Mon, 30 Mar 2009

Deep six the supplemental budget

The House rewrite of the Governor's supplemental budget could hardly be a worse document than the original budget, but it is just as bad. On balance, you have to say it's slightly more realistic in its assumptions, but it is crueler to the cities and towns. So take your pick: a bad budget, based on unrealistic assumptions (from the Governor) or a worse budget, based on realistic assumptions (from the House).

The budget ends general revenue sharing for the cities and towns. This is a pot of about $55 million that is shared with all the municipalities, and which they were all counting on in order to fill out this year's budget. This is cut to zero in the House version. Let's be clear about what's happening. Three-quarters of the way through the fiscal year, cities and towns are being told they have to suck it up and make up a whole year's worth of state aid. Providence will lose $15 million under this budget. For comparison, the police and fire departments are both about $43 million departments, and the rest of the municipal government is about the same. So they'll have to cut about 13% of their annual expenses in three months. In other words, if everyone took six weeks off and went home, they might make it. This doesn't consider the cuts to education aid, but there are some of those, too, despite the addition of federal stimulus money.

To pick a random suburban town, in North Kingstown the loss appears to be about 4-5% of the general municipal budget. So they'll only need to give everyone two and a half weeks off, or otherwise find a way to cut 20% of the budget for three months.

According to my understanding of the ARRA (stimulus) money, the House budget front-loads the money more than the Governor had. The Governor appeared to be saving some of the ARRA money for the next fiscal year, which is sort of counter to the spirit of the stimulus. On the other hand, the House budget scoops more of this money, giving less of it to the towns, so that's counter to the spirit of the stimulus, too.

A big part of the fiscal stimulus money was an increase in the Medicaid match, which means the federal government's split of medicaid costs would change from 52/48 to 55/45 or so. The legislature scooped that money, too, cutting Medicaid expenses and keeping the additional Medicaid money for the general revenue budget.

The good parts of the House changes are they scotched the idea of selling state buildings to RI Housing as a way to loot that agency, and they put off the Governor's weird pension savings, which weren't really supported. But they didn't reject the pension cuts. They just said we're not going to make any pension payments between April 2 and June 30, while we await more documentation. I'm sure that on June 30, they'll be happy to pony up.

And let's not forget that there is still a multi-million-dollar tax cut in this budget. The flat tax is still due to go down a half-percent this year, providing a huge break for a small number of lucky people. While the rest of us watch the state crumble, those folks will continue to fly first class.

There's much more; almost every page has a new outrage. This budget is a disgrace to the people who wrote it and an affront to anyone who cares about the future of our state, not to mention the future of whatever city or town you live in. I don't think what's wrong with it can be fixed by amendment, and I hope it goes down in flames. Sadly, I fear this is unlikely, because there are very few legislators with the courage to defy the leadership, but when the leadership has led you into a disaster, why do you still follow?

22:28 - 30 Mar 2009 [/y9/ma]

Sun, 29 Mar 2009

Plus ca change...

From O. Henry's Rural Sports, one of his tales of Jeff Peters, the con man:

"Farmers are not fair game to me as high up in our business as me and Andy was; but there was times when we found 'em useful, just as Wall Street does the Secretary of the Treasury now and then."

07:21 - 29 Mar 2009 [/y9/ma]

Sat, 28 Mar 2009

Our economic woes: Doing it to ourselves

The essence of Greek tragedy is that the hero does it to himself. King Creon destroys his family through his stubborn insistence on punishing Antigone. Oedipus was, well, blind to his own quick temper, and if he hadn't killed that guy he met on the road, things might have turned out differently.

At this point, it's hard to argue that the state's fiscal problems were not self-inflicted. Yes, we're in an economic crisis, but the state's books were out of balance before, and we blindly cut taxes to make it all worse.

But what a lot of people don't appreciate is how much of our economic problems are self-inflicted, too. Some interesting evidence comes from data developed to determine how best to stimulate our economy.

Last summer, Mark Zandi, of economy.com (the economic consultant the state uses), presented to Congress some estimates of the efficacy of different kinds of government spending. He calculated that a dollar of spending on an across-the-board tax cut would net $1.03 in benefit to the nation's economy. A dollar cut from corporate taxes would net about 30 cents of benefit, while a dollar of extended unemployment benefits would net $1.64.

It's an interesting list: capital gains cuts are worth about 37 cents, while an increase in food stamps could net $1.73. A dollar spent on infrastructure will produce around $1.59 in benefit, while making the Bush tax cuts permanent would produce 29 cents. These estimates have shaped the debate about the Obama stimulus plan, and they have lessons for us, too. If we're willing to learn.

One thing you notice as you look at the list is that income supports for poor people have a much more significant impact on the economy than aid to rich people and corporations. But what about the investment rich people make in businesses? Step back a moment.

The Zandi estimates are essentially straight expressions of Keynesian economics, and one of Keynes's significant contributions to economics was to point out that savings does not equal investment. A dollar saved is not a dollar invested, as is assumed by classical economists.

In classical economics, a dollar in the bank is a dollar invested productively, but does that sound realistic to you? First of all, bank loans don't always go to productive investment (I know you're shocked) and investment funds don't always come from banks, either. Second, people have different preferences for how they hold their money -- cash is different from a CD, for example. And third, changes in the money supply can create big differences between savings and investment, by soaking up excess funds, or supplying more.

Because of this, policies to support rich people are not always helpful. In his landmark, "The General Theory of Employment, Interest and Money", Keynes wrote, "... the growth of wealth, so far from being dependent on the abstinence [savings] of the rich, as is commonly supposed, is more likely to be impeded by it."

People routinely misunderstand the important points of policy that stem from Keynes's findings. Government spending and progressive taxation aren't good things because they support government workers or "punish" rich people. They are good things because they are how a government can help the economy grow. (Up to a point, of course, a detail Keynes made clear.) Government workers with money to spend will spend it, and that drives the economy. Progressive taxation keeps more money in the hands of the poor and people in the middle, both of whom are more likely to spend their income than rich people are.

Or course, this works in reverse, too. Government layoffs and tax cuts -- a perfect summary of the dominant policy prescriptions of both our Governor and our Assembly -- will make us all poorer in the end.

Keynesian principles aren't just a guide to future action; they are also a way to understand what has happened to us. Over the past decade, official Rhode Island state government policy has been acting to slowly strangle our own economy, in the name of increasing savings for rich people. In order to cut their taxes, we've raised taxes on poor and middle income families via the property tax, cut education and investment programs, and laid off workers. All of these things have a depressive impact on our economy. We've responded by lowering our aspirations: eliminating advanced courses and special programs at schools, foregoing workforce development projects, letting our infrastructure rot and much more. This, of course, just makes it worse.

We are doing this to ourselves at the same time as we wonder what's going on. For more than a decade, our state has been cutting taxes on the rich and slashing services, and each year our economy has responded in the ways predicted by Keynes, not in the ways predicted by classical economists and ill-informed politicians.

Remarkably, the only solutions on the table seem to be more of the same. My prediction? This will continue until we demand that it stop.

15:56 - 28 Mar 2009 [/y9/cols]

Mon, 23 Mar 2009

The budget follies: Comedy or tragedy?

W.C. Fields had it that "Comedy is tragedy happening to someone else." And in truth, what can you say about the budget farce whose curtain went up last week? If I lived in another state, I'd be laughing.

Governor Carcieri presented his budget to the legislature last week (only five or six weeks past the deadline). Astonishingly, he was unable to get any Republican to introduce it for him at first. They think he didn't cut enough spending, and though I disagree, they do have a point: fantasy makes bad budgets.

The Governor is committed to the fiction that we can have it all, and lower taxes, too. There are no cuts to programs mentioned at the top of the budget's executive summary except for cuts to state employee pay and pensions and some cuts to medical care for the poor. How can he manage such fiscal legerdemain? Easy: by sticking it to the cities and towns. Between this year and next, we're looking at around $110 million cut from state contributions to the non-school side of municipal aid, and $31 million restored by the federal government, through the stimulus package. General revenue sharing with municipal budgets will be a thing of the past, and the education cuts are deep and dramatic, too, unless you're running a charter school (up 20% since 2008).

Meanwhile, it's not even clear that the budget is even legal. The Governor intends to appropriate all the federal stimulus package money meant for city and town education budgets this year and next year, except increases in Title I and special ed money. His budget simply deducts the payments each town is to receive from their state aid payments. (Granted, for the current year they demand that towns make up part of the difference from the municipal side of the budget, but how does that help?) The state budget officer, Rosemary Booth Gallogly, isn't sure this is permissible under the stimulus package rules, and Providence Mayor David Cicilline has written to Arne Duncan, President Obama's new education secretary to ask that they not permit it.

The Governor also plans to take the advice of his "blue ribbon" commission on taxes, and proposes to cut taxes still further for the wealthiest individuals in the state. Who will take up that slack? A bit more than half of the taxpayers who earn between $30,000 and $100,000 or so. (Do you itemize deductions now? If so, you're among them.)

The commission also recommended the complete elimination of the corporate income tax, but in typical dishonest tax-cutting fashion, the budget proposed to phase it out over a few years beginning in 2011, so it will be someone else's problem, not this Governor's. And no, he proposes no program cuts to pay for it.

The tax commission's long-awaited report came out last week, too. The report is a great resource, full of useful information and references for nerds like me, and the commission staff deserves praise for it. But some of the most interesting things in it are the forceful dissents registered by the two out-of-state members, Robert Tannenwald of the Boston Federal Reserve, and Michael Mazerov of the DC-based Center for Budget and Policy Priorities. They pointed out that the commission punted on its mission to stay revenue-neutral, and charged that the elimination of the corporate tax was sprung on the commission at its last meeting.

Mazerov was particularly damning in his appraisal of the proposals put forth by the commission. For example, he recounts the story of Ohio's "dramatic" 2005 tax changes, meant to signal that Ohio was "open to business" under Republican Governor Bob Taft. Ohio also eliminated its corporate income tax in 2005, and made substantial cuts to its income taxes. The result? Lower growth in Ohio than in every one of its neighbor states save only Michigan. He has lots more.

And what about the legislature? All you can really say about them is that the leadership's reaction to all this muddling is oddly incoherent. Fine, the Governor's budget is no good, they say. I agree. But what are they going to do instead?

This is essentially the third year of our state budget disaster. Sure, things have gotten even worse since 2006, but they were pretty bad then. The problems that year were effectively hidden by a one-time $250 million dose of money from the tobacco settlement, but everyone involved knew there was real trouble. Did the leadership do anything? Nope.

Since 2006, the legislature has had plenty of time to craft a solution with which to oppose the Governor's efforts, and they have not. They've been content to let him take heat for nonsensical budgets, but have done little besides. They trim a little around his edges, but mostly they seem quite content to go along on this ride to catastrophe. They happily endorse his absurd tax cuts, just as he happily endorses theirs. He suggests cutting municipal aid or pension cuts, and they go him one better by cutting more. The massive and ill-considered retirement rush of last fall was a joint effort, and we'll be paying for that for years.

There was a bill introduced in the House last week calling for a real school aid formula. It had 38 co-sponsors, including much of the leadership. You'd think this was enough to pass it, wouldn't you? Silly you. A fair education formula would cost money, and nothing that costs new money can pass this legislature, because no one in a position of influence will endorse paying for it. They'll "call" for a program like this, and talk about how wonderful and fair it would be, but they won't pay for it, so it won't happen.

Sadly, there is little way out of our fiscal mess without deciding to pay for our government. The alternatives are fantasy. We could help a lot just by returning to the kind of progressive taxation we had back in the bad old days of the 1990's, but it seems as if our leaders would have us choke on their red ink first. To outside observers, this kind of hapless government must seem pretty comic. Are you laughing yet?

08:03 - 23 Mar 2009 [/y9/cols]

Sat, 21 Mar 2009

Stimulus estimates

Have you wondered where the numbers come from when people say stuff like "tax cuts are less stimulative than food stamps"? Much of them come from estimates made by Moody's economy.com, and presented to Congress last summer (2008). Find them here.

09:43 - 21 Mar 2009 [/y9/ma]

Sat, 14 Mar 2009

Suffering a catastrophe to prevent a catastrophe

Sometime in the future, a storm might come and knock down your house. If it does, rebuilding will cost a lot of money. Suppose you could shore up your house now, with a stronger roof and steel beams, but you'd have to sell all your furniture to do it. Would you prevent a disaster in the future by voluntarily undergoing one today?

The people managing the state's pension system say yes. Public employee pensions are on a lot of people's minds. There's a legislative commission looking into them, and some alarming testimony came from the Treasurer's office last week about the rising cost of pensions, which provoked predictable calls for slashing them, again.

You'll hear people say that the system we use to pay the pensions of teachers and state employees is short $5 billion and that sounds terrible. It's not great, that's for sure, but it's worth being sure you understand the real problem. An "unfunded liability" like this means that the pension system would need $5 billion more in order to pay pensions from the investment income of the fund. That's a little less than is in the fund already. Whatever pension costs isn't covered by the investment income have to be covered by tax revenue.

There's a difference between a public and a private pension system that is crucial to understand, and that's the motivation for wanting your system to be fully funded. As we're seeing, even companies as big as General Motors can get in trouble and some of them even disappear. In order to keep the promises to their employees, their pension systems have to be 100% funded, with no unfunded liability, so they can pay benefits even if the company vanishes. So there are laws that require full funding for private companies.

But a state isn't going to go out of business. A public pension system wants to keep the funding level high, but for a wholly different set of reasons. Investment income varies from year to year, and the needs of retirees varies, too. A system funded at 90% will be easier to budget for than a system at our 55%, because the amount necessary to make up the difference won't vary as much. The state that runs a fully funded system will find that system easier to budget for than a state whose system is less well funded.

What's important to understand, though, is that in neither case are the retirees in danger of not getting checks. It's less of a burden on the government in one case, but that's the only difference. Until the reform of 1986, Social Security, for example, happily paid its benefits at what amounted to about a 10% funding level. That's 50 years without trouble, and it's not entirely clear to many whether the reform helped matters.

Back to the state pension system. Where did our unfunded liability come from? It came from three years of missed payments in the 1990's, from decades of sweetheart pension deals to legislators and other insiders (awards of pension "credit" for people who didn't pay into the system), and from some bad guesses our actuaries made. It didn't come from the employees themselves, who pay 8.75% of their salaries (9.5% for teachers) into the system, a much higher level than most systems require. The pensions are good, but they are paid for.

In 1999, the legislature decided to do something about the unfunded liability, and started us down a 30-year course to pay it off. Our actuaries report that in 2030, the payments will go down by a factor of twenty. That's worth working towards, but unfortunately, right after we set about that course, the stock market tanked. Paying off the liability by 2029 suddenly became a lot harder. Undaunted by reality, the decision-makers forged ahead, determined to be fiscally responsible by not contemplating putting off the magic date a couple of years. Because of this, the vast bulk of state and local pension payments is for paying off the liability, not for paying checks to retirees this year.

Now we're in the middle of another crisis. Along with the crisis in the investment markets, our actuaries estimate that the wave of retirements of last September will cost the system at least $33 million. Plus, an unexpected drop of almost 1200 employees paying in to the system means that $20 million has to be found somewhere. (For some perspective, usually around 1200 people retire in a year.) The actuaries' report says these retirements will save the state $100 million in payroll costs, but we pay for that in reduced services and increased pension costs.

The goal of the pension "reform" proponents is to reduce the unfunded liability, by reducing the pensions. Aside from the problem of accidentally provoking another rush to the exits, there is a fairness issue. The employees we're talking about didn't create the unfunded liability, legislators, governors and actuaries did.

But really, it's slightly beside the point. It's a good thing to pay off the unfunded liability, but there's nothing magical about the year 2029. What's the matter with 2039? We could cut the pension payments by 15% simply by delaying the payoff a few years. To be clear, that's almost $60 million, shared between the state and school departments.

This might sound like giving in, or being fiscally imprudent, but tell it to the radicals in North Dakota, Iowa, or Kentucky, whose pension systems refinance the undfunded liability every year. This is far from unusual in pension systems, and it's called an "open" amortization schedule. The progress toward paying off the liability isn't as quick, but it isn't nothing either. Fiscal responsibility is good, but since when is it fiscally responsible to break the bank in the name of fiscal responsibility?

It's a fine thing not to burden our children with huge pension payments, but our children are currently in schools suffering from the huge increase in pension payments, so it's not like there's an obvious benefit to them. Like the owner of that storm-plagued house, we're suffering now from the very problem this policy is supposed to prevent. Does that make sense?

00:00 - 14 Mar 2009 [/y9/cols]

Mon, 09 Mar 2009

More good reading

Can be found at Closing Arguments, a new blog by Matt Jerzyk, the founder (though no longer the proprietor) of RI Future. He intends to make it more about the legal and intellectual background to the news. It's good stuff, go there and read it. Often.

22:30 - 09 Mar 2009 [/y9/ma]

Sat, 07 Mar 2009

Why is this kind of waste ok?

In debates over taxes, it's easy to get caught up in statistics, and sometimes it's a little hard to tell what they mean. But here's another source of data about the impact of taxes in Rhode Island.

Last week I wrote about the movie production tax credit: up to $15 million in credits we give out each year for movie productions in Rhode Island. We also have the Historic Structures tax credit, which was phased out last year, but there are still a number of projects that got in before the deadline and are now in the pipeline.

But what happens to credits awarded to people or organizations who don't owe that much tax? They sell them at a discount, and the buyer gets a break on their taxes and the seller gets most of the money and everyone's happy. Well, except the taxpayer who is subsidizing some rich person's taxes for what reason, exactly?

There's another wrinkle, too. Consider AS220, the artists' space in downtown Providence. They recently bought a third building downtown, next door to their second building, finished a couple of years ago. They're developing the new building into apartments, studios, and a "Fab Lab" associated with RISD and MIT, and equipped with milling machines, laser cutters and electronics equipment for making art with new technologies. (Yes, it's just as cool as it sounds, and will be open to all.) The building is a $14 million project, and about $3 million of that is to be funded with historic tax credits.

To make this project go, AS220 needs to sell those $3 million in tax credits at the highest price possible. In the past, they've sold them to corporations, who use the credits to offset their corporate taxes. Because AS220 wants to get as much as possible for the credits, they don't want to resort to a broker, who can split them up into smaller pieces, but will take a fee for the service. They need every penny, but they have a problem.

I spoke with Lucie Searle, the real estate doyenne at AS220, who tells me they are having a much harder time selling their tax credits than they had just three years ago. Lucie didn't want to be specific with me about which companies they'd approached, but she did comment that it has been "a real eye-opener as to who pays corporate taxes and who doesn't." She did tell me that some of the state's biggest corporations have no use for their tax credits, because they're either not paying enough taxes, or not paying taxes at all.

For some corporations, this is obviously because business is off and income is down, but for several, tax cuts and credit have lowered their tax liability until there just isn't enough left to reduce it any further. Yes, that's right. For all the moaning about taxes in Rhode Island, AS220 hasn't yet found anyone who needs these credits enough to buy them.

A tax credit disclosure report mandated last year tells us a little more. According to this report, CVS collected over $14 million in job development tax credits from the state in the year ending last June plus another $3 million in credits for construction costs. Bank of America collected $1.7 million from the same program. What's more, the Governor's tax "reform" commission has been making waves with a suggestion to eliminate the corporate income tax entirely. With talk like that floating about, why would any corporation buy credits?

I spoke briefly with Anthony Gudas, who brokers tax credits in this state and others. He says business here is terrible, and that "it's been killed by the flat tax." If you take the flat tax, you can't use tax credits, and apparently his former customers find their taxes lower with the flat tax than with credits. He figures that pretty soon, he won't be able to sell tax credits at any more than 50 cents on the dollar. In AS220's case, that would mean $1.5 million for them and $1.5 million to cut a lot of rich people's taxes.

Tax credits aren't by definition a bad thing, but they aren't always a good thing, either. They are a way to devote state money to a public purpose in a relatively low-overhead way.

But the low overhead doesn't mean free. Federal taxes are higher than state taxes, so federal credits go for 94 cents on the dollar and up. The federal government can issue credits and at least 94% of the money goes for the intended purpose. State tax credits sell for much less. (We could make them more valuable by calling a halt to the insane tax cutting that dominates statehouse policy discussions, but that's not on the table.)

Gudas says he currently gets around 85 cents on the dollar for state credits, but he takes a commission, too, so it's probably more like 80 cents that go to the historic building or the movie production. I've heard other reports of organizations getting as little as 77 cents on the dollar for their credits.

Under current conditions, if we award $10 million in credits, then around $2 million is going for no public purpose at all. Is it permissible to call this for what it really is? It's a wasteful and scandalous misuse of public funds. Your tax dollars spent for no reason beyond giving someone richer than you a tax break. It would be a far more efficient use of tax dollars to hire staff to administer an $8 million grant program. You could hire ten people and still save over a million dollars. You might have thought Republicans and business-friendly Democrats wanted efficiency in government, but apparently gross inefficiency is no problem, so long as it provides tax breaks to a lucky few.

19:11 - 07 Mar 2009 [/y9/cols]

Ads and the like:

Rhode Island 101
(A funny book you should own)