Budget Crisis Requires Simple Steps
By Mike Thompson • Jan 20th, 2010 • Category: Economy, Top Story
As Governor Bob McDonnell settles into his new office, counties and cities throughout the state continue their annual budget drafting process in earnest. Local governments rely heavily on state spending. Indeed, about 52 percent of the state budget goes to our counties and cities and these local jurisdictions will have to enact large budgets cuts if local taxes and fees remain unchanged.
Our new Governor and the General Assembly must close a $4 billion shortfall. Since former Governor Kaine’s proposed budget used tax and fee increases of close to $2 billion to eliminate the state’s two year budget deficit and our new Governor has pledged not to raise taxes broader and deeper cuts are required.
First, let’s make it very clear. Fueled by unrealistic increases in property values our state and local governments spent the last ten years growing the size and scope of their activities. These elected officials simply didn’t want to believe that the “good times” would end and built government bureaucracy each and every year. They spent money as if the spigot would never slow down.
Just look at the largest jurisdiction in our state – Fairfax County. This county had to cut spending last year and this year by what could total $400 million. When you look over the past ten years Fairfax spent itself into its current financial mess. In 1993 a group of noted business leaders, economists and community activists were part of the Cole Commission which said that government’s annual budgets should increase no more than the rate of inflation and population growth. This formula allows government spending to reflect the ability of the taxpayers to pay for it without increasing the financial burden of government on our families.
Since fiscal year 2000, had Fairfax County spent at the rate of inflation and population growth the financial headache faced today would have been avoided. Even after the past three years of falling property values, this year’s budget would only have been $10 million out of balance instead of $300 million or more. As for the school budget, had spending been kept within the suggested parameters, this year’s budget would have been $148 million in the black!
The same budget realities can be found at both the state and local level and unless strict budget discipline is permanently part of the government spending process we will be back here again in a few short years.
So what can be done in the short run to bring the state and local budgets into balance? This is the gnawing issue being faced by our state legislators and county officials from one end of our state to the other.
Finding large savings is difficult for sure. Across the board program cuts unfairly penalize the good programs and the poor programs at the same rate. But when governments have not prioritized their spending, to reduce spending in a logical way is difficult. Government agencies need to prioritize their programs now and let our elected officials know what those priorities are. These agencies all know that major cuts are coming and they need to participate in that decision-making process. This includes the schools as well. Core purposes of government and of education need to be protected as much as possible and everything else should be reduced and/or eliminated.
Governments normally face a personnel turnover of about eight percent a year. Carefully managed, this turnover can be used to reduce government in a responsible way over a couple of years. As employees leave (retire, move away, die, or take jobs in the private sector) only those in core government functions should be replaced. And if they can be replaced by those in non-core government programs, over a couple of years that will reduce government significantly.
In the meantime, governments must reduce spending this spring by some pretty large numbers. Employee costs are the single largest expense and that is the logical place to cut and this can be done without letting employees go during this difficult recession. A five percent cut in salaries and benefits will reduce spending significantly. Such an across the board reduction will likely allow all current employees to remain in their jobs while governments review its programs and prioritize its spending. These reductions should include retirement and health insurance benefits as well.
Everyone is hurting in this economic environment and if layoffs can be avoided, then reducing everyone a little makes good sense. Government employees should pay into their retirement programs and contribute to the cost of their health insurance, just like private sector employees. Recent studies show that public employees are paid better than the private sector and that simply must end.
Spending restraints, reviewing government staffing requirements and prioritizing programs are long overdue. The current spending crisis must be confronted, but we should learn from it. Let’s shed unnecessary government programs, make those that remain more efficient, reduce the number of government employees in a way that does not require large scale layoffs and institute spending limits so that government no longer grows faster than the rate of the inflation of population.
Government can use the current economic recession to re-evaluate its purpose, prioritize its programs, re-structure its employee compensation and permanently restrict the growth of future spending. If it doesn’t take these steps then nothing will have been learned from the past profligate spending and we will end up in a “budget crisis” again in a few short years.
Mike Thompson is the chairman and president of the Thomas Jefferson Institute for Public Policy, Virginia’s premier non-partisan public policy foundation.
For 24 years Mr. Thompson owned his own marketing company in Springfield. During 11 of those years he was also president of a family owned group of furniture stores in Georgia. After selling his company he started the Thomas Jefferson Institute.
He has been very active in national, state and local politics and has been a member of a number of community organizations, commissions, and committees. He is the Past Chairman of the Virginia Leadership Council for the National Federation of Independent Business (NFIB) and serves as Vice Chairman of the internationally acclaimed Fund for American Studies.
These views are his and do not necessarily reflect those the Institute or its Board of Directors.
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Please publish the citation of those “[r]ecent studies [that] show that public employees are paid better than the private sector” that pertain to public employees in Virginia and, preferably exclude Northern Virginia since that region skews many statistical analyses away from a true depiction of the Commonwealth as a whole.
Mike: Good job articulating what must be looked at and addressed. Had the state not put a series of tax relief measures in place under Governor’s Allen and Gilmore, the size and growth of Virginia government would have been significantly greater than it is today. The issues are complex but when one simply assumes there is a revenue problem, then tax increases are the easiest solution. The debate needs to continue with the expenditure side of the equation, and yes that means programs and services. Ron
I I think the solution is quite simple. “interview” each Director of each state agency. Give them a budge of “$0.00″ and tell them to justify any state money they are requesting to run the agency for the benefit of our Citizens.
Once it’s apparent how many DUPLICATE agencies we have – eliminate and consolidate. Then, do the same thing within each agency. Look at the Official job functions of each state employee within that agency. Eliminate and consolidate the DUPLICATE positions.
Run it like a business. Be accountable for every penny to ALL the Citizens.
see my speech to Va. Legislators in 2008 – you’ll find at least an extra $20million…
George:
Here are links to two national studies comparing public sector and private sector compensation:
http://www.usatoday.com/news/nation/2008-02-01-civil-servants_N.htm
http://www.usatoday.com/news/nation/2007-02-20-pensions-cover_x.htm
These studies include public employees in large and small cities and large and small states. I think you will see that it is time for the compensation of public employees to be reviewed carefully. For instance, state employees have a much more lucrative retirement program and health benefits program than do most private sector employees. State employees, in most cases, do not pay into their retirement funds and a much larger percentage of their health insurance is paid for by the state than is the case in most all private sector businesses.
Ron:
Your support for the approach outlined in my column is truly humbling. Your tenure in state government and your knowledge of that beast is a huge asset to our state. I hope it is used by the incoming leadership.
Marsha:
Thanks for the comments. There are all sorts of areas where money can be saved. For instance, why does the prison system still pay for warehousing food for 30 days as it did when this system was set up several decades ago? What happened to the 37,550 state jobs that were identified by agency heads eleven years ago that should be looked at and analyzed for possible transfer to the private sector? Why did Virginia almost lose the US headquarters for Royals Royce because of our poor job training programs? Why are the buildings on university and college campuses so much more costly than off-campus buildings constructed by the same companies? Why doesn’t the state contract out the maintenance on our primary and secondary roads?
If you have ideas, please write a column for Bacons Rebellion — we are always looking for good ideas to publicize.
Mike–
Thanks for the citations–as I suspected, the articles don’t mention Virginia at all. Lumping Virginia in with California, Ohio and Rhode Island which are mentioned seems a bit of a stretch. I think it would be very enlightening to perform the research on the various regions of Virginia and see where the Commonwealth stacks up. Also, since the government does not perform most of the labor in the economy, what is needed for an accurate comparison is a matching of public and private sectors on a comparable basket of job classifications and seniority ranges. So, for example, the CFO for a locality should be compared with the CFO for a corporation of similar budget and numbers of employees and compare not only salaries but the options for bonuses and profit-sharing (for which most public employees are not eligible).
George:
A national comparison also includes Idaho, Missouri and North Carolina — and Virginia unless we are no longer part of the country. As with any national study, it is an average and Virginia is something like the 12th largest state in the union so there is no reason to think we are much outside the average. The point of the two studies is that public employees in this country do pretty darn well. Most small businesses don’t have stock ownership for employees yet they employ the vast number of those in the private sector. State employees here in VA pay a much smaller percentage of their retirement and health care than do those employees in the private sector. Federal employees are much better off than private sector employees and have been for a long time. I had to compete with that for 24 years as president of a small company in Northern Virginia so i know this problem first hand. And we had to compete with local government and the local school system as well. All three paid better than did those in the job generating sector — small business. We’d love to do the analysis you suggested and if someone reading this would like to underwrite that analysis we will do so. It should include the comparison of K-12 teachers with those in the private sector with similar degrees, college professors to the local area, etc. etc. We’ll have a top notch economist do this analysis. George, interested in underwriting this analysis? Contributions to the Thomas Jefferson Institute are tax deductible!
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
“Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM.”
The Center for Responsible Lending says YSP “steals equity from struggling families.”
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F