reduction.

No Place Screws Up the Concept of Fiscal Responsibility Quite Like Rhode Island Does

The bill being heard today by the House Finance Committee that would give municipal bondholders a "first lien" on local government treasuries (H5376), introduced on behalf of the Rhode Island Department of Revenue and already passed by the Senate Finance committee (S0614), should not be passed into law. Peder Schaefer of the Rhode Island League of Cities and Towns, which has taken a position against the bill, relays a key rationale being advanced by its supporters, as offered at the Senate Finance hearing: "A bond lawyer retained by the Department of Revenue testified that the real reason for the bill was in the event of a Federal Bankruptcy in Central Falls. She testified that if this were to occur, bond holders would not have a first lien on city revenues. She believes that the language of the act would improve the credit quality of all municipal bonds in the state".

In other words, the Chafee administration Department of Revenue believes that a community should not be allowed to drastically restructure its finances to deal with a financial meltdown until the bondholders are taken care of. The bondholders come first, and then everyone else can fight over what's left.

But even those who don't believe that full-blown bankruptcy for Central Falls or any other Rhode Island community is likely should be troubled by this bill.

1. Allowing "first liens" on general tax-revenue does damage to the underpinnings of democratic governance. Tax revenue is taken from the income and/or wealth of taxpayers; revenue doesn't magically fall out of the sky, despite what some government officials might believe. To create a bondholder lien on general tax revenue is to create a bondholder lien on taxpayers, i.e. to grant one group of people long-term, legally enforceable claims on the incomes and wealth of another. This is less compatible with modern than with medieval concepts of government and property rights, and I don't think there's any case to be made that we will do any better than our ancestors did under a system where regular citizens can find a portion of their incomes automatically claimed by a class of people who assert their superior position in the order of things.

2. Consider possibile outcomes, short of Federal bankruptcy, in the case of Central Falls. Section 45-9 of RI law (already in place) gives a receiver the power to issue bonds on behalf of his municipality including the power to use them to fund a deficit or to fund pension obligations. (Regular municipal governments are barred from issuing bonds to cover a deficit; the current bill reinforces that a receiver is immune from this limitation). The receiver cannot break collectively bargained contracts, so union benefits are locked in. And if this bill is passed, bond-holding financiers will be locked in too -- which means that it's the people in-between who will absorb the entire burden of government's inability to rationally finance itself, as everyone else will have to be paid first, before regular citizens get anything from government. Except the bill, of course.

3. I know there is a group of people who believe that financial efficiency is the primary issue that needs to be addressed by government, and who aren't much concerned with the undemocratic system being installed for dealing with Rhode Island's financial mess (I think there may be more than a few of these folks in the Chafee administration). But even those who believe in nothing but the brutal efficiency of markets should be troubled by the imbalance created by this bill. If government writes into law that bondholders have a direct legal claim to money in the public treasury, then there is little to no risk of them not receiving their scheduled payments, and every bond covered by the law should be given the highest possible rating with lowest possible interest. Financiers who want to assert a legal claim over a portion of the tax levy and a right to take money through legal compulsion are not assuming true market risks, and should be paid accordingly.

In a special report put out last November, the Fitch Ratings service concurred with the idea that "first lien" bonds involve very limited risk, because people are required to pay whatever amount government demands of them...

Question: Given the strained finances of most state and local governments, and the likelihood of continued difficult times to come, why do Fitch’s ratings suggest confidence in the ability of most to meet their debt?

Answer:...Other commonly issued municipal bonds are secured by a first lien on sales or income taxes, where there is little if any legal discretion for the taxpayer to choose not to remit the taxes owed to the government.

The attitude reflected above, by the way, is why you should never trust the "financial efficiency is everything" crowd to run the government.

Once upon time, in the Western tradition of democracy and self-government, it was understood that government's ability to compel people to surrender a portion of the fruits of their labor was a critical reason for limiting government claims on the property of the citizenry and to err on the side of the taxpayer. Rhode Island is sadly leading the way in eroding this tradition, asserting instead that government power to compel payment of taxes is a valid reason for allowing groups of people favored by the political class to make near-permanent claims on the livelihoods of average taxpayers.

Looking More Closely at the Plan to Reverse Cuts to Higher Education

A Gina Macris story in today's Projo discusses funding for public higher education in the always-troubled Rhode Island state budget...

Governor Chafee’s budget would add a total of $10 million to higher education, stopping the decline in state support and sparing Community College of Rhode Island students tuition increases. But the system as a whole will still have to cut expenses, even with the tuition hikes at URI and RIC.

...and in a statement earlier this year, University of Rhode Island President David Dooley emphasized past cuts...

"As you all know (Tuesday) night was quite an occasion for higher education in Rhode Island,” Dooley said during a press conference called by the Governor at URI to discuss his plans to reverse years of heavy budget cuts to URI, Rhode Island College and the Community College of Rhode Island.

However, despite the references to state budget cuts or expense cuts, the overall public higher education system in Rhode Island hasn't experienced anything resembling heavy budget cuts in recent years.

1. Total expenses for "Public Higher Education" in Rhode Island are listed in this year's gubernatorial budget document...

	Public Higher Education Total Expenditures
FY 2009 Actual	$842,410,188
FY 2010 Actual	$901,551,465
FY 2011 Enacted	$937,802,389
FY 2011 Revised	$996,080,552
FY 2012 Recommended	$994,958,261

I sense some budget gimmickry going on in the FY2011 and FY2012 numbers, with a budget being set up so that higher-education advocates can claim that they were flat-funded this year -- but not mentioning that the flat-funding year followed a 10.5% increase.

2. The $95 million dollar jump from FY2010 Actual to FY2011 Revised seems to include some Federal stimulus funding. Federal expenditures for public higher education are listed as...

	Public Higher Education Federal Funds
FY 2009 Actual	$3,735,333
FY 2010 Actual	$3,746,126
FY 2011 Enacted	$15,004,667
FY 2011 Revised	$32,657,457
FY 2012 Recommended	$4,594,756

3. Though some of the stimulus funding might have gone towards capital costs, the portion of the RI public higher education budget classified as "operating expenditures" has not experienced any overall budget cuts, heavy or otherwise...

	Public Higher Education Operating Expenditures
FY 2009 Actual	$777,838,168
FY 2010 Actual	$838,415,178
FY 2011 Enacted	$850,217,635
FY 2011 Revised	$887,207,836
FY 2012 Recommended	$926,649,575

To put this into perspective, if it is assumed that the $10 million dollar general revenue increase being proposed by Governor Chafee was taken purely away from "operating expenditures", then the public higher education budget would have to get by with "only" a 9% increase spread out over the last two years.

4. Finally, it is interesting to contrast the increase in public college and university operating costs with the "other funds" figure from the revenue-side of the report, which in the case of public institutions of higher education, is mostly tuition. The first column below is operating expenditures, the second column is revenue from "other funds"...

	Public Higher Education Operating Expenditures	Public Higher Education Other Funds
FY 2009 Actual	$777,838,168	$667,142,742
FY 2010 Actual	$838,415,178	$735,958,261
FY 2011 Enacted	$850,217,635	$758,260,879
FY 2011 Revised	$887,207,836	$799,919,901
FY 2012 Recommended	$926,649,575	$816,021,529

From these numbers, it appears that tuition increases have been keeping approximate pace with operating cost increases, and have not been strongly determined by general revenue cuts.

The point is, as is the case in many areas of the Rhode Island budgets, that sources of growth in spending need to be identified and addressed at some point. Government funding of any program, no matter how worthwhile, cannot forever keep pace with faster-than-inflation growth in costs.

H'mm, What's Steve Laffey Up To?

The following press release materialized in my in-box this afternoon.

With regard to the location - Fort Collins, CO - note that Colorado is the state to which the former Mayor of Cranston Steve Laffey and his family have relocated.

"Fixing America"

The Movie

Fort Collins, CO - April 26, 2011

Stephen P. Laffey and Stephen T. Skoly, in conjunction with The 989 Project, a film and video production company located in Rhode Island, announce a collaborative effort to produce a feature length documentary film entitled "Fixing America" (www.fixingamericamovie.com).

"Our goal is to travel the country with a film production crew and speak with regular Americans as well as politicians, policy experts, and prominent business people on a variety of topics such as trade, China, taxes, energy policy, defense, and balancing the budget, and to ultimately share real solutions for fixing America now, while there is still time," said Mr. Laffey, a former RI elected official, president of a major investment banking firm, and author of Primary Mistake.

Laffey stated, "The political elites from both parties have destroyed our country financially. Since 1971 and the closing of the 'Gold Window' by President Nixon, America has not settled its accounts. By using its status as both the world's reserve currency and the world's military superpower, America has put off the day of reckoning. The financial shenanigans in the USA have grown, along with the power of the financial and political elite, to a point that it threatens our freedom, our financial future, and just maybe the freedom of the free world. Our goal is to show solutions to these issues and how they should be addressed immediately."

Please direct media inquires to: Field Producer Colleen Conley at colleen@the989project.com

Another Tale of Pensions

Once upon a time, a guy named Mike had money accumulated from various sources. He wanted to use some of that money to buy a car. The car was priced at $20,000.

As Mike was preparing to visit the car dealer, a young gentleman named Brian passed by. Brian had also accumulated some money of his own, though not as much as Mike had, mostly because Brian was much younger than Mike. Mike discreetly approached Brian, pointed to the $20,000 car in the showroom, and said "I have a plan that can get a car like that for the lowest cost possible. Do you want to learn how it works?". Brian, always looking for ways to stretch his money, said he did. Mike said, "Give me $5,000 of your dollars". Brian, being a trusting and innocent young fellow, complied.

Mike entered the dealership with his money and Brian's, bought the car for $20,000, and drove off, leaving Brian behind.

Brian patiently waited for the plan to make the purchase less expensive to continue to unfold, but heard nothing further from Mike. Being a resourceful young man, Brian found a way to contact Mike and messaged him to inquire when the next step in the plan to lower the cost of a car would occur. Mike answered "What do you mean by 'next step'? I just bought a $20,000 car by spending only $15,000 of the money I had saved for myself".

Brian, now growing concerned, replied "But I'm now $5,000 further away from a car of my own -- and I'll still have to pay the full $20,000 to get it".

Mike was honestly confused. "I got a $20,000 car for my $15,000. I got it at the lowest cost possible, like I said I would". Then, realizing what the problem was and its obvious remedy, Mike continued, "Don't worry, Brian. You're young enough; you'll eventually find someone even younger who will be willing to make the same deal with you that you made with me".

Understand this story, and you will understand the meaning of "lowest cost possible" used by advocates of reamortizing the pension system.

Comment via Facebook

It's Been a Good Decade: Why Public Employees Make So Much of Freezes or Minor Cuts

To those of us not in the public sector, it seems outsized when public employees and politicians make so much of temporary pay freezes or a few minor cuts (or reductions in the expected increases!). Red Jahncke adds some context that will help us understand their perspective by explaining how, nationwide, local and municipal government employee compensation has outpaced the private sector. He backs it up with two tables (6.2D and 6.5D) from the National Product and Income Accounts of the U.S. Bureau of Economic Analysis.

Table 6.2D shows that, nationally, state and local government worker compensation grew 45 percent from 2000 to 2007 — plus another 8 percent in the next two recession years, while private-sector compensation grew only 33 percent from 2000 to 2007 and — surprise, surprise — fell 3 percent in the recession. [Incidentally, the chart also shows that Federal Gov't grew 52% 2000-07, 11.5% during the next two recession years~ed.].

Table 6.5D reveals that, during the 2007-2009 recession, private-sector employment fell by 8 million jobs to a level below its total in 2000, while state and local public-sector employment grew by 185,000 jobs, reaching 1.3 million, or 9 percent, above its total in 2000.

As Jahncke notes, public sector salaries were ahead of private before the Great Recession. He continues:

The 2007- 2009 data speak to the issue of fairness — massive job losses and pay cuts in the private sector, continued job gains and a smart compensation boost in the public sector. In 2010, relatively few jobs were regained in the private sector or lost in the public sector.

And the data for the full decade speak to the issue of sustainability: How can slower-growing private-sector income produce the taxes to fund a public-sector payroll growing at almost twice the pace?

The answer is that it can’t, and it isn’t.

So now we get even Democrats making cuts and both they and the unions think they're making significant sacrifices. Given their experience over the last decade, I can understand why they think that. But they have to understand that the sacrifices they are making now have already been wrung from private sector employees over the last decade. So forgive us if we don't hail them as martyrs for giving some of what they earned--even during the Great Recession--back.

Cantor: No Bailout OR Bankruptcy for States

You've probably heard about states' - specifically not excluding Rhode Island's - cash flow problems in which unfunded pension liabilities feature prominently.

A federal bailout redux would kick the can down the road ease the problem for another year, though even the most tax-n-spend-happy state politicians have wisely been pessimistic about such a development.

You may have also heard about a far less easy approach (Andrew wonders what Gov Chafee knew about this option and when he knew it) that has just cropped up in Washington.

Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

During his weekly briefing yesterday, House Majority Leader Eric Cantor put the kibosh on both ideas.

Heading into Tuesday’s State of the Union address, Cantor showed no desire for increases in virtually any area of the federal government, and he doubled down on his opposition to new proposed spending on infrastructure and education, even in areas, like transportation, where he acknowledged there were deficiencies.

Cantor flatly rejected any changes in the law that would allow state governments struggling with record budget deficits brought on by the economic recession and rising pension costs to restructure debt, including allowing them to declare bankruptcy.

Why no bankruptcy?

“I don’t think that that is necessary, because state governments have at their disposal the requisite tools to address their fiscal ills,” the majority leader said, before going a step further.

“I think some ... have mentioned this Chapter 9 equivalent for states is somehow going to stave off some kind of federal bailout — we don’t need that to stave off a federal bailout. There will be no bailout of the states,” Cantor said. “States can deal with this and have the ability to do so on their own.”

"[H]ave at their disposal the requisite tools to address their fiscal ills"? You mean, we have to face up to and deal with the problems we created without outside help?? Eeep! That sounds dreadfully ... mature and responsible ...

State Bankruptcy Watch

About a month-and-a-half ago, I sent the transition team of (at the time) Governor-Elect Lincoln Chafee a set of potential interview questions, including this one...

There has been speculation in national media that several states facing long-term fiscal problems -- a category that can be fairly said to include Rhode Island -- may ask for a Federal bailout, or that Federal laws will be changed to allow them to declare bankruptcy. Do you believe that either of these options are possibilities for Rhode Island in the near term?

The response from Mike Trainor, then a spokesman for the Governor-elect, now a spokesman for the Governor, was that...

We do not agree with the premise of these questions.

Today, this is the lede of a page A1 story appearing in the New York Times...

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

It seems like the premise was sound. The question is now whether we should believe that the Chafee administration is not tracking developments related to state bankruptcy, or just not telling the public that they are.

Budget Summit: Second Panel Discussion

Richard Licht continues to moderate...

[10:33] Q to George Nee, President of the RI AFL-CIO: I know you are concerned as anyone else with balancing this budget. Do you have any ideas where money can be saved?

[10:34] George Nee: We have focused too much on the FTE issue. We haven’t looked at total personnel costs, overtime, and sub-contracting and contractors.

[10:35] We have 300 lawyers on the state payroll, but we use lots of lawyers as outside consultants.

[10:36] There are jobs in government that are revenue-generators. For each new revenue agent you hire, you end up collecting more revenue. Enforcement of prevailing wage can increase revenue.

[10:38] People in the private sector are being misclassified as independent contractors. They should be reclassified as full-time employees.

[10:39] State employees should have more say in running their departments. They could come up with tremendous ideas for saving money.

[10:40] We’ve heard too much about cuts for the past 5 years. Labor appreciates Governor-elect’s Chafee’s balanced approach.

[10:41] Combined reporting, to get more revenue from corporations that earn money in Rhode Island.

[10:42] Reamortize the state pension fund.

[10:42] State employees and teachers have paid their fair share. “It’s time to let them have a little rest”.

[10:43] Budget presentations deal with figures and figures and figures. We lose sight that it is a values document and the moral document.

[10:44] Q to Helena Buonanno Foulkes: What can we do to help grow the economy in the state?

[10:45] Buonanno Foulkes: There is a sense that big budgeting changes can occur from year-to-year, as RI struggles to balance its budget, making it hard for businesses to plan.

[10:46] We need to be as efficient as and competitive with neighboring states.

[10:47] We need to invest in education and training. The number 1 concern of business is for the workforce in this state.

[10:48] Improved effectiveness and efficiency are needed in the healthcare system. There is a big burden on the consumer, to have to figure out how to navigate the existing system.

[10:49] Rhode Island has a good opportunity to advance in the world of entrepreneurship.

[10:50] Q to Kimberly McDonough, President of Advanced Pharmacy Concepts: What do we do about the RI economy?

[10:52] McDonough: Economic advantages of off-shore manufacturing in places like China are diminishing, due to increasing costs and civil unrest. It is creating an opportunity to bring manufacturing back.

[10:53] BUT someone bringing their factory back from China to the US is willing to go anywhere in the US. We have to be competitive with the entire country to capture a part of that.

[10:55] I think McDonough just said that her business income last year was taxed at a rate of 65%, due to the general weirdness of the tax code (“general weirdness” is my phrase).

[10:56] McDonough also has an interesting anecdote about her company’s health-insurance being terminated, due to some unusual regulations. I’ll post the audio explaining later.

[10:58] “What is going on in Central Falls is unconscionable”. McDonough says #1 impediment to expanding her business in RI is finding workers who have the skills to do the work.

[11:00] Q to Warwick Mayor Scott Avedisian: Regionalization, consolidation.

[11:02] Mayor Avedisian: Cities and towns are working on it, from the ground up, but the devil is in the details.

[11:04] You can’t just say “you four communities are now together”.

[11:05] There are systemic problems everywhere. Combining them doesn’t solve them.

[11:06] Communities need more flexibility to be able to combine on their own.

[11:07] Department of Municipal Affairs needs more power to be able to enforce the state reporting requirements cities and towns are supposed to obey.

[11:08] Proposes bi-annual budgeting for cities and towns.

[11:09] Q to Scott Wolf of Grow Smart Rhode Island: How do we streamline permitting and related processes?

[11:10] Scott Wolf: We need more predictability and a quicker process for developers.

[11:11] Different state agencies that impact development need to coordinate better, and provide a single point of contact for major projects.

[11:13] The ultimate goal is prosperity, not austerity. Prosperity is what we need for Rhode Islanders.

[11:14] We need to improve our transportation system and our higher-education system, and to eliminate the structural budget deficit.

[11:15] Q to Pablo Rodriguez: What challenges are unique to the minority-owned business community?

[11:16] Rodriguez: The increase in social service spending is not the cause of the budget deficit, it is the result of improper budgets in the past.

[11:18] People with the biggest challenges have the most difficulty in accessing the system. That can be fixed, and it essential for people of color that it is fixed.

[11:19] Latino children in RI have the lowest math scores in the country.

[11:21] We shouldn’t be looking for places to cut, we should be looking for places to make money.

[11:22] When we try to create something like a financial literacy program, it gets fragmented between too many different offices.

[11:23] Medicaid is a money-maker for Rhode Island, because of the effects of matching funds. We should deliver Medicaid more efficiently, not cut it.

[11:24] Just passing laws is not enough for minority-owned business initiatives, we have to get each department to think creatively to implement programs.

Governor-elect Chafee finishes up with four points:

1. Priorities towards education were reinforced.
2. Governor-elect Chafee emphasizes the e-commerce issue again.
3. By increasing FTEs, we may be able to bring more revenue to the state.
4. And more FTEs is more people paying into the pension system.

Budget Summit: First Panel Discussion

Richard Licht moderates.

[9:24] Q to John Simmons of RIPEC. What's happening in other states?

[9:24] Simmons: Rhode Island has acted much faster than other states in facing the fiscal crisis. Simmons is presenting some RIPEC "How we compare charts"...

[9:23] Simmons highlights “vendor payments” as a big RI budget driver, and that a lot of that is Medicaid.

[9:29] Interest payments on debt are also growing.

[9:30] RI’s ranking in revenues collected has dropped.

[9:32] Simmons: The major thing we have not done is make changes to the social safety net programs, particularly eligibility changes.

[9:33] Q to Lt. Governor Elizabeth Roberts: How should RI approach health and human service payments and delivery?

[9:34] LG Roberts: HHS numbers are comparible as percentage of the budget to other states.

[9:36] RI leads the country in percentage of private-sector economy in healthcare.

[9:37] We cannot only cut reimbursement rates and do nothing else, that will only shift costs.

[9:38] Constructive suggestions: 1. Continue investment in primary care services. 2. Include all Medicaid programs that involve this issue. Either 2a or 3, strengthen case management for Medicaid, improve transitions and reduce readmissions.

[9:39] Roberts: “We must save” but we shouldn’t think government is doing a worse health-care job than the private sector.

[9:40] Final point: Let’s not forget the importance of public health.

[9:42] Q to Anne Nolan, President of Crossroads RI: “Are there ways the not-for-profit sector can help us lessen the costs of the services we are providing”. “Is there a duplication of efforts?”

[9:43] Nolan: “This has been a very depressing morning”.

[9:44] There is misconception on the part of a lot of Rhode Islanders that we are a welfare-rich state.

[9:45] Our approach to social issues and people is too siloed.

[9:46] There is an opportunity now to relook at how we deliver services, including between the government and the private sector.

[9:47] My interpretation of what Nolan is saying: Rather than have different departments deliver a loosely bundled set of services to a person who needs help, government needs to look at the person as a whole and give them one point of contact, from where help can be coordinated.

[9:50] Funders have to take more responsibility, to have move effective spending of limited resources.

[9:52] Q to Ray DiPasquale, RI Commissioner of Higher Ed: Why can’t the back offices of RIC, URI, and CCRI be combined?

[9:55] DiPasquale: There is already back-office collaboration on things like purchasing, distance learning, IT.

[9:57] Presidents and vice-presidents of the institutions meet often, to discuss how they can educate all of their students, be efficient, and deal with the recent $40M in budget cuts.

[9:59] DiPasquale gives rationale for the Office of Higher Ed: It is the office that best allows RIC, URI and CCRI to work together.

[10:00] Tuition increases at this point would significantly impact access of Rhode Islanders to higher education.

[10:01] Q to Robert Flanders, Chair of the RI Board of Regents for Education: Same question as to Commissioner DiPasquale: How can cities get together to combine back office functions, as separate from educational functions?

[10:03] Same answer as DiPasquale: There’s lots of back office working-together either going on or being discussed, for example Aquidneck Island and the educational collaborative (and I can’t believe my spell checked actually recognizes “Aquidneck”).

[10:04] Plugs the idea of a statewide healthcare contract.

[10:06] We need to do a better job of keeping kids in school, and not having them turn out to be dropouts. That saves costs up the educational line.

[10:07] Better pre-school is needed, to help alleviate poverty and language problems.

[10:08] Basic math and literacy skills are needed for many of the jobs available right out of high school.

[10:09] DiPasquale: Out of every 100 RI 9th-graders, 73 will graduate. 40 of those will enter college. Only 21 will earn an associate or bachelors degree. 70% of students who enter college need one remedial course. About 50% will need two or more.

[10:13] Flanders: Effective teaching is the critical factor in raising the bar throughout the education system.

[10:14] Q from Licht to panel in general: Are there other ways we can save some money.

[10:15] Laughter then silence.

[10:16] John Simmons (addressing Anne Nolan’s concerns) argues for efficiency in the human services programs, which is different than just denying access. If we were as efficient as our neighbors, there would be tremendous savings.

[10:18] Anne Nolan: We need to think better, clearer and more effectively. And in some cases, we are going to have to spend more money, as an investment in the future.

[10:19] LG Roberts: We shouldn’t assume that managing the budget deficit will always do harm. Reforms can be implemented, to make programs more effective.

[10:20] Licht: “Government exists to serve the people of Rhode Island. It doesn’t exist to serve itself.”

[10:22] Ray DiPasquale: Extend commuter rail to URI. It will be an economic benefit for the state.

[10:23] Licht discusses the concept, possibly, of connecting to the Connecticut commuter rail system.

[10:24] DiPasquale: Get government, higher-ed, and business to work together at a high-level (the direct quote was “in a room”) to solve the state’s problems.

Welcome to the Governor-Elect's Budget Summit

Good morning, from the Sapinsley Center on the campus of Rhode Island College, where I will be liveblogging Governor-Elect Lincoln Chafee's budget summit this morning:

Governor-Elect Chafee offers opening remarks:

First priorities are education, state-aid and Central Falls

Deficit for next year as high as 300M

There are 2 columns in any budget, revenues and expenditures.

Mentions “revenue enhancement” (the sales tax) could be as high as 120M. Still leaves a big gap.

Did 7 budgets as Mayor of Warwick, and it’s never an easy process.

[8:48] Over to Rosemary Booth Gallogly, Director of Dept. of Administration:

Revenues are growing much faster than expenditures. About a 450M gap projected for FY2016.

Impact of ARRA (stimulus) loss will be that $215M of human services disappears, 18M of education funding will disappear.

Revenues have dropped from 3.4B to 3.0B between FY2008 and FY2010. All sources of revenue were down.

Income tax is largest source of revenue. Gambling revenue has been fairly flat, for the past three years.

[8:53] Hmmmm. Various sales tax trends are noted, including loss of sales-tax revenue due to e-commerce. Gallogly mentions this can only be “fixed” by Congress.

[8:54] 300M coming in from gambling revenue, it’s been flat (which is better than down) since FY2008. Casinos in Massachusetts are a threat, one estimate is a 27% reduction.

Table games could increase revenues by 26%, even with Mass casinos (according to a Twin River estimate).

[8:56] Discussion of “tax-expenditures”. They’re hard to track, since the government is not collecting anything once they are enacted. Various estimates come with their own “reliability index”, which should be taken into account, before any actual decisions are made.

[8:59] Ranking of expenditures in the total budget (Federal + Stste): 1 Assistance and grants, 2. Salary and benefits, 3 Aid to local units, 4 Operating expenses.

[9:03] General revenue only, FY2012 debt service rises to 4th place.

[9:04] Ranking of expenditures by function: 1. Human services, 2. Education, 3. General Government.

[9:05] Gallogy emphasizes that Transportation is only 5% of the state budget.

[9:08] In 2012, expenditure growth is projected to be 12%, mainly due to loss of stimulus funds.

[9:09] 1701 fewer state-worker positions filled, compared to 2002. About 1,300 persons retired in 2008, coincident with a set of pension changes.

[9:13] For FY2012, 41.3% of payroll must be budgeted for, for pension, FICA, retiree health and “assessed fringe” costs.

[9:15] Personnel costs will rise about 6% in FY2012, due to concessions that are (expired? Not carried forward? Just aren’t there?)

[9:16] We are one of a few states that issues bonds to get its Federal highway match.

[9:17] Big increase in debt-service, due to historic tax-credits between now and FY2016, from about 18M to 51M.

[9:20] “In the current year, we seem to have things under control. Next year is a huge, huge challenge.”

Tabulating Rhode Island's FY2011 Federal Earmarks

For those interested, HERE is a working list of all of the earmarks contained in the lame duck FY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

Which City of Providence Accounts are the Reserve Accounts?

Philip Marcelo's story on Providence City Auditor James Lombardi's memo expressing "grave concern regarding the financial stability" of Providence is running in today's Projo. The memo addresses several issues, one of which concerns the reserve fund that the City is supposed to maintain. According to the memo, the balance in the “reserve contingency funds cash account” has gone from $14.4 million to minus-$187 thousand, and the balance in the “capital assets account” has gone from $22.2 million to a $4.6 million. The implication of Mr. Lombardi's memo is that these two accounts make up reserves which have gone from $36.6 million dollars at the end of fiscal 2009 to “approximately $4.6 million” at present, because the city has used them to pay operating expenses.

According to both Philip Marcelo's story, as well as Stephen Beale's story on the same subject in GoLocalProvidence, the Cicilline administration denies that the reserve fund is below the level it is supposed to be at. Here is the Projo version...

The city is also required to maintain a reserve equal to about 5 percent of the city budget, or about $30 million, he said. (Karen Watts, the mayor’s spokeswoman, said the city’s reserves are currently at about $30 million.)

Auditor Lombardi has provided detailed information in his memo, in the form of a set of general ledger reports, supporting his statements that the reserves are nearly tapped out. One report shows an end-balance of negative $187,736 in account, on October 6 of this year, in account 10101-0000 from accounting unit 657-900 (the “reserve contingency funds cash account”). The other report shows an end-balance of $4,661,904.14, on October 14 of this year, in account 10101-0000 from accounting unit 856-900 (the “capital assets account”).

If the Cicilline administration disputes that the sum of these two figures fully accounts for the city's required reserves, they should be able to make a straightforward refutation, by providing either 1) the account numbers and balances of other accounts that should be counted as part of the "reserves" and/or 2) details of other transactions (including source and amounts) that have replenished the balances in these two accounts since the reports were generated.

Open Thread: Ballot Question 4

The floor (aka the comments section) is open, for people who’d like to discuss why they will or will not be voting for or against the fourth question that will appear on the Nov. 2 Rhode Island ballot...

OPEN SPACE AND RECREATION BONDS -- $14,700,000

Approval of this question will authorize the State of Rhode Island to issue general obligation bonds, refunding bonds, and temporary notes in an amount not to exceed ten million dollars ($10,000,000) for the purpose of acquiring title to all or a portion of land in and around the former Rocky Point Park for the purpose of establishing the same as a public park, and three million two hundred thousand dollars ($3,200,000) for the purpose of transferring title to 25 India Street, Providence, Rhode Island 02903 from the department of transportation to the department of environmental management, with the funds to be used to reimburse the US federal highway administration for the market value of the property preserving the same as open space and for recreation, and to further issue general obligation bonds, refunding bonds, and temporary notes in an amount not to exceed one million five hundred thousand dollars ($1,500,000) for the purpose of improvements and renovations to Fort Adams State Park in the city of Newport dedicated to the preservation and public accessibility of the Fort.

Voting yes authorizes the state government to borrow the money for the projects described above. Without voter approval, the borrowing cannot occur.

Open Thread: Ballot Question 3

The floor (aka the comments section) is open, for people who’d like to discuss why they will or will not be voting for or against the third question that will appear on the Nov. 2 Rhode Island ballot...

TRANSPORTATION BONDS -- $84,700,000

Approval of this question will authorize the State of Rhode Island to issue general obligation bonds, refunding bonds, and temporary notes in an amount not to exceed eighty million dollars ($80,000,000) to match federal funds and provide direct funding for improvements to the state's highways, roads and bridges and four million seven hundred thousand dollars ($4,700,000) to purchase and/or rehabilitate buses for the Rhode Island Public Transit Authority's bus fleet.

Voting yes authorizes the state government to borrow the money for the projects described above. Without voter approval, the borrowing cannot occur.

Open Thread: Ballot Question 2

The floor (aka the comments section) is open, for people who’d like to discuss why they will or will not be voting for or against the second question that will appear on the Nov. 2 Rhode Island ballot...

HIGHER EDUCATION FACILITIES BONDS -- $78,000,000

Approval of this question will allow the State of Rhode Island to issue general obligation bonds, refunding bonds, and temporary notes in an amount not to exceed sixty-one million dollars ($61,000,000) for the construction of a new chemistry building at the University of Rhode Island, and seventeen million dollars ($17,000,000) for the renovation and construction of an addition to the Art Center at Rhode Island College.

Voting yes authorizes the state government to borrow the money for the projects described above. Without voter approval, the borrowing cannot occur.

Re: A Billion-Dollar Cold Turkey Dinner for Rhode Island?

In response to my post from yesterday on the potential crunch coming to the Rhode Island budget based on the loss of Federal dollars, spurrued by Professor Leonard Lardaro's Staurday Projo op-ed, commenter Bill replies...

Most respectfully and to the contrary, there will always be "bailout" or other "funny" money from Washington for RI. Obama knows that those who become dependent on welfare, bailouts, and other such federal handouts will vote democrat. The "bailout" will likely be called something else, but I have no doubt it will arrive just in time to obviate the need for RI's public unions and the state legislature (of course, largely one and the same) to begin thinking seriously about reforming anything.

That certainly has been an accurate description of things have worked in Rhode Island so far, with one-time fixes like "stimulus" and tobacco money used to plug budget holes. The problem is that the trend of constant growth in cost-of-government (after the adjustment for inflation) that we have been experiencing in Rhode Island...

...cannot continue forever, under the current conditions, unless there is a never-ending supply of one-time fix money to draw on (or taxes are increased to annually cover the cost of the one-time fixes).

The flawed assumption in the we-can-always-find-another-one-time-fix strategy is that while the supply of one-time sources of revenue may be large, it is not infinite. And just like with the gambler who walks into a casino with $10,000, mistakenly believing that as long as he makes small bets, he will always have enough money available to stay in the game, it's in the nature of these matters that when the source of money used to cover a series of bad outcomes runs out, the magnitude of the damage is related not only to the last of the bad outcomes, but to the entire series of outcomes that led to the final crash.

A Billion-Dollar Cold Turkey Dinner for Rhode Island?

In an op-ed in today's Projo, University of Rhode Island Economics Professor Leonard Lardaro connected the macroeconomic to the macropolitical...

The upcoming election is more important than is generally assumed for Rhode Island, because federal bailout money will no longer be available by this time next year. Fiscally, this will force us to go “cold turkey.” The resulting jolt to a fragile upturn may well force our state into a double-dip recession. The citizens of this state need to be proactive, even though our elected officials seldom are.

The impact of Federal money and of its loss is evident from a series of budget graphs presented here at Anchor Rising at the end of August.

State government expenditures in Rhode Island have been growing steadily for the past decade, and are about 50% more than they were a decade ago (adjusted for inflation) (and begging the question, do you feel you are getting 50% better service from the state compared to a decade ago?)...

Maintaing that growth trend over the past two years has required as massive infustion of Federal funds into Rhode Island's government, which have grown by 40%-50% since just 2008...

If Federal money drops back to the vicinity of 2008 levels in the next couple of years, it will represent a cut of about a billion dollars from current annual budget levels. The question is, will the legislature elected this November continue to be committed to the steady growth in RI government that has characterized the past decade (at least), and plan to continue that growth by taking a billion dollars per year in new taxes from Rhode Island residents, or will the new legislature seated in November begin to make up for the loss by reducing the spending done by the state?

Still on the Hook

Ted Nesi has responded to my post, yesterday, about state conduit debt. Giving some further details about the situation in Rhode Island, Nesi writes:

To return to Justin's critique, the reason it's easier and cheaper for these institutions to borrow through the state isn't because of an implicit Fannie-Freddie promise; it's because state bonds are tax-exempt, which tends to reduce how much interest they have to pay and the amount of time they get to pay it. The treasurer's office tells me there has been a surge of interest in RIHEBC bonds since credit markets started to seize up in 2007.

The tax exemption is likely part of it, but to my knowledge, bond ratings are still a factor, and when the the financial vehicle is issued by a public agency — created through legislation and staffed with board members appointed by elected government officials — the game is somewhat different than purely private ventures.

More important, though, is that there's got to be something in these deals for the state. For the most part, that something is an ability to borrow money without first acquiring direct voter approval. If, for example, the R.I. Health and Educational Building Corporation — which lends substantial money, let's remember, to government agencies like municipalities for education buildings — finds its borrowers defaulting in substantial amount, it will have a more difficult time finding investors, and its interest rates will have to go up to attract them.

That's where the Central Falls example comes into play: The reason given for state involvement in appointing a municipal dictator to repair the city's finances was that one municipal bankruptcy in the state would affect the borrowing opportunities for all municipalities in the state based on bond ratings. As I've said, if the borrowers utilizing the "conduit" cannot fulfill their obligations, the state will find a way to smooth the financial hit.

If defaults happen on a limited, atypical basis, then the arrangements will never be a problem, but remember that the reason that we're discussing the matter at all is that about half of the state's total debt is associated with the conduits. Therefore, even though we must certainly be aware of the different implications of the various forms of public bonds, it remains wise to keep an eye on them all, and it is hardly unreasonable to compare the figures on a state-by-state basis.

Rhode Island apparently leads the nation in conduit debt. We should be very suspicious about why that might be.

... Wait, the Obligation to Repay is "Moral" and Not "General"?

Not because Andrew's post is deficient (on the contrary) but because sometimes I'm thick, I hunted out two more definitions of "moral obligation bonds".

tax-exempt bond issued by a municipality or a state financial intermediary and backed by the moral obligation pledge of a state government. (State financial intermediaries are organized by states to pool local debt issues into single bond issues, which can be used to tap larger investment markets.) Under a moral obligation pledge, a state government indicates its intent to appropriate funds in the future if the primary obligor , the municipality or intermediary, defaults. The state's obligation to honor the pledge is moral rather than legal because future legislatures cannot be legally obligated to appropriate the funds required.

-

tax-exempt bond issued by a municipality or state financing authority, secured by revenues from the project financed, plus a nonbinding pledge by the state legislature. In the event that project revenues are insufficient to meet debt service payments, the legislature is authorized to step in and appropriate funds in the future to cover principal and interest payments to bondholders. The state's commitment to service the bonds is moral, rather than contractual, as legislatures have no legal obligation to do so if the original obligor defaults.

Okay, so what would it look like if there were a default on a moral obligation bond issued by Rhode Island? A request for repayment would be made of the state. The request would get forwarded to the General Assembly then in session for a vote on the necessary appropriation. Assuming matching bills made their way out of committee (a potentially significant stumbling point right there) and on to both floors, a majority of legislators would have to vote in favor. Further, they would most likely have to do so in the face of a budget deficit, thereby requiring the identification of a revenue stream (*cough*raisetaxes*cough*) to fund the repayment. Legislators would be acutely aware as the bill came up for a vote that an explanation to their constituency of their vote and the purpose of the ... er, revenue stream would need to follow in due course.

Under these circumstances, how likely is it that a repayment appropriation would pass?

Speaking for myself, if it had been clear from the beginning that these were not general obligation bonds, I wouldn't have gotten nearly as worked up. Presumably, however, it wouldn't help with bond sales if the state had issued a statement saying, "Hey, don't worry about it; taxpayers have no legal obligation to repay the bondholders in the event of a default."

Gridlock is Good

Via this piece against the implementation of a Value-Added Tax (ie; "A VAT is a terrible idea if it triggers bigger government, and a VAT is a bad idea if it merely finances bigger government."), I came across the below from a decade-old interview with Milton Friedman. It was 2000 and we had a budget surplus. Why?

Milton Friedman: The...reason you have a surplus today, in my opinion, the credit for that has to be given overwhelmingly to gridlock.

Peter Robinson: To gridlock?

Milton Friedman: If you had had a Democratic House and Senate, as well as a Democratic president, you would not have a surplus today in my opinion. They would have spent it. Similarly if you had had a Republican president as well as a Republican House and Senate, I doubt that there would have been a surplus today. Because they would either have spent it or had tax reductions.

Peter Robinson: So when President Clinton steps forward to take his bows, you don't applaud at all?

Milton Friedman: Well, I applaud. He provided gridlock.

Peter Robinson: Okay, you applaud but for a different reason than the one he supposes.

Milton Friedman: The winning thing that really contributed to our successful economy over recent years is that the government has stayed out pretty much, with the White House and the Congress and the Senate haven't done much.

Seems like the last ten years have pretty much proven him right.

What is a "Moral Obligation Bond"?

If you see the words "moral obligation" being repeated in statements and news reports related to the Rhode Island Economic Development Corporation's loan guarantee program with 38 Studios (like this one from Jim Baron of the Pawtucket Times, or this one from Ted Nesi of WPRI-TV (CBS 12)), there is a specific reason why: there actually are financial instruments called "moral obligation bonds" that are distinct from "general obligation bonds" and, according to a statement from RI General Treasurer Frank Caprio, that are being used to finance the 38 Studios deal.

The difference between moral obligation bonds and general obligation bonds is that moral obligation bonds do not involve a full-faith-and-credit promise by the government to use its sovereign powers (e.g. its taxation powers) to raise the revenue needed to pay off the bondholders. The basic concept is explained in The Financial History of the United States, written by Jerry W. Markham...

Moral obligation bonds were introduced by Governor Nelson Rockefeller of New York in the 1960s...[The] idea was that public corporations could be created that would issue housing or other bonds backed by income from the projects being financed, rather than from the state's taxes or other revenues. This avoided the necessity of obtaining voter approval of the bonds.

In fact, with moral obligation bonds, the government doesn't really promise to pay off the bondholders at all; that's why it's called a moral obligation (I'll throw it over to the ethicists, to decide if moral obligation should be considered more or less binding than legal obligation). There are, however, some rules that are supposed to be followed, regarding reserve funds to be used to pay off a moral obligation bond. Here is a brief description from the website of the Council of Development Finance Agencies...

Moral obligation bonds do not carry the full faith and credit pledge of the obligor (i.e. state or locality). Rather, the moral obligation requires the issuer to maintain a debt service reserve fund at a specified reserve requirement, typically maximum annual debt service, and report any deficiencies that arise to an appropriate official of state or local government. The official then is required to request an appropriation from the legislative body to make up any shortfall. Since there is no legal requirement to make the appropriation, timely payment depends on the obligor’s willingness to support the debt.

This newfound knowledge (at least to me) of "moral obligation bonds" leads me to ask if part of the initial wave of opposition to the 38 Studios deal, which came from many sources, was rooted in the fact that using instruments that are supposed to be paid for using future income seems an odd choice for guaranteeing a loan, where money will only be needed if the future income is not realized.

Or am I missing a step in how the chain of finance would work?

National Budget Deficit Trends

Randell Hoven (h/t) uses CBO figures and a simple chart to put the lie to the now familiar claims that the Iraq and Afghanistan wars and Bush tax cuts caused a $3 Trillion budget deficit.

The CBO breaks that cost down over the eight calendar years of 2003-2010. Below is a picture of federal deficits over those years with and without Iraq War spending.

As Hoven points out, the deficits actually were shrinking until 2007, then started back up in 2008. What happened in between? Democrats took over Congress. Hoven adds some context (we all love context!):

The sum of all the deficits from 2003 through 2010 is $4.73 trillion. Subtract the entire Iraq War cost and you still have a sum of $4.02 trillion.

No one will say that $709 billion is not a lot of money. But first, that was spread over eight years. Secondly, let's put that in some perspective. Below are some figures for those eight years, 2003 through 2010.

* Total federal outlays: $22,296 billion.
* Cumulative deficit: $4,731 billion.
* Medicare spending: $2,932 billion.
* Iraq War spending: $709 billion.
* The Obama stimulus: $572 billion.

There is an important note to go along with that Obama stimulus number: the stimulus did not even start until 2009. By 2019, the CBO estimates the stimulus will have cost $814 billion.

If we look only at the Iraq War years in which Bush was President (2003-2008), spending on the war was $554B. Federal spending on education over that same time period was $574B....

So spending $572B in two years stimulates an economy, but spending $554B over six years ruins one?

Depends on who did what, right?

A Tale of Two Counties

I missed this when it was published in May, but this Washington Post article detailing the fiscal differences between the economically and demographically similar D.C. 'burbs of Fairfax County, VA and Montgomery County, MD is worth a read.

Take a snapshot of one year, 2006, when times were flush. In Fairfax, the county executive, an unelected technocrat, proposed a budget with a relatively robust spending increase of about 6 percent. In Montgomery, County Executive Douglas M. Duncan, a career politician then running in the Democratic primary for governor, pitched a gold-plated, pork-laden grab bag of political largess that drove county spending up by 11 percent.

Mr. Duncan's budget that year capped a three-year spree in which county spending rose by almost 30 percent. It reflected major multiyear increases in pay and benefits that he had negotiated for police, firefighters and other county workers. At the same time, Jerry D. Weast, Montgomery's schools superintendent, negotiated a contract that promised pay increases for most teachers of 26 to 29 percent over three years -- about twice the raise Fairfax teachers got -- plus health benefits virtually unmatched in the region....The results have been striking -- and strikingly unaffordable -- in a county where more than half of all spending goes to public schools. The average teacher salary in Montgomery today is $76,483, the highest in the region. Average pay for teachers is now almost 20 percent higher in Montgomery than in Fairfax and has increased much faster than in most local suburban school systems. Since 2000, salaries for Montgomery teachers, as for many other county employees, have nearly doubled, rising at almost triple the rate of inflation.

Teachers are pillars of any community, and Montgomery's are highly rated. But their compensation has outstripped the marketplace. Today, Montgomery schools spend about 20 percent more per pupil than Fairfax schools; they consume a greater share of the public spending than in any other locality in the region. The spending gap is not about classroom quality and student achievement; in those terms the two school systems are comparable. Rather, the difference is compensation, which accounts for 90 percent of Montgomery's education spending.

But times aren't always good, and Fairfax was better able to handle the economic downturn. Why? Part of it has to do with the tax structure differences between the two states: Maryland relies on the more volatile income tax while Virginia doesn't. But there is another factor.

Virginia law denies public employees collective bargaining rights; that's helped Fairfax resist budget-busting wage and benefit demands. As revenue dipped two years ago, Fairfax officials froze all salaries for county government and school employees with little ado. By contrast, Montgomery leaders were badly equipped to cope with recession. County Executive Isiah Leggett took office proposing fat budgets and negotiating openhanded union deals after he succeeded Mr. Duncan. Then, as economic storm clouds gathered, he shifted gears and cut spending -- while still trying to appease the unions....The county has just about run out of revenue-raising options, having boosted nearly its entire menu of taxes to the legal or practical limit. Montgomery's higher taxes already put it at a competitive disadvantage with Fairfax, which has a wide lead in attracting business and creating high-wage jobs; now Montgomery risks a downward spiral.

Yeah, they wouldn't want to turn into, say, Rhode Island. Virginia's local county governments have the flexibility to make expenditure changes required without having to worry about doing the contract renegotiation kabuki dance. The genie is already out of the bottle here in RI, but, well, I guess we can take some solace from the fact that we're not alone (right?).

Recent RI Budget History, Part 3 of 3

The final graph in this series shows the recent history of Rhode Island's combined state and local spending. Rhode Island's Municipal Affairs Office provides annual data on total municipal spending with state aid broken out in a separate column, allowing the state-aid contribution to local budgets to be subtracted out, avoiding the double-counting of intra-governmental transfers. Complementary to this, much of the yellow "education" section attributed to the state budget is money that is ultimately spent by municipal governments. (Municipal Affairs data available on the Internet goes back to 2001, and FY2011 data is presumably still being collected).

This graph has been normalized for inflation, so the roughly steady increase in the total represents a real increase in the amount being spent by goverment.

This pattern is one of government growth on autopilot for most of the decade, whether the national economic climate was good or bad, whether state revenues were increasing or decreasing.

This idea of government expansion that is automatic and inevitable -- with everything outside of government expected to adjust accordingly, of course -- is an important focus of the dissatisfaction being expressed with regards to the direction that our state and nation are headed, as more and more people come to realize that steady increases in the real amount spent by government cannot continue indefinitely.

Recent RI Budget History, Part 2 of 3

The graphs below show the recent histories of two important subcategories of spending by Rhode Island state government, spending from general revenues...

...and spending from Federal Funds (both adjusted for inflation)...

Recent RI Budget History, Part 1 of 3

This is the first of several sets of posts intended to be rolled out over the next few weeks (the traditional summer slow season for political writing, though that will hardly be the case in RI this year!), related to issue discussions that will hopefully occur during the 2010 campaign.

For starters, here is a short history of the recent growth in the Rhode Island state budget. Data was compiled from two sources: the RI Department of Administration's Budget Office, for fiscal years 1998 to 2009, and this year's "enacted budget" document from the legislature, for fiscal years 2010 and 2011.

This first graph is total budget amounts, from all sources in terms of "current dollars" (meaning the actual dollar amount spent in that fiscal year), broken down by the state's official major categories for its spending...

Current dollars do not take into account purchasing power changes due to inflation. Consumer Price Index data by month, which can be used as an estimate of inflation and can be used to adjust the sepdning data across time, is available the State Department of Labor and Training website. Using FY2010 as the base year, I adjusted prior year totals upward (because of positive inflation rates) and assumed a small positive inflation rate for the current fiscal year, to create a set of inflation-adjusted spending figures

The results show that the growth in government spending has exceeded the rate of inflation, i.e. that government has steadily claimed more and more resources over the past decade...

The Case for Gridlock, Kinda

In response to recent GOP leadership pronouncements, Kevin Williamson asks why anyone would trust the GOP any more than the Democrats in making budget cuts.

Now, the 2009 balloon isn't shown in this chart (and it may go off the chart if it was), but this shows that no matter who is in control, spending just continues to go up, up, up. I'd say go with the lesser of two evils, but it's darn hard to figure out which is which. Maybe the best we can do is divided government so that no one Party can get all the things done they would like. Gridlock is probably our best chance at slowing down the seemingly inevitable growth.

Explaining Why the Pension System Should Not Be Reamortized

To rigorously show that reamortizing a pension system costs almost all taxpayers more money, you would begin with the risk-free rate of return on money and the expected return from the pension fund (which are two separate quantities) and then apply an appropriate discounting formula to the appropriate combination of the two. However, going strictly by the percentages overlooks an important point, related to a famous quote from economist John Maynard Keynes...

The long run is a misleading guide to current affairs. In the long run we are all dead.

In deciding whether to reamortize a pension system, we must take into consideration both the fact that our lives have finite end dates and as well as finite start dates, i.e. taxpayers do not exist from the beginning of time.

If a pension system is properly designed, funded and not raided, the state maintenance contribution -- the part that goes to the fund from taxpayers without passing through an employee paycheck first -- should only be at most 2-3% of payroll. In many years, it should be around 1%, and it never should reach the 20-25% that Rhode Island taxpayers will be paying through the year 2029 on the current funding schedule. The good news is that after 2029, if Rhode Island doesn't reamortize (and benefit levels are rationally aligned with contributions and realistic estimates of interest growth), the taxpayer contribution should be in the range of 1%-2%-3% of payroll going forward from then on.

However, if the system is reamortized under a new 30-year plan (and benefit levels are not adjusted), the state contribution will remain a double-digit percentage of payroll through the decade of the 2030s. The result will be that RI citizens in the 2030s, some collecting the first paychecks of their lifetimes in that decade, will be burdened by higher tax rates than or service levels from what they would experience under a non-reamortized system. These citizens -- amongst whom will be many individuals yet to be born -- will be left with fewer resources for addressing their own needs, because we will have decided to make them help pay for what at that time will be decades-old mistakes made by our generation and the generations prior.

To progressives like gubernatorial candidate Patrick Lynch, passing the problems we've created to people 20 years down the road is the "fair" way to deal with the situation. The lesson, as always, is that progressives and public finance don't mix.

If Ireland can do it...

....why not us? According to the Wall Street Journal:

Government employees on average have higher pay and bigger benefits than the private-sector employees who support them with taxes. This has become a well known fact.

When private firms run extended losses—spending more money than they take in—their employees must share in the necessary adjustments. But how about when governments spend much more than they take in, running huge and extended deficits? What should happen then? This is something Americans who work in private companies might consider while they file their tax returns over the next week.

Ireland shows the way.

Having had a long run of high growth and success, Ireland has now had a severe bust, the deflation of a housing bubble, and a financial crisis. Plus, its government is running big deficits. Sound familiar?

In response, the current Irish government budget takes these steps (translating from euros to dollars and rounding):

• Government employees' salaries up to $40,000 will be reduced by 5%.

• The next $54,000 of salary will be reduced by 7.5%.

• The next $74,000 of salary will be reduced by 10%.

When these tranches are added together, this gets you up to salaries of $168,000. Government salaries over this amount may be subject to marginal reductions of as much as 15%.

This looks like a very sensible plan for nonmilitary government employees.

Ireland has already worked out the plan. All the U.S. has to do is implement it.

And any other unit of government, for that matter.

Obama Stimulus Helps RI's Invisible Districts

Thanks to President Obama's stimulus package, RI's 86th Congressional District has netted $10.2 million in aid and has had 58 jobs created (or saved)! The district, which encompasses the Williams and Franklin households in Ashaway, was given funds based on a proposal to open a low footprint, "green" factory for the manufacture of 100% eco-friendly air lined containers. This product--invisible and lightweight--has gained the attention of the aspiration and exhalation industries.

86th District Congresswoman Envy Sibal Williams was thankful for the stimulus help to her district. In a written statement, she explained that, "...over the last two years, the snipe-flu has raged through our domestic snipe farming operation. While some farmers have successfully transitioned to snipe hunting, others were having a tough go....These green jobs will more than make up for those lost."

Additionally, the 5th Congressional District saw $1.3 million in stimulus money. The district, sandwiched between the Jones and Smith houses on Conimicut point, will use the money to develop an entertainment complex--including bleachers and a concession stand--for the purpose of viewing the submarine races that are a regular, nightly attraction.

Unfortunately, the 00th Congressional District, located on the 2nd floor of a tri-decker in Central Falls, reported that they have received no stimulus aid while district(s) 4 and 6 through 85 have not responded to our inquiries.

In other news, the population in Rhode Island is booming...

Pension Problems from Coast to Coast

This can't be a good sign. They're now making fun of Rhode Island in New Jersey, that bastion of good government practices, because of our inept pension fund management. John Bury of the nj.com website writes that…

Rhode Island's public pension plans are a basket case. They were 50% funded before the market collapse and bankruptcy is imminent for many. Sensing the seriousness of the issue the state set up a commission on January 30, 2008 made up primarily of politicians and union representatives which issued a report with attachments on June 5, 2009. There were no actuaries invited to be on the commission though they did specify that one of the 19 members should "be a practicing member of the Rhode Island Bar Association who shall have experience in pension law."

Then he gets serious…

Total it up, take into account recent asset losses, benefit payouts, and continuing accruals and Rhode Island might turn ponzi before New Jersey. This is not a situation that can be rectified by tinkering with retirement ages or moving new hires to 401(k) plans. This calls for either substantial revenue commitments or severe benefit cuts (including for retirees). Those solutions won't be implemented as long as the politicians and unions who bargained their people into this mess are looked to for ideas on cleaning it up.

And from the other coast comes a warning via the Los Angeles Times that a favorite proposed solution in Rhode Island -- consolidating all of the problems and handing them to the state to solve -- doesn’t guarantee that things will automatically get better for the localities…

Slammed by huge investment losses in last year's meltdown of financial markets, the nation's largest public retirement plan faces questions about its long-term ability to make good on the benefits it owes more than 1.6 million workers, retirees and their families.

All Californians have a stake in the fund's performance: If CalPERS' $200-billion portfolio comes up short, and state and local governments refuse to cut workers' benefits, the bill falls to taxpayers -- many of whom have no guaranteed pension benefits of their own.

Already, CalPERS has notified state and local government authorities that their contributions to the fund will have to rise beginning in 2011 or 2012, reflecting the steep drop in the system's assets during the markets' crash.

Kicking problems up to a “higher” level of government doesn’t solve anything, if the higher-ups ignore the underlying causes of the problems -- and moving decision-making to more remote levels of government can often make changing bad policies more difficult.

And this is all, of course, before we even begin to consider the California situation in the context of why anyone thinks that defined-benefit retirement plans are not seriously impacted by market downturns. Just keep this one principle in mind when considering any of the options: in the absence of economic growth, nobody’s plan for a secure retirement is going to work.

Links to various articles

Power Line on Taking the National Debt Seriously

Stephen Spruiell on Obamacare Dissected: Ten things that probably will be in the health-care bill (but shouldn’t)

Kevin Williamson on Real Health-Care Reform: Ten things that ought to be in the health-care bill (but probably won’t)

Veronique de Rugy on Elinor Ostrom and the Essence of Economics

Matt Welch on The Unknown War: The defeat of communism 20 years ago was the most liberating moment in history. So why don't we talk about it more?

Jagdish Bhagwati on Feeble Critiques: Capitalism's Petty Detractors

Power Line on Democrats to Curtail Free Speech

Cato on What Does the State Department Not Want Us to Know about Honduras?

John Derbyshire on The Thatcher Giant

ADDENDUM #1:

Larry Kudlow on The Mundell-Laffer Solution: A stable King Dollar and lower tax rates could save the nation at this critical juncture

Harsanyi on The doers against the "thinkers"

Russ Roberts on Stimulus in the Real World

Victor Davis Hanson on The Power of Payback

Milton Friedman on 4 Ways to Spend Money

Milton Friedman on Libertarianism (Part 1 of 4)

Milton Friedman on Libertarianism (Part 2 of 4)

Milton Friedman on Libertarianism (Part 3 of 4)

Milton Friedman on Libertarianism (Part 4 of 4)

Friedman and Sowell on Equality

"It's More Like a Debt Sun Roof"

This was the reaction last hour by Glenn Beck's producer Stu upon being told that Treasury Secretary Timothy Geithner had requested (on Friday - do you suppose they were trying to minimize media attention?) that Congress raise the national debt ceiling.

It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations

As Daily Markets Kenneth Bell dryly points out

So, if I’ve maxed out my credit card it only makes sense that my credit card company further boost my credit limit so that my other creditors can remain confident in my debt-paying ability.

Who Woulda Thought It: Defined-Benefit Pensions Don't Do Well in a Market Crash!

Given the numbers reported in this Los Angeles Times story from today…

California's two huge government pension funds reported whopping annual losses today of about one-quarter of their portfolios.

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

…would anyone like to volunteer to walk Anchor Rising's readers through the explanation, heard from some quarters, of how the financial meltdown has "proven" that 401(k)s and individual Social Security accounts are unworkable, while not proving the same thing about defined-benefit pension plans?

The Big Picture on Progressives and Pensions

A defined benefit pension system, like any retirement system, only works if there's enough money in it to fund what needs to be paid out. Seems straightforward, right?

Alas, not if you're a progressive. That's why they simultaneously push ideas like these, via a recently recycled Pat Crowley post at RI Future…

• 87% believe all workers should have a pension so they can be self-reliant in retirement.
• 79% of Americans think it is a good idea for government to sponsor pension plans that small employers or individuals can join.

...that suggest the goal should be to get to a place where "all" people are going to be in a pension system, with a large part of the system "government sponsored". But if everyone is in a defined-benefit plan, then where will the money come from, when there's not enough money to simultaneously meet current obligations, while keeping enough in the kitty to pay for future obligations -- as is the case in many state pension funds (including Rhode Island's) right now? Or what will happen to pension benefits promised by companies that go out of business, without adequate resources in their funds to cover their future obligations?

DB proponents offer two basic categories of answer to these questions…

1. Answer #1: What problem are you talking about -- pensions are always secure because as much money as is necessary can be taken at will from future taxpayers to pay for them. (DB proponents don't actually say this, it's just implied). To get a rough idea of what this future would look like, imagine having Social Security as your only retirement, and probable continuing increases on your FICA payroll taxes throughout your lifetime in order to pay for it.
2. Answer #2: Trust us, you can be sure that government will put aside the money it needs to pay for future obligations, even though it hasn't managed to so far. Note, however, that amongst Rhode Island DB supporters, there are several who do not believe that providing the funding that pension plans need to meet their future obligations should be a budget priority (see Answer #1 on how they plan to make up the difference.)

But as we've discussed in some detail here at Anchor Rising, DB pension systems that are properly funded and managed over their lifetimes are virtually identical, from a fiscal perspective, to defined contribution systems that are properly funded and managed over their lifetimes , i.e. you get the same amount out relative to what you put in.

In the end, DB advocates, who also argue the adequate funding and reasonable benefit levels can be assumed, aren't arguing for a system that's fiscally different from a 401(k)-style defined contribution system, they're arguing the government needs to take a certain portion of everyone's paycheck, because it can plan for everyone's retirement better than they can themselves (especially, I learned this week, in the case of people who belong to certain demographic groups whom they've concluded are unable to make the investment decisions that improve their chances for a maximal return, but I wouldn't dare touch that point, except to note that Judge Sonia Sotomayor might also agree that there are "inherent physiological differences" that might make one group "wiser" than another when it comes to decision-making, but that's her stated position, not mine, and I'm getting way off-track now...)

A Tea Party Icebreaker: What Are You Getting for Your $6,000 in New Debt?

According to numbers put out by the Congressional Budget Office…

1. President Obama's economic stimulus package will increase the debt burden on American taxpayers by over $6,100 per household ($719 billion in debt, divided by about 117 million households) by 2011.
2. The total package of spending and revenue changes enacted by Congress between January and March of this year will increase the debt burden on American taxpayers by over $6,700 per household by 2011.

This might make for a good ice-breaker with the other tax-units, er I mean people, at next Wednesday's Rhode Island tea-party: What returns are you seeing on the $6,000 - $7,000 surge in debt that the government will be running up in your name over this year and the next two?

No End to the State's Financial Problems in Sight

Steve Peoples serves reminder in today's Projo that the passing of a supplemental budget hardly even qualifies as round one in Rhode Island's continuing fiscal crisis...

The business-backed Rhode Island Public Expenditure Council analyzed both sets of out-year figures and concluded that the legislature’s projections -- showing an average annual deficit of $462 million through 2014 -- are more accurate than the governor’s, which estimate the annual hole at $360 million.

The difference is largely attributed to assumptions in the projected growth of Medicaid programs, which annually consume more than $1.9 billion in state and federal funds. The governor’s budget office assumes Medicaid will grow at approximately 6.5 percent annually, while the House fiscal office used the nationally recognized projection of 7.9 percent, according to RIPEC’s policy and research director, Susanne Greschner...

The out-year projections already assume sweeping changes in the public pension system for teachers and public employees, a redesign of costly Medicaid programs and the permanent elimination of general revenue-sharing for cities and towns.

The radical implications of Obama's budget proposal

Commentators on the evolving Obama presidency:

Charles Krauthammer: Obama proposes a European U.S.

Not a great speech, but extremely consequential. If Barack Obama succeeds, his joint address to Congress will be seen as historic -- indeed as the foundational document of Obamaism. As it stands, it constitutes the boldest social democratic manifesto ever issued by a U.S. president...

...The economic crisis is to Obama a technocratic puzzle that needs to be solved because otherwise he loses all popular support.

Unlike most presidents, however, he doesn't covet popular support for its own sake. Some men become president to be someone, others to do something. This is what separates, say, a Ronald Reagan from a Bill Clinton. Obama, who once noted that Reagan altered the trajectory of America as Clinton had not, sees himself a Reagan.

...Obama made clear Tuesday night that he intends to be equally transformative. His three goals: universal health care, universal education, and a new green energy economy highly funded and regulated by government.

(1) Obama wants to be to universal health care what Lyndon Johnson was to Medicare...

...Obama will create the middle step that will lead ultimately and inevitably to single-payer. The way to do it is to establish a reformed system that retains a private health-insurance sector but offers a new government-run plan (based on benefits open to members of Congress) so relatively attractive that people voluntarily move out of the private sector, thereby starving it. The ultimate result is a system of fully socialized medicine. This will likely not happen until long after Obama leaves office. But he will be rightly recognized as its father.

(2) Beyond cradle-to-grave health care, Obama wants cradle-to-cubicle education. He wants far more government grants, tax credits and other financial guarantees for college education -- another way station to another universal federal entitlement...

(3) Obama wants to be to green energy what John Kennedy was to the moon shot, its visionary and creator. It starts with the establishment of a government-guided, government-funded green energy sector into which the administration will pour billions of dollars from the stimulus package and billions more from budgets to come.

But just picking winners and losers is hardly sufficient for a president who sees himself as world-historical. Hence the carbon cap-and-trade system he proposed Tuesday night that will massively restructure American industry and create a highly regulated energy sector.

These revolutions in health care, education and energy are not just abstract hopes. They have already taken life in Obama's massive $787 billion stimulus package, a huge expansion of social spending constituting a down payment on Obama's plan for remaking the American social contract.

Obama sees the current economic crisis as an opportunity. He has said so openly. And now we know what opportunity he wants to seize. Just as the Depression created the political and psychological conditions for Franklin Roosevelt's transformation of America from laissez-faireism to the beginnings of the welfare state, the current crisis gives Obama the political space to move the still (relatively) modest American welfare state toward European-style social democracy...

Conservatives take a dim view of the regulation-bound, economically sclerotic, socially stagnant, nanny state that is the European Union. Nonetheless, Obama is ascendant and has the personal mandate to take the country where he wishes. He has laid out boldly the Brussels-bound path he wants to take.

Let the debate begin.

Power Line on Clarity

We shouldn't be surprised by the radicalism of Obama's domestic agenda. He was, after all, the most liberal member of the Senate. And he found congenial both the preaching of Rev. Wright and the educational agenda of William Ayers...

Obama's unwillingness, as a formal matter, to take Republican views on domestic issues seriously should not be surprising either. There is no room for meaningful discussion between radicals and non-radicals...

But Obama no longer needs Harvard conservatives or Illinois Republicans to vouch for his "reasonableness." Moreover, he is now engaged in an enterprise that requires a greater single-mindedness -- the transformation of the American economic system...

Under the circumstances, conservatives should be grateful for the clarity of the situation. It is better that battle lines be drawn in sharp relief than that Republicans have the opportunity to pull off this or that legislative tweak...Economic radicalism cannot be tweaked into something palatable.

We now know for certain that Obama is an out-and-out statist bent on redistributing income and clamping down on free markets. He desires, as Charles Krauthammer has shown, to convert our free and vibrant economy into a European-style nanny state.

Conservatives must be equally single-minded in the defense of our country's way of life. There is no cooperating with Obama on domestic issues, and to the extent that Republican Senators like Arlen Specter cooperate, conservatives must do whatever we can to end their public careers.

Continue reading "The radical implications of Obama's budget proposal"

At What Point Do We Begin Using the Phrase "Out of Control"?

Turning debate into bickering over legislation that would increase departmental budgets by eight percent, Rep. James McGovern (D, MA) offered this irrelevancy:

"The same people who drove the economy into the ditch are now complaining about the size of the tow truck," said Rep. James McGovern, a Democrat from Massachusetts, pointing out the large increase in deficits that President George W. Bush and GOP-controlled Congresses amassed.

I guess responding to a wrong with a wronger makes it right. Reading the Nation section of the newspaper is beginning to feel like watching teenagers run up the family's credit cards while the parents recover from a peculiar illness that had caused financial delusions.

On the healthcare side, the change in the flow of money couldn't be more dramatically drawn:

Obama's budget proposal would effectively raise income taxes and curb tax deductions on couples making more than $250,000 a year, beginning in 2011. By not extending all of former President George W. Bush's tax cuts, Obama would allow the marginal rate on household incomes above $250,000 to rise from 35 percent to 39.6 percent, said an administration official.

To raise more money, Obama wants to reduce the rate by which wealthier people can cut their taxes through deductions for mortgage interest, charitable contributions, local taxes and other expenses to 28 cents on the dollar, rather than the nearly 40 cents they could claim otherwise.

That proposal is deeply controversial, particularly with nonprofit institutions that depend on wealthy donors and with lawmakers representing high-tax states such as New York and New Jersey.

The plan also contains a contentious proposal to raise hundreds of billions of dollars by auctioning off permits to exceed carbon emissions caps Obama wants to impose on users of fossil fuels to address global warming. Some of the revenue from the pollution permits would be used to extend the Making Work Pay tax credit of $400 for individuals and $800 for couples beyond 2010 as provided in the just-passed economic stimulus bill.

About half of what officials characterized as a $634 billion "down payment" toward healthcare coverage for every American would come from cuts in Medicare. That is sure to incite battles with doctors, hospitals, health insurance companies and drug manufacturers.

Some of the Medicare savings would come from scaling back payments to private insurance plans that serve older Americans, which many analysts believe to be inflated. Other proposals include charging upper-income beneficiaries a higher premium for Medicare’s prescription drug coverage.

Even after all those difficult choices, Obama’s budget would still leave the federal government heavily in the red, with deficits remaining above $500 billion over the second half of the decade — even after a series of wrenching policy choices.

Running with the just-make-it-so liberal fantasy that policy can simply be dictated to society without consequence, the current regime is going to stultify economic growth and foster dependence. Well, America, you asked for change, and you're going to get it; let's hope we all survive the experience.

Congressman Says Let's Have Public Sector Pension Funds Bail Out the Banks!

One of the most unenlightening debates that has resulted from the financial crisis has been the one where advocates of defined benefit pension plans argue that the market crash proves that 401(k)-style plans can't work and therefore we need to increase the number of people in defined benefit plans, while advocates of 401(k)s argue that the market crash proves that defined benefit plans don't work, and therefore we need to increase the number of people in 401(k)-style plans.

This argument is inane. Without robust market growth, nobody's plan for a multi-year retirement is going to work.

What has remained true, however, both before and after the crash, is that public sector defined-benefit plans require putting a huge single pool of money under the control of politicians and that the odds of a big pool of money, under the control of politicians for multiple decades, not getting raided for something stupid, are virtually negligible.

Case and point, from the New York Times via Instapundit, is Congressman Gary Ackerman's plan to a) bail out banks using pension fund money and, even better, b) his attitude that this is not a problem, because the government can magically "guarantee" an 8.5% return on investment...

Financial institutions in the United States probably need hundreds of billions of dollars in additional assistance, and one congressman wants to harness state and local pension funds to help them.

Rather than rely more heavily on the Treasury, which has already put $350 billion in the nation’s banks, Representative Gary L. Ackerman sees an opportunity in the trillions of dollars in public pension funds, The New York Times’s Mary Williams Walsh reported....

Mr. Ackerman, Democrat of New York, is sponsoring legislation that would allow public pension funds to pool some of their money and use it to create a sole-purpose entity that would buy $50 billion to $250 billion worth of preferred stock in America’s banks. That would strengthen the banks’ balance sheets and, Mr. Ackerman hopes, get them lending again.

And, saving the truly best for last, here is Congressman Ackerman's explanation of why he favors this plan, because...

Some of us are getting tired of writing checks with public money.

Mark Zaccaria: You Can’t Finance Growth with Deficit Spending

We all should be vitally interested in the goings-on in Washington, DC, regarding the Stimulus Package that’s making its way through Congress. The news reports may make it seem complicated and far away, but it won’t be long before the effects of what our lawmakers do to us on this matter come right home to roost.

America became what it is today by productivity. In days gone by that word meant manufacturing, virtually the only process by which wealth is created. The productive capacity of the United States of America was the deciding factor in both World Wars of the Twentieth Century, and our ability to build the things that businesses and consumers around the world wanted created the highest living standard in history. I would also argue that the inability of our adversaries to keep up with our productivity was the very thing that won the Cold War.

Today we are seeing what happens when our ability to keep creating wealth slips away from us. Make no mistake. We still manufacture plenty here in America, just not as much as we once did. But we have been consuming more than we’ve been creating for some time and the result is plain for everyone to see. So it falls to government to act as agent for American society and do something to fix our ailing financial system.

That means now is the time that every politician who has ever uttered the phrase “Doing the People’s Business” gets to prove that he or she knows what that means. To government, Doing Something means spending money. To politicians, spending money carries with it the implicit chance to curry favor with voters in the process. Without that there might be no re-election.

So what will curry favor with the voters while also having a positive impact on our economic woes?

The Congress of the United States seems to think that would be a spending frenzy on public works and special interest projects. Collectively, our Senators and Representatives appear to have decided this will please voting constituencies in the short term, even if it takes years for the economic impact to trickle down to you and me. What we are seeing in the Gazillion Dollar Spending Bills making their way through Congress is a litany of measures that fail to address the housing crisis, contain wasteful spending at a time when tax revenues are bound to be down, and create only temporary or purely public sector jobs.

How about creating an Industry instead of just a spending program? What if private capital instead of public tax dollars created the infrastructure that millions of us could work within to once again make the things that businesses and consumers around the world really want? For that to happen, government action has to attract that private investment, not repel it. Harder still, our political leaders have to have the courage of their convictions to give the voters credit for understanding that it is only economic activity that will create growth, not pork and not special interest pandering.

Giving taxpayers’ hard earned dollars to inefficient corporations won’t help us. Spending in deficit to pump up the balance sheets of banks won’t help us either, if those banks just sit on the cash instead of putting it to work in the economy. What these approaches will do, at least according to one study, is give every American Taxpayer a brand new $10,000 invoice on top of all our existing indebtedness.

There are real product opportunities in green technologies and alternative fuels, just to name two industries that will be built on innovation. Electronics and nanotechnology are two more. Recent gains in efficiency for high voltage electrical transmission promise to let us use much more of the juice we generate, if we will only put them in place. There are plenty of market segments where a real stimulus might trigger a new growth industry.

What’s lacking is political courage inside the Washington Beltway.

But you and I can help with that. We can let our elected representatives know we understand that stimulating the economy is different than helping insiders feed at the public trough. We can let them know that we hired them to go down there and do the right thing for Us, even if we don’t have lobbyists reminding them of it all the time. Drop a Dime. Send an E-Mail. Write a letter. It could save you Ten Grand! The more we tell them that they have more to loose by doing Business as Usual than they do by innovating for new times, the more likely they are to get it.

Here in Rhode Island, our own Congressional Delegation is composed of professional legislators. None of our team in Congress has any practical experience in the private sector. So they can’t be expected to understand intuitively what the right thing to do actually is. We need to tell them. We need to let them know that when they hold back on spending for government managed projects they are doing what we want. We need to tell them that incentives for economic development will cost much less and go much farther towards helping everyone than entitlements put in the hands of consumers will.

Let them know you’re watching. Let them know that you approve of doing the right thing in this crisis. Hopefully it will give them the political courage to actually do it.

Mark Zaccaria is a small businessman in North Kingstown. He is a former member of the North Kingstown Town Council and was the Republican Candidate for the state’s District 2 seat in Congress in 2008.

Nationalizing Failure

Yesterday, Marc and Monique noted that the "stimulus" sticker is being slapped on boxes of the Democrats favorite things. It may be the giddy air of Washington, these days, that brought forth from House Speaker Nancy Pelosi the comment: "Would we have ever thought we would see the day when we'd be using that terminology - 'nationalization of the banks?'"

With the direction in which the federal government is going, I fear that "stimulus" will prove to mean "national collapse." From the proximate link (emphasis added):

Many believe that form of hybrid ownership - part government, part private, with the responsibilities of ownership unclear - will not prove workable.

"The case for full nationalization is far stronger now than it was a few months ago," said Adam Posen, the deputy director of the Peterson Institute for International Economics. "If you don't own the majority, you don't get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It's the mistake the Japanese made in the '90s.

"I would guess that sometime in the next few weeks, President Obama and Tim Geithner," he said, referring to the nominee for Treasury secretary, "will have to come out and say, 'It's much worse than we thought' and just bite the bullet."

That's speculation from a think-tanker, of course, but consider the prospect's implications. Bank management will face national politicization of their jobs. Private shareholders will have less incentive to invest. The federal government will have even more power to refashion our financial system based on its own impressions of economic reality and "social justice."

This path was mapped in the very first leap toward bailouts, last year, when America was assured of the necessity and everybody brushed off the natural tendencies of government as a consideration. The only question, at this point, is whether the stumbling beast can be stopped.

Treasurer Caprio on Pension Performance

Rhode Island's General Treasurer is also the chair of the state's investment commission, which as part of its duties determines the asset allocation of the state pension fund. (Professional fund managers then decide specifically which funds to put the money in).

Breaking news: You may have heard that that markets did not do so well in 2008. Treasurer Frank Caprio quantified exactly how badly the Rhode Island retirement system was hit between June 30, 2008 and October 31, 2008, and provided a comparison to several other benchmarks…

We asked the General Treasurer what the ramifications of a sudden 19% downturn for the pension system were…

General Treasurer Frank Caprio: The pension system values the fund with a five-year smoothing, so any one big positive or negative year doesn't really move the needle as you would expect. We take five-year blocks and average those years. A down year has an impact, no doubt about it, but it's not as if our fund is viewed as having dropped by whatever our negative number is for the year. Most large pension funds use this type of smoothing.

Now, we will be penalized for that too. In strong positive years, you don't get the full benefit either, as they're averaged again over time. If you look at the value of our fund at any point in time, there will be two numbers, what the fund is actually trading at, and what the five-year smoothing is. On the way up, you usually lag where the fund actually is. And when you have a down year, it's factored in over the five years. So there is an impact, but it's not an immediate impact.

Anchor Rising: There are some non-fiscally conservative people out there who would like to reamortize the whole system and start the clock again…

FC: I've talked about the thirty year mortgage, where we've paid ten years and have twenty years to go. What they would want to do is say let's cease that and start a new thirty-year mortgage. Just like any mortgage, if you paid ten years, assuming the value of the house hasn't dramatically decreased, when you refinance, you have the benefit of spreading out a smaller liability over a longer period of time.

That type of engineering is fine if you're making other material changes that benefit the taxpayers. But if you are just doing those one-time gimmicks, that's not going to strengthen the system for the long term. If you want to do that in conjunction with some of these other things that are being debated that materially reduce the liability, then that's something that not only a policy leader can live with, but that the rating agencies will look at as neutral or favorable and not mark you down for.

Treasurer Caprio on Pension Reform

During Anchor Rising's interview of Rhode Island General Treasurer Frank Caprio, Treasurer Caprio presented the results of several case studies illustrating how the pension reforms implemented in 2005 have helped bring the cost of Rhode Island's pension system in line relative to the other New England states. One set of analyses compared benefits owed to a state retiree with 30 years of service and a final salary of $57,000 who retired at age 55 -- as was allowed in the pre-2005 system -- to what is owed to a state retiree with the same service time and salary who retired at age 60, under the post-2005 schedules…

• The ERSRI benefit under [the pre-2005 schedule] is 48% larger than the average in the other five states, and the APV is 60% larger than the average.
• The benefit under [the post-2005 schedule] is 7% larger than average, and the APV is 15% larger.

The 48% and 7% figures represent differences in first year payouts; the APV figures are the "actuarial present values", which are estimates of the total costs of all future-year payouts to a retiree.

Treasurer Caprio also added this observation…

If you think about costs increasing in our state, when the average household is bringing in $39,000 -- that's an actual stat from RI -- why should that household be supporting a pension benefit for a state employee that is going to be much larger than what the average household in Rhode Island is getting by with and have a 3% increase compounded on.

We then asked the Treasurer about the unfunded liability, which he discussed with us in some detail...

General Treasurer Frank Caprio: Here's how I like to conceptualize the unfunded liability. Assume that we're buying a house, and the house costs $700,000. We're going to have to put in place a mortgage to buy the house…over 30 years it gets paid off. Change those numbers; the unfunded liability in Rhode Island is about $7 billion for our pension. We have $6 billion that we have to pay it, but then we need another $7 billion to be fully funded.

Anchor Rising: And that's to pay out if everybody works a normal working career, retires, and lives an actuarily determined lifespan?

FC: Correct. The actuaries will make a bunch of assumptions. Usually, they're pretty close to being accurate. Large numbers are in play here. You look at the past practice and experience, and you overlay that onto the future.

Think of the house example. We have this liability and we're paying a yearly payment in the form of a mortgage. After 30 years, we'll have no debt on this asset. Now, think of the same concept with the unfunded liability. We have a $7 billion unfunded liability. We are currently paying between the state and the municipal payments into the system...about half-a-billion dollars a year in employer contributions. The reason we're doing that is we're 10 years in on a 30-year plan. 20 years from now, we'll have a fully funded pension system. The system gets high marks – when I say system, I mean the state of Rhode Island -- because we've anted up the payments on that mortgage, so to speak.

What the changes that are being proposed to the system do is take that $7 billion that we currently owe and shrink it, because by not guaranteeing that 3% a year cost-of-living adjustment, our future liability becomes much smaller. It will shrink by about 25% and therefore our "mortgage" payment can shrink. That's what's being attacked, by changing the benefit formula and not being able to retire at any age.

Continue reading "Treasurer Caprio on Pension Reform"

Tom Ward's COLA Proposal

Valley Breeze publisher Tom Ward offers a proposal for modifying cost-of-living pension increases that's softer than a total freeze…

What is the better way to handle COLAs and save money? Follow the lead of our surrounding states, that's how.

In Massachusetts, all state employees get a 3 percent raise on the first $12,000 of their pensions, and no more. What if we did this in Rhode Island (with $12,000 or, I would suggest, an even larger figure) and extend it to both current and future retirees?

It's a question I posed to state General Treasurer Frank Caprio last week when he stopped in for a visit to this newspaper.

"Is it fair," I asked, "for a recently retired Woonsocket superintendent of schools to receive a $350 per month raise (on a $140,000 annual pension), every year, forever, while teachers who have been in the classroom 25 years get no COLAs when they retire?" We agreed the correct answer was "No."

The Details of the Governor's Supplemental Budget

For those interested in full detail, the complete text of the Governor's budget proposal is already available from the Rhode Island Legislature's website. I recommend the PDF version over the HTML in this case, since it's a little easier to tell what's being added and what's being removed in the PDF scheme.

Let me add that, despite the many problems with Rhode Island government, one consistent area of excellence is the legislative staff's work in making a large volume of information regarding proposed legislation available to the public after a very short turnaround.

The Governors Pension Proposal

Governor Carcieri's proposal has two major ongoing items relating to non-disability pensions...

1. Elimination of cost-of-living adjustments for state and municipal employees who retire after April 1, 2009.
2. Establishment of a minimum retirement age of 59 for state and municipal employees, including teachers, to be eligible for retirement.

Also, the Governor's plan calls for only 25% of the state contribution to the retirement fund for teachers, judges, state police officers and state employees to be made for the period between February 1, 2009 and June 30, 2009. I'm not sure how much of the contribution deferral is offset by the above two changes.

And if I understand this properly, the plan calls for local communities to make only 25% of their scheduled pension contributions. Correspondingly, state education aid to each city and town will be reduced by the amount deferred.

Index of the Governor's Budget Proposals

Here's an index of the major items in Governor Donald Carcieri's supplemental budget reconciliation plan. "Major" in this context is defined as any item saving $10 million or more for FY2009; the 10 items below account for $305 million of the $357 million deficit (85% of the total).

Greg Mankiw's memo to Obama

Greg Mankiw:

Congratulations, Senator Obama. You ran a good campaign, and you racked up an historic victory. As you get ready for your new responsibilities, let me suggest four ways for you to become a reliable steward of the economy:

Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996.

Health policy is a case in point. Over the past several months, you lambasted McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. Did you know that long before McCain ever proposed this idea, it was advanced by Mr. Furman, your campaign’s policy director? He can explain to you why the Furman-McCain plan makes a lot of sense.

Now you may decide that this plan does not go far enough. You may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, you run into the next issue.

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare.

Yet during the campaign, you promised that you would cut taxes for 95 percent of Americans, that you would vastly expand health insurance coverage, and that you would never cut Social Security benefits or raise the retirement age. You will almost surely have to renege on some of these promises. As your economic team will often remind you, even if the laws of arithmetic are ignored during campaigns, they provide a real constraint when making actual policy.

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Take trade policy, for example. In the senate, you voted against the Dominican Republic-Central American Free Trade Agreement. You opposed free trade agreements with Colombia and South Korea. You supported Senators Charles Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. You supported the Byrd Amendment, which encouraged domestic companies to file anti-dumping suits against foreign competitors. You supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

Your economists can explain to you why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

This past Tuesday, many people voted for you hoping you would achieve the kind of economic success that Bill Clinton enjoyed in the 1990s. Your best chance of delivering what they want requires that you abandon some of your past positions and pursue a more moderate, bipartisan course.

Re: A Study in Contrasting Responses

UPDATED ON SEPTEMBER 8 & 9

Incentives drive human behavior but, especially in government where there are no market forces, rarely does anybody pay attention to the impact of the incentives created by laws, regulations or government actions. Which is why government actions will always create "unintended" consequences and less than efficient solutions.

There is a concept called "moral hazard" in the finance world which one source defines as:

One of two main sorts of MARKET FAILURE often associated with the provision of INSURANCE...Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

What both Palin and especially Obama are missing in the Freddie and Fannie bailouts/takeovers is the larger issue of moral hazard. These bailouts/takeovers are signaling to the marketplace that nobody in the future will suffer meaningful adverse economic consequences as a result of their bad decisions.

As a first step into the moral hazard world, the federal government enabled this situation by not officially giving its full faith and credit guarantee to backstop any future defaults by Freddie and Fannie, as government-sponsored enterprises...but then winking at investors, as if to tell them that the government would step up if they had to.

Now think of how a bailout works, about what incentives and rewards it dishes out:

Investors have generated greater than T-bill rates of return on Freddie and Fannie debt investments in past years while really only having marginally more risk than T-bills, which are explicitly guaranteed by the federal government. So investors have made out by generating a higher rate of return.

Who paid for giving investors that higher rate of return? The American taxpayers. By now bailing them out, American taxpayers - who never contributed one iota to the misdeeds of Freddie and Fannie - are forced to pay billions of dollars of their hard-earned monies toward the bailouts. Said another way, taxpayers are being forced to make a payment for a past-due risk premium which is the difference between a T-bill level of risk and the Freddie and Fannie risk actually taken.

The government says that the bailout proceeds will be repaid, while adding that it will be up to the next administration and Congress to decide the particulars. The players committing publicly today to a payback won't be around to ensure it happens so their words are meaningless. The government players who could be responsible for repaying taxpayers in the future have no obligation to do so and the government world provides them with no incentives to do so. Which, I predict, will yield a not-surprising indifference to paying back American taxpayers.

Meanwhile, the people in Freddie and Fannie who actually made the bad decisions (including, it sounds like, aggressive accounting practices) that led to the bailout have no incentive to moderate their risk-taking behaviors because they have learned - just like children learn from bad parenting practices - that they will get away with acting out of line. Sure a few top executives lost their jobs but what else has changed? So the bailout/takeover has largely rewarded bad behavior and even those who lost their jobs have not suffered consequences anywhere near the magnitude of the actions they took or allowed under their watch.

Lovely.

The only genuine solution to stop the stupidity of incentivizing bad behavior that costs taxpayers money is to let something fail completely. Yes, it would be painful and that is never pleasant. But if anybody had the courage to do it, the proper alignment of incentives, of risk and reward, would ensure organizations rapidly returned to paying attention to their business fundamentals.

This is yet another example of what happens when government gets too large and when big business can buy favors from government.

ADDENDUM

See, once it starts, it just keeps going.

Don't lose sight of the obvious: It's big government and big companies doing corporate welfare OR it's big government doing other forms of undeserved welfare.

Meanwhile, average working Americans have no such welfare options. Nope, the government just takes more of their hard-earned monies via taxation to fund everyone else's misbehavior.

Call it justice, big-government style.

ADDENDUM #2

With a H/T to Ramesh Ponnuru, the Wall Street Journal weighs in:

...Treasury Secretary Henry Paulson wants to prop up the walking dead so the world keeps buying their mortgage-backed securities. His action may calm jittery credit markets, and it may get the companies through the current mortgage crisis -- albeit at enormous cost to American taxpayers. The tragedy is that he and Congress didn't act 18 months ago -- when the cost would have been far less -- and that he still isn't killing the Fannie and Freddie business model that has done so much damage. These corpses could still return to haunt us again...

At least Mr. Paulson has finally figured out he's been lied to...[previously] saying that the battle over the two government-sponsored enterprises (GSEs) was nothing but a scrap between "ideologues." So he bought the Congressional line that Fan and Fred weren't a problem and would help financial markets through the housing recession...

This weekend's formal rescue puts an end to those illusions...

The new federal "conservatorship" is a form of nationalization that puts regulators firmly in control. The feds fired the company boards and CEOs, though the clean up needs to go further to change the corporate cultures. Both companies remain Beltway satraps that hire for reasons of political connection, not financial expertise.

The taxpayer purchase of preferred stock means that the feds will own about 80% of the companies if all the warrants are ultimately exercised. The feds also stopped dividend payments, saving about $2 billion a year. This amounts to significant dilution for current Fannie and Freddie shareholders, and it offers taxpayers some return on their bailout risk if the companies recover.

We only wish Mr. Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure. Fan and Fred holders had profited handsomely for decades by exploiting an implicit taxpayer guarantee that their management claimed didn't exist. Now that the taxpayers are in fact stepping in, the current common and preferred holders deserve to lose everything. Mr. Paulson apparently wanted to dodge that political fight...

The Treasury chief also gave a free pass to the holders of some $18 billion in Fan and Fred subordinated debt. He did so even though these securities were understood not to have the same status as mortgage-backed securities or other Fannie debt, and even though this will set a bad precedent for other bailouts. Watch for Citigroup's subordinated debt to jump in price as investors conclude that the feds would do the same thing if Citi needs a rescue.

By far the biggest risk here, however, is that the companies could still emerge with their business model intact. That model is the perverse mix of private profit and public risk, which gave them an incentive to make irresponsible mortgage bets with a taxpayer guarantee.

Mr. Paulson could have ended that model immediately by putting the companies into "receivership." Both companies could have continued to securitize mortgages, even as their riskiest businesses were wound down...And in any case, had Mr. Paulson acted sooner and given markets time to understand that receivership doesn't mean immediate liquidation, the risk of a run might now be far less.

The Treasury plan does at least put some useful limits on Fan and Fred risk-taking, albeit starting only in 2010...

Treasury says all of this will provide a motive for Congress and the new President to change how Fan and Fred do business, and in the meantime the conservator has also ordered a stop to their political lobbying. It's also nice to see that on this point Mr. Paulson has found religion. In his statement Sunday, he blamed the need for a bailout on "the inherent conflict and flawed business model embedded in the GSE structure." Welcome to our merry band of "ideologues," Mr. Secretary.

The Treasury chief has nonetheless decided to leave the hardest political choices to his successor, who will have to face down the usual phalanx of Fannie apologists: Democratic barons Barney Frank and Chuck Schumer, the homebuilders, various Wall Street sages and left-wing journalists...

...who knows how the political mood will have shifted once the housing slump passes. It's easy to imagine the next Treasury Secretary concluding that he also thinks the fight for permanent reform is too difficult. Then we are back to the same old stand.

The Fannie-Freddie bailout is one of the great political scandals of our age, all the more because it was so obviously coming for so long. Officials at the Federal Reserve warned about it for years, only to be ignored by both parties on Capitol Hill. The least we can do now is bury these undead monsters for all time.

ADDENDUM #3

More from Jim Rogers:

Has America created its own variety of communism with the U.S. Treasury Department’s bailout of two beleaguered government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac? According to Rogers Holding CEO Jim Rogers, the answer is yes.

"America is more communist than China is right now," Rogers told CNBC Europe’s "Squawk Box Europe" September 8. "You can at least have a free market in housing and a lot of other things in China. And you can see that this is welfare for the rich. This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters."

Rogers...said the bailout was not benefiting homeowners or helping average citizens improve their standing for a home mortgage.

“It’s not bailing out the homeowners who are in trouble, by the way,” Rogers said. “It’s not bailing out people who want a mortgage – it’s just bailing out financial institutions...I think it’s a mistake.”...

"This is a big huge mess and neither [Obama nor Palin] has a clue as to what to do next year," Rogers said. "Bank stocks around the world are going through the roof, that’s because they’ve all been bailed out. You don’t see the homeowners in Kansas going through the roof because they’re not being bailed out."

Rogers had previously called for Fannie and Freddie to be allowed to go bankrupt...

"Let the patient go bankrupt,” he said. “We have courts in America; they will be reorganized."

Fannie Mae and Freddie Mac were "wove a mantle of invincibility" through lobbying according to a September 8 Wall Street Journal "Deal Journal" blog post. According to the Journal’s Heidi N. Moore, the mortgage giants had $170 million in lobbying bills in the past decade and spent $3.5 million on lobbying just in this year’s first quarter, spreading their largesse among 42 outside lobbying firms.

Yep, big government works for the powerful who can buy favors. Now if the less powerful only had some more community organizers to help them out...

ADDENDUM #4

McCain and Palin weigh in with a WSJ editorial.

Corruption. Politicians and former politicians scratching each other's backs, getting wealthy at the expense of average Americans while not serving the public. Where is the outrage?

Gambling Revenue Counteroffer?

Robert Walsh's controversial proposal to permanently dedicate a portion of Rhode Island's gambling system to the state pension fund makes the lede of the Katherine Gregg/Paul Grimaldi article in today's Projo even more eye-catching than it would normally be…

The owners of Twin River are offering the state upward of $500 million up front in return for slicing by more than half the percentage of money the state gets from the slot parlor.

The offer is part of Twin River’s plan to solve its own “dire” financial crisis. Twin River has missed loan payments to its bank and is in danger of falling into bankruptcy. “The situation is dire. We are standing on the edge of a precipice,” Twin River spokeswoman Patti Doyle said yesterday.

But based on the raw numbers presented in the article, it's difficult to see the Twin River proposal as a good deal for the state…

Meeting with House Speaker William J. Murphy earlier this week, the Twin River delegation offered the $500 million if the state would reduce its cut of the slot revenue from 61.45 percent to 25 percent....

The state anticipates $261.4 million from Twin River alone in the fiscal year beginning July 1, and that does not include any of the additional money that newly approved 24-hour gambling on weekends and holidays is expected to generate.

Let's see, 25 is roughly 40% of 61-and-change. That means the state would collect, again in rough terms, about $104 million per year under the new rate, approximately $155-$160 million less than it collects now, meaning that after just 3 1/4 years (500-divided-by-155) the state ends up with less money than it otherwise would have taken in.

Trading a reduction in revenue in-perpetuity for a short-term boost that evaporates after three years doesn't seem like sound fiscal policy to me, unless you believe for some reason that gambling is on the verge of dying here in Rhode Island, which I don't think anyone is forecasting.

Later on in the article, Gregg and Grimaldi ask the first question that I know occurred to me -- and I suspect occurred to others -- immediately upon viewing the headline…

Asked how Twin River’s owners could afford to offer the state a $500-million upfront payment when they can’t afford to pay off their outstanding loans, Doyle said: “If we are able to reduce our tax rate overall, the lending community will look more favorably on our relationship with the state” and presumably be “willing to advance the upfront payment.”

Do you buy this answer? Or do you perhaps take a more cynical view, that this is an attempt to head-off the recent proposal made by Mr. Walsh and protect the full value of a lucrative revenue stream?

If you don't take the cynical view, does the Walsh proposal still make sense, if Twin Rivers is going bankrupt? Or do you take a doubly-cynical view that this is a ploy by Twin Rivers to make them seem less fiscally sound than they may actually be, reducing any potential enthusiasm on Smith Hill for the Walsh plan? Or is that just too many layers of cynicism heaped upon one another?

UPDATE:

If commenter "ChuckR" doesn't mind, I'm going to mark him down in the "cynical but accurate" column...

If it was a good deal for the state, it wouldn't have been offered.

Finance and Demography

I found this article by the pseudonymous "Spengler" of the Asia Times interesting for at least two reasons...

1. The big-picture view of finance, demographics and debt he offers suggesting that increased transfer of American capital to foreign markets and the sub-prime mortgage crisis are bigger than anything that's fixable with a few new regulations (note: in the excerpt below, the term "pension" is used in a European sense, closer to what we in America would call Social Security than to an employer-based pension plan)…

   The aging pensioners of Europe and Asia must find young people to pay interest into their pensions, and they do not have enough young people at home. Germans aged 15 to 24, on the threshold of family formation, comprise only 12% of the country's population today and will fall to only 8% by 2030. But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century.

   It is fashionable these days to blame the Americans for borrowing instead of saving. In effect, Americans borrowed a trillion dollars a year against the expectation that the 10% annual rate of increase in home prices would continue, producing a bubble that now has collapsed…[but] the monster is not the financial system, crooked and stupid as it may have been. The monster is the burgeoning horde of pensioners in Germany and other industrial countries. It is easy to change the financial system. The central banks can assemble on any Tuesday morning and announce tougher lending standards. But it is impossible to fix the financial problems that arise from Europe's senescence....

   There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear....

   The world kept shipping capital to the United States over the past 10 years, however, because it had nowhere else to go. The financial markets, in turn, found ways to persuade Americans to borrow more and more money. If there weren't enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

   America's financial market could not produce enough pork chops, so the Europeans bought Spam and scrapple. America's rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down.

2. The graph he presents on S&P 500 returns that those who have been following the recent Anchor Rising discussion on the rates of return of pension and 401(k) funds should find interesting...

   

So do you think that Spengler tells you everything you need to know, or do you think he's a bit too reductionist?

The Anchor Rising Pension Simulation: The Walshian Assumptions

These results are so counter-intuitive, someone needs to double check that I haven't made a mistake, but I think I have all the formulas in the right place. Using NEA-RI Executive Director Robert Walsh's suggested pension analysis parameters, 13.5% of salary contributed to the fund each year, 8.25% investment growth and a 75% benefit after 38 years, plus (for now) an assumption of 3.25% annual salary increases, and a 3.0% COLA after retirement not kicking in until the third year, an employee who retires after 38 years will fund him or herself for a very long time.

The result is very sensitive to the number you assume for growth. With a 7.0% growth figure, the retiree "only" stays self funded for about 26 years. The result is also sensitive to the figure you assume for an annual salary increase, but because (in percentage terms) the big increases in teacher salaries are at the front of a career, when the absolute numbers are relatively small, my initial guess is that the step-system doesn't pose a problem for the retirement of long-career teachers.

But if the 8.25% that Mr. Walsh suggests is realistic, and I haven't made an error in my spreadsheet, it's a truly amazing feat that pols across the nation have managed to screw the public pension system up as badly as they have.

Continue reading "The Anchor Rising Pension Simulation: The Walshian Assumptions"

The Anchor Rising Pension Simulation

James Cournoyer's observation, made in his May 5 Projo letter-to-the-editor, that contributions from employees into the Rhode Island public pension system don't come anywhere near to covering the amount that the system is obligated to pay out, shouldn't take anyone by surprise. Pensions (and defined contribution plans, for that matter) work on the principle that contributions + investment growth = mo' money, given time. The investment component cannot be neglected in any attempt to determine reasonable payouts.

The basic assumptions that go into building a pension fund are that...

1. Every year, an employer and employee will put some percentage of an employee's salary into a "kitty" of eventual retirement funds.

   (I can have a bit of an argument with multiple sides in the pension reform debate here. Especially when participation in a pension plan is mandatory, I don't see much point, from a fiscal perspective, in separating the "employer" contribution from the "employee" contribution.)

2. As the employee's salary grows each year, so do the contributions to the kitty.
3. The total in the kitty also grows (hopefully) through investment.

To get a sense of what the numbers are, we can start with the assumptions in Mr. Cournoyer's letter, an initial salary of $30,000 and annual raises of 3.25%. We'll also need to assume a figure for total employer-plus-employee contributions to the pension fund (I'll use 20%, for starters), and an annual investment growth rate, (I'll use 7%, relative to what's already in the kitty from the previous year plus one-half of the current year's contribution).

Under those conditions, after 20 years, Mr. Cournoyer's hypothetical employee will begin with about $287,000 to draw on for his or her retirement...

Now, our hypothetical retiree begins drawing out of the pension fund at age 45 after 20 years of contributions. According to Mr. Cournoyer, the rules are that…

1. The initial pension amount taken is 50% of the average of the highest (in this example, the last) five years of salary.
2. There is a 3.0% cost-of-living adjustment on the size of the annual withdrawals.

But also, there's a third rule we need to add -- a rule, I suspect, often forgotten in initial perceptions of how pensions work -- that growth (hopefully) continues in the kitty throughout the retirement drawdown period. In particular, we'll assume the same 7.0% growth used in the building phase continues, in this case calculated relative to last year's kitty minus one-half of the current year's withdrawal amount. The quantity to be concerned about is not when the money-out equals employee-contributions-in, but when the total in the kitty, contributions plus investment growth minus distributions, falls below zero. At that point, our hypothetical employee's retirement is no longer self-funded and additional money must be found to directly cover the pension cost. (There are two basic sources of this additional money. One, of course, is tax revenue sent directly to pensioners. The other is money already in the fund from people who die before they collect everything their contributions + growth would pay for. Sometimes I think that actuarial science, rather than economics in general, should be called "the dismal science").

Anyway, here's what happens to the fund based on Mr. Cournoyer's assumptions ...

I used Mr. Cournoyer's numbers, not because they are necessarily realistic (for state employees and teachers, for instance, I don't think that 50% pensions for 20 years of service are possible, and under some recent reforms, the COLA increase may not be so aggressive), but because they simultaneously illustrate...

1. That with solid investing, it is reasonable for a pensioner to expect to get many multiples of his or her contributions back, but also...
2. That many multiples may not be enough to cover the cost of an early retirement. Given that the average lifespan in the U.S. is around 75 years, a pensioner in the system above would require direct funding from some other source to pay for his or her retirement for about 15 years.

So, before going on and trying to figure out what is or isn't working in the pension system, are we anywhere close to having a method we can agree upon for analyzing it? (Also, I can tinker with the numbers, if people are interested in seeing the results under other conditions).

The Anchor Rising Pension Simulation

James Cournoyer's observation, made in his May 5 Projo letter-to-the-editor, that contributions from employees into the Rhode Island public pension system don't come anywhere near to covering the amount that the system is obligated to pay out, shouldn't take anyone by surprise. Pensions (and defined contribution plans, for that matter) work on the principle that contributions + investment growth = mo' money, given time. The investment component cannot be neglected in any attempt to determine reasonable payouts.

The basic assumptions that go into building a pension fund are that...

1. Every year, an employer and employee will put some percentage of an employee's salary into a "kitty" of eventual retirement funds.

   (I can have a bit of an argument with multiple sides in the pension reform debate here. Especially when participation in a pension plan is mandatory, I don't see much point, from a fiscal perspective, in separating the "employer" contribution from the "employee" contribution.)

2. As the employee's salary grows each year, so do the contributions to the kitty.
3. The total in the kitty also grows (hopefully) through investment.

To get a sense of what the numbers are, we can start with the assumptions in Mr. Cournoyer's letter, an initial salary of $30,000 and annual raises of 3.25%. We'll also need to assume a figure for total employer-plus-employee contributions to the pension fund (I'll use 20%, for starters), and an annual investment growth rate, (I'll use 7%, relative to what's already in the kitty from the previous year plus one-half of the current year's contribution).

Under those conditions, after 20 years, Mr. Cournoyer's hypothetical employee will begin with about $287,000 to draw on for his or her retirement...

Now, our hypothetical retiree begins drawing out of the pension fund at age 45 after 20 years of contributions. According to Mr. Cournoyer, the rules are that…

1. The initial pension amount taken is 50% of the average of the highest (in this example, the last) five years of salary.
2. There is a 3.0% cost-of-living adjustment on the size of the annual withdrawals.

But also, there's a third rule we need to add -- a rule, I suspect, often forgotten in initial perceptions of how pensions work -- that growth (hopefully) continues in the kitty throughout the retirement drawdown period. In particular, we'll assume the same 7.0% growth used in the building phase continues, in this case calculated relative to last year's kitty minus one-half of the current year's withdrawal amount. The quantity to be concerned about is not when the money-out equals employee-contributions-in, but when the total in the kitty, contributions plus investment growth minus distributions, falls below zero. At that point, our hypothetical employee's retirement is no longer self-funded and additional money must be found to directly cover the pension cost. (There are two basic sources of this additional money. One, of course, is tax revenue sent directly to pensioners. The other is money already in the fund from people who die before they collect everything their contributions + growth would pay for. Sometimes I think that actuarial science, rather than economics in general, should be called "the dismal science").

Anyway, here's what happens to the fund based on Mr. Cournoyer's assumptions ...

I used Mr. Cournoyer's numbers, not because they are necessarily realistic (for state employees and teachers, for instance, I don't think that 50% pensions for 20 years of service are possible, and under some recent reforms, the COLA increase may not be so aggressive), but because they simultaneously illustrate...

1. That with solid investing, it is reasonable for a pensioner to expect to get many multiples of his or her contributions back, but also...
2. That many multiples may not be enough to cover the cost of an early retirement. Given that the average lifespan in the U.S. is around 75 years, a pensioner in the system above would require direct funding from some other source to pay for his or her retirement for about 15 years.

So, before going on and trying to figure out what is or isn't working in the pension system, are we anywhere close to having a method we can agree upon for analyzing it? (Also, I can tinker with the numbers, if people are interested in seeing the results under other conditions).

The Iraq War and the State Budget?

At the Taubman Center panel on the Rhode Island budget crisis I attended at Brown University a few weeks ago, several members of the audience attempted to attribute at least part of the state deficit to Federal cut-backs in domestic spending forced by the costs of fighting in the Iraqi theater in the War on Terror. (And much to my disappointment, Paul Choquette, supposedly one of the voices of fiscal sanity on the panel, didn't disagree). However, the notion of a drastic -- or any -- reduction in domestic spending by the Federal government since 2001 or 2003 isn't supported by the numbers.

The Heritage Foundation's Brian Riedl has calculated that Federal spending, adjusted for inflation, has grown by about 30% overall since the year 2001. Riedl doesn't break out an Iraq-war figure specifically, but he does separate out the defense-related portion of the Federal budget. According to his numbers, 63% of the amount of the Federal spending increase has gone to entitlements and other non-defense related areas, while 34.5% has gone to defense. Non-defense related spending, in fact, has risen in the vicinity of 3% to 4% above the rate of inflation, on an annual basis, since the year 2001.

So, with Federal spending per household already near its highest levels ever (over $23,000, according to the Heritage Foundation), are advocates for bigger-and-bigger government really willing to attach themselves to the position that non-defense related government spending should always be climbing by more than twice the rate of inflation, no matter how much of the nation's GDP is ultimately consumed?

Continue reading "The Iraq War and the State Budget?"

The Entitlement Mindset of Rich and Poor

A relevant thought for the day from Claremont's Richard Reeb:

Entitlements ought to be understood only as goods or honors that we have earned, not something we think that we, or someone else, ought to have. That necessarily and unavoidably entails taking from one person or group and giving to another. The impolite word for that is theft. It impoverishes the victim and corrupts the beneficiary...

There is no point in being charitable toward what is truly not a charitable, but rather a greedy and a covetous, impulse, this political game called income redistribution. People who advocate it call themselves liberals (or progressives since liberalism got a bad name in the 1980s), but liberal people don’t demonstrate any moral virtue by forcibly taking someone else’s money instead of donating their own.

...the words of the Declaration of Independence clarify the matter: one is entitled only (though this is no small thing) to life, liberty and the pursuit of happiness, meaning that all must respect, and the government that we establish should secure, the free exercise of those rights.

The pursuit of happiness is not merely following one’s passions or inclinations but making the decisions and forming the habits which sustain one’s life, enhance one’s liberty and attain one’s happiness. None of this is easy, nor can it be, but it is easy to understand: one works to enrich oneself and not a king, aristocrat, dictator or bureaucrat, not to mention citizens who choose not to work and expect you to support them.

The entitlement mentality is so strong and pervasive that both the well off and the poor have fallen prey to it. In this democratic country, it has become a political creed that there is a permanent "underclass" that deserves to be supported. But no less a force are the wealthy farmers, businessmen and bureaucrats whose subsidies, write offs and sinecures fill their pockets and distort the marketplace.

Decent people are rightly critical of what they call "crazy" government programs that waste billions of taxpayers’ dollars. But the recipients of those giveaways are not crazy by any means, except perhaps crazy like a fox.

But maybe the foxes watching the Rhode Island hen house have finally out-foxed themselves.

Hide Your Wallets, D.C. Dems are Coming....

Republican Senator Mitch McConnell writes:

While most of the media were busy covering the latest developments on the Iraq funding bill or the bipartisan immigration proposal, congressional Democrats on Thursday quietly passed a budget creating the framework for the largest tax increases in American history...

Everyone takes a hit. Forty-five million working families with two children will see their taxes increase by nearly $3,000 annually. They’d see the current child tax credit cut in half — from $1,000 to $500. The standard deduction for married couples is also cut in half, from the current $3,400 to $1,700. The overall effect on married couples with children is obvious: Far from shifting the burden onto the wealthy, the Democratic budget drives up taxes on the average American family by more than 130 percent.

Seniors get hit hard too. Democrats like to crow that only the richest one percent of Americans benefit from the stimulative tax cuts Republicans passed in 2001 and 2003. What they rarely mention is how much seniors benefited from those cuts in the form of increased income as a result of lower taxes on dividends and capital gains. More than half of all seniors today claim income from these two sources, and the Democratic budget would lower the income of every one of them by reversing every one of those cuts.

Heritage also has some analysis on the Senate Budget--most of the tax increases are because the Senate is going to simply let the Bush tax cuts expire--and more here:

With federal spending surging above $24,000 per household per year, the incoming Democratic majority of Congress promised to restore fiscal responsibility in Washington. Instead of paring back the growth of government, however, Congress came to agreement in conference on a budget resolution that:

* Raises taxes by $721 billion over five years, and a projected $2.7 trillion over 10 years, or more than $2,000 per household;
* Includes 23 reserve funds that could be used to raise taxes by hundreds of billions more;
* Increases discretionary spending by nearly 9 percent in FY 2008 and does not terminate a single wasteful program;
* Completely ignores the impending explosion of Social Security, Medicare, and Medicaid costs; and
* Creates rules that bias the budget toward tax increases.
...

Congress’s budget resolution is consistent with the Democratic majority’s budget agenda so far. In just a few months in Washington, the Democratic Congress has tacked $21 billion in unrelated deficit spending onto the Iraq war emergency bill; passed a $7 billion farm bailout—without any offsets—that violates the majority’s own pay-as-you-go (PAYGO) rules by adding new mandatory spending;[1] and waived its own PAYGO rules in order to add new mandatory spending as part of a bill to expand the House of Representatives.[2] Coming on the heels of these initiatives, Congress’s irresponsible budget resolution is hardly a surprise.

President Bush has vowed to veto the Democratic budget.

New House Budget Means Higher Taxes

The Heritage Foundation has done an analysis of the new House Budget crafted by the Democratic majority in Washington and concluded that it means higher taxes across the board. Their reasoning:

The House leadership has proposed to increase spending over the next five years. Given the leader­ship's avowed commitment to paying for spending increases, tax revenues will have to rise. Which taxes will have to rise is unclear, as budget resolutions are notoriously short on details. However, the failure of House leaders to include any language addressing the expiring Bush tax cuts of 2001 through 2004 indicates that they could intend to end these tax cuts.[1] This, in turn, means that the House leadership could be allowing American taxpayers to assume a large and expensive tax increase upon the expiration of these tax cuts.

The House budget resolution has the potential to cost the average American taxpayer an additional $3,026 in taxes. In addition to the increased tax bur­den, Americans could also see their personal income decrease by an average of $502 dollars due to a weaker economy. Moreover, the budget resolution could dam­age employment growth, causing about one million fewer jobs to be created, and has the potential to damage economic output by over $100 billion nationally. The average cost of the House budget resolution to each congressional district amounts to the potential loss of 2,284 jobs that would have oth­erwise been created and a loss in economic output by an average $240 million.

The culprit for these negative impacts is higher taxes. Many economists believe that higher taxes, particularly on capital, cause the level of private investment to fall, thereby slowing productivity improvements and weakening the earning capac­ity of households. Wages and business earnings, which are closely tied to productivity, would fall as well.

Again, the budget resolution does not contain a detailed tax plan. However, the resolution also is silent on the most important tax policy change since 2001: the expiration of the tax law changes from 2001 through 2004 over the next four years. This paper presents estimates of the potential impact that allowing the Bush tax cuts to expire would have on Americans.[2]

Here's how--according to their calculations--Rhode Islanders would be affected:

Democrats Hiding Earmarks?

The new Democratic Congress really is changing the way things are done in Washington, aren't they? I'll leave it up to the reader to define "change" (h/t) in John Fund's story:

Democrats promised reform and instituted "a moratorium" on all earmarks until the system was cleaned up. Now the appropriations committees are privately accepting pork-barrel requests again. But curiously, the scorekeeper on earmarks, the Library of Congress's Congressional Research Service (CRS)--a publicly funded, nonpartisan federal agency--has suddenly announced it will no longer respond to requests from members of Congress on the size, number or background of earmarks. "They claim it'll be transparent, but they're taking away the very data that lets us know what's really happening," says Oklahoma Sen. Tom Coburn. "I'm convinced the appropriations committees are flexing their muscles with CRS."

Indeed, the shift in CRS policy represents a dramatic break with its 12-year practice of supplying members with earmark data. "CRS will no longer identify earmarks for individual programs, activities, entities, or individuals," stated a private Feb. 22 directive from CRS Director Daniel Mulhollan...The concern now is that free-spending appropriations committees will use the new CRS gag rule to define earmarks downward. "We need CRS to continue its reliable reporting so we can save the taxpayers money," says Sen. [James] DeMint...

...CRS is merely being asked to continue providing objective data. If it can't do that, why do taxpayers shell out $100 million a year to employ its 700 researchers?

Governor Carcieri's Budget: Early Reporting

The Governor has just releases his State budget proposal for next year. Scott Mayerowitz of the ProJo chose to highlight the "several accounting tricks, one-time sources of revenue and other gimmicks to balance his tax and spending plan," (sheesh, no in-story editorializing there, Scott) and glossed over one major source of cuts (state workers). Ray Henry of the AP (via the Boston Globe) was more detailed in explaining the nature of those cuts:

Hundreds of state workers would be laid off and social spending programs would be slashed to close a $350 million budget deficit under a budget proposal released Wednesday by Gov. Don Carcieri.

The Republican governor's $7.02 billion spending plan also taps into the state's rainy-day fund to help close the gap. But it avoids tax increases and pumps money into education initiatives backed by Carcieri, a former math teacher, including expanding nursing programs and modestly increasing education assistance for cities and towns.

"The decisions contained in this revenue and expenditure plan were not easy ones to make, but they were made with careful consideration for the best interests of all Rhode Islanders," Carcieri wrote in a letter to lawmakers.

His budget staff justified cutbacks by warning that expenditures were projected to grow 9 percent for the 2008 fiscal year starting in July. Revenue was only projected to increase around 4.3 percent. By law, Rhode Island must pass a balanced budget.

State workers are among the groups hit the hardest. Carcieri's plan calls for saving $9.8 million by firing 168 state workers, both unionized employees and management. Carcieri's plan would also privatize the food service and housekeeping staffs at a state hospital and veteran's home, eliminating an additional 214 workers.

All nonessential employees would have to take three unpaid days off scheduled around the Thanksgiving, Christmas and New Year's holidays, a move that he estimated would shave $4.8 million off the deficit...

And just like last year, the Governor is targeting both RIte Care and Child Care subsidies (I can hear the shrieking now).

As required by a new federal law, Rhode Island health officials will begin demanding more proof of U.S. citizenship, for example a birth certificate or passport, before allowing people to enroll in subsidized health care services.

Those changes could force an estimated 5,700 people off RIte Care, the state's insurance program for the needy, said Gary Alexander, the acting director of the Department of Human Services...

One of the larger social spending cuts would tighten the eligibility requirements for families that use state-subsidized child care programs, probably eliminating about 3,800 children from the program. Those children would largely come from families that already contribute some money toward their child care, Alexander said.

Of course, there's much more and a lot of it won't make many people happy. I don't like that the Governor has chosen to freeze the car-tax reduction, has proposed several fee hikes and I don't like the stop-gap measure of getting another tobacco settlement buyout. There's a lot to go over, and I'm sure we'll hear all sorts of whining from many quarters (including here). The lesson: don't spend more than you take in and you won't have to worry about "cuts." Now we ALL will have to make some sacrifices to pay for our fiscal largesse.

House Dems Like Earmark Reform. Senate Dems? Not so much...

Ah yes, see how much has changed! Looks like the House Democrats earmark reform bill is being supported by most Senate Republicans and a few Democrats....but the heartiest opposition is being put up by Sen. Majority Leader Harry Reid (via Glenn Reynolds). TPM Muckraker has one report and Andy Roth at the Club For Growth kept a running commentary on the goings on. Roth also posted a follow-up, which included this bit:

Senator Jim DeMint offered strong reform to the most egregious spending abuses in Congress-a proposal that was sponsored by Speaker Nancy Pelosi and that passed the House just last week. After trying, and failing, to kill the DeMint proposal, Senate Majority Leader Harry Reid, Senator Ted Kennedy and other Democrats used stall tactics to delay a final vote. Ultimately, the Senate was forced to postpone it.

I had heard that some local "new media" outlets sympathetic to the Democrats were starting up some countdown or something to track all of the "change" that was going to happen. (Funny, I checked them out and haven't seen anything about this yet. Maybe they'll get around to it. That is, of course, once they work out how to frame it as a positive for "their side.")

Which gives me an opportunity to offer a little advice for those new to the porkbusting/earmark reform movement in particular. You're either "all in" by going after anyone of either party who is a roadblock to said reform or you're not "in" at all. That means that you really, truly have to hold people accountable, even if, you know, you really, really like them, and all. So, yes, you actually have to put the pom-poms down every once in a while and throw a "boo" and "hiss" their way. Or you can just keep being a Party cheerleader.

Then, of course, maybe some Democrats supported earmark reform only because it was the GOP running Congress, right? Nah.....couldn't be that.

UPDATE: Looks like Senator Reid has acquiesced (via CFG quoting a Congressional Quarterly $$ article):

After losing a critical floor vote Thursday and scrambling in vain to reverse the decision, Senate Majority Leader Harry Reid, D-Nev., found the spirit of bipartisan compromise more to his liking Friday morning.

Reid offered an olive branch to Sen. Jim DeMint, R-S.C., agreeing to embrace his amendment to a pending ethics and lobbying overhaul (S 1) with some modifications. DeMint’s amendment, which Democratic leaders tried but failed to kill on Thursday, would expand the definition of member earmarks that would be subject to new disclosure rules.

[...] Reid admitted Friday that he was caught off guard when nine Democrats and independent Joseph I. Lieberman voted against his motion to table, or kill, the DeMint amendment. His effort failed, 46-51.

[...] Friday morning, a chastened Reid said, “Yesterday was a rather difficult day, as some days are. We tend to get in a hurry around here sometimes when we shouldn’t be. Personally, for the majority, we probably could have done a little better job.”

DeMint, who was flabbergasted Thursday by Reid’s maneuvering to change the outcome of the vote, was happy to accept the compromise Friday.

“DeMint has been happy to work to come to a bipartisan compromise that solidifies the reforms done by [Speaker Nancy] Pelosi [D-Calif.] and House Democrats,” said DeMint spokesman Wesley Denton.

Congrats to those on the left, right and center who held Reid's feet to the fire. Maybe next time, when such hypocrisy becomes readily apparent, even more folks from across the political spectrum will chime in!

The New Congress Encourages Automatic Tax Increases to Pay for Unlimited Spending Increases

The new Democratic-led Congress has passed so-called pay-as-you-go (PAYGO) rules that require new spending or new tax-cut legislation to be approved by a 3/5 majority, if the Federal budget deficit is projected to increase because of it. Pay-as-you-go, however, is a misnomer. The Federal budget will continue to increase on autopilot under the House’s version of PAYGO rules. The trick is hidden in the dense prose of this amendment to House rule XXI…

7. It shall not be in order to consider a concurrent resolution on the budget, or an amendment thereto, or a conference report thereon that contains reconciliation directives under section 310 of the Congressional Budget Act of 1974 that specify changes in law reducing the surplus or increasing the deficit for either the period comprising the current fiscal year and the five fiscal years beginning with the fiscal year that ends in the following calendar year or the period comprising the current fiscal year and the ten fiscal years beginning with the fiscal year that ends in the following calendar year.

The problem is that annual spending increases in programs like Social security, Medicare, and Medicaid -- the programs at the heart of the American fiscal crisis -- are approved in a concurrent resolution on the budget that does not make any “changes in law”. Amounts spent on these programs are determined by formulas written into already-passed laws. Entitlement spending will thus continue to grow without limit under PAYGO rules.

PAYGO is not about fiscal responsibility. It is about political cover, intended to allow Congressional Democrats (and the 48 Republicans who voted with them) to say they have no choice under House rules but to vote for individual pieces of legislation that increase taxes. Don’t believe it. Congress had a choice when it voted for PAYGO and it chose a fiscally profligate set of operating rules.

What could have been done instead? Well, if Congress was truly in a fiscally conservative mood, they could have done the obvious -- amend PAYGO to include automatic entitlement increases. Brian Riedl and Alison Acosta Fraser of the Heritage Foundation suggest this extension to PAYGO …

Congress would set multi-year spending targets for entitlement programs covered by PAYGO. If OMB projects that spending will exceed these targets, the president would have to submit reform proposals as part of the annual budget request, and Congress would have to act on those proposals. A similar trigger for Medicare spending was included in the 2003 Medicare prescription drug legislation, and expanding the concept could help Congress address current entitlement spending growth.

Finally, Mr. Riedl and Ms. Fraser also serve reminder that PAYGO-syle rules of any form can only go so far in promoting fiscal responsibility, because fiscal responsibility is more than reducing deficits; it is also choosing to control spending…

PAYGO also focuses on only the budget deficit, rather than the size of government. A strong PAYGO would ensure that new or expanded programs are balanced with other spending cuts or tax increases, but it would not prevent the government from taking a steadily larger share of citizens' paychecks. PAYGO would allow escalating entitlement program costs to push the size of the federal government to nearly 50 percent of GDP by 2050. PAYGO would also promote the expiration of all Bush tax cuts and force millions of Americans to pay the Alternative Minimum Tax. As a result, tax revenues would rise from the historical average of 18.3 percent of GDP to a record 23.7 percent by 2050.

Following-Up the Projo's Debate Follow-Up on Taxing and Spending

There are a few gaps that need to be filled in Mark Arsenault's Republican Senate debate follow-up article appearing in today's Projo. The article contrasts the positions of Senator Lincoln Chafee and Mayor Steve Laffey on the issues of taxes and spending.

1. Though Arsenault's description of the PAYGO rule supported by Senator Chafee regarding deficits is correct in a technical sense,

Chafee is a believer in "pay as you go," a philosophy from the 1990s that requires spending cuts or a new source of revenue to balance each tax cut or new spending program.

...Arsenault doesn't discuss PAYGO's ultimate ramification. The key word in Arsenault's description is "new". The authors of PAYGO were certain to exempt the growth of "old" spending -- spending on already existing entitlement programs that increases according to pre-determined formulas -- from any limitation. Here's how the exception appears in the text of the legislation...

(1) IN GENERAL -- It shall not be in order in the Senate to consider any direct spending or revenue legislation that would increase the on-budget deficit or cause an on-budget deficit for any 1 of the 3 applicable time periods as measured in paragraphs (5) and (6)...

(4) EXCLUSION.--For purposes of this subsection, the terms "direct-spending legislation'' and "revenue legislation'' do not include --
(A) any concurrent resolution on the budget

Since Congress' concurrent resolution on the budget is that the only place where spending on existing entitlements needs an annual approval, exempting the budget resolution from the PAYGO rule exempts entitlement growth from the PAYGO rule. And, as Isabel Sawhill of the Brookings Institution explains, entitlement programs are where our country's biggest spending problems are...

In efforts to restore fiscal balance, it's important to focus on entitlements for a number of reasons:

• Entitlements are where the big dollars are.
• They are growing rapidly.
• Given the unsustainable deficits that this growth implies, there are only three possible options: restructure entitlements, eliminate most of the rest of government, or raise taxes to unprecedented levels.

Ultimately, the entitlements-exempt PAYGO rule favored by the Democrats and Senator Chafee becomes a way of forcing automatic tax-increases on the public. Here's Brian Riedl of the Heritage Foundation explaining how...

While PAYGO allows current entitlement programs to grow on autopilot, it would likely lead to the expiration of the current tax cuts. Merely retaining the tax relief that Americans now enjoy would, under PAYGO, require 60 votes in the Senate and a waiver in the House. To avoid this supermajority requirement, lawmakers seeking to prevent tax increases would have to either: A) raise other taxes; or B) reduce mandatory spending by a larger amount than has ever been enacted. Option A is still a net tax increase (raising one tax to avoid raising another), and Option B is probably politically unrealistic.

Senator Chafee tries to define his position on taxes and spending, which presumably includes PAYGO, as that of a traditional conservative Republican...

Chafee says that, while opposing the big tax cuts, he also voted against major spending items, such as the Medicare prescription drug benefit, which he says is too expensive. "I'm a very traditional conservative Republican on taxes and spending," he said.

But it is difficult to accept this statement as meaningful when the Senator supports a program that seeks to turn the Federal Government into an entitlement machine paid for through automatic yearly tax-increases.

2. Arsenault devotes only a single to line Mayor Laffey's proposal for tax simplification...

He also proposes rewriting and simplifying the tax code,

...presenting tax-simplification as if it were an add-on to the the Mayor's fiscal proposals, when it is actually a starting point. Mayor Laffey argues that simplifiying the tax code will reduce the power of lobbyists and the associated corruption they can bring. He is far from alone in arguing this (Mickey Kaus provided one of the best explanations I can remember seeing, but I can't locate the exact quote). The essential argument is that the influence of K-Street lobbyists in Washington is rooted in their knowledge of and their ability to manipulate an arcane tax code; simplify the tax-code, and corporate and industrial-sector lobbyists will become no more or less influential than Sierra Club-type lobbyists.

Unfortunately, since Arsenault relegates tax-simplification to a sidebar, we never learn Senator Chafee's position on tax simplification, nor any arguments for or against the idea. Do politicians unwilling to pursue tax-simplification take that position because they believe that tax-simplification does not matter, because they believe a complex tax-code is an inherently good thing, or because they are simply unwilling to challenge the existing network of lobbyists on this issue?