Paper
Cuts
The
politicians in Richmond still cite the "$6 billion
shortfall" in the last budget to justify raising
taxes for the next. But their spending "cuts"
barely went skin deep.
It’s
all over but the shouting. In the Great Tax Reform
Debate of 2004, the House of Delegates has capitulated
by passing a budget that would push spending and taxes
up -- way up. All that remains is for the House, the
Senate and the Governor’s Office to agree on the fine
print. Will spending in fiscal years 2005/2006 increase
by 10 percent, 11 percent or 16 percent? Will taxes
increase by $500 million in the next biennium, $1.2
billion or $3.5 billion? Who will pay: big business, the
wealthy, or the rest of us?
So,
congratulations to all you who think state government
needs our money more than we
need it -- you won! I ask only one thing: Can we be
honest now? If nothing else, can we dispense with the
farce that Virginia state government has been starved of
funds, and just come out and admit that – whoopee!! --
the era of Big Government is here?
I
went soft on the spending issue last in my last column
(“Questions
for the Governor,” February 16, 2004
) when I critiqued the PowerPoint presentation that Gov.
Mark R. Warner had taken on the road to promote his tax
plan. Warner made a superficially plausible case that
he’d chopped state spending to the bone during the
recent budget crisis, and I largely gave him a pass. But
I began thinking about some of the assertions he made,
and I decided to go back for a second look.
Now
that I have, I’m really ticked off. I’m
steamed at the governor for making misleading claims. I’m
mad at pro-tax senators and delegates for repeating the
same assertions. I’m furious with Big Business
advocates of higher taxes who have bankrolled an
expensive public relations campaign spreading the same
misinformation. I’m contemptuous of lazy, lap-dog press and
editorial writers for allowing the one-sided
presentation of data to go
unchallenged. And I'm disappointed in myself for having
been gulled, even momentarily, into overlooking the
obvious.
If
you wonder what's gotten me so fired up, you can see for
yourself. Check out the second slide in Gov. Warner’s
dog and pony show, “A
Budget and Tax Reform Plan,” viewable on the
governor’s website. Here's what it says:
The
Warner administration has instituted sweeping reforms to
ensure accountability to taxpayers and restore Virginia’s
fiscal stability. We have worked with the General
Assembly to close a $6 billion shortfall:
-
Eliminated
more than 50 agencies, boards and commissions
-
Eliminated
5,000 positions from state government
-
Cut
every agency by an average of 20 percent
-
Produced
significant savings through government-wide
efficiency plans
In
his address to the Greater Richmond Technology Council
two weeks ago, the governor stuck closely to these
talking points – and he made quite an impression.
Members of the audience were wowed. Golly,
the state really has done a lot to cut spending.
If downsizing government to that extent doesn’t solve
our chronic budget crisis, what will? I guess we do
have to raise taxes!
Now,
before I dissect this slide to show how it obfuscates
budgetary reality, let me say one thing. I’m not
singling out Gov. Warner for criticism. Many
elected officials, both Republican and Democratic, have
been pushing the same line, as have a legion of
lobbyists, reporters and editorial writers.
Among
other notables, Sen. John Chichester, R-Stafford, said
this to the Virginia Foundation for Research and
Economic Education last year:
Having
dealt with a $6.0 billion budget problem over a
three-year period, suffice it to say that the
Commonwealth has “prioritized away” all but the core
functions. … The Commonwealth stands leaner and with
less flexibility than it has enjoyed in the past.
Got
that? After the General Assembly manfully struggled with
a $6 billion shortfall, Virginia government now stands
lean and mean! There's no recourse now but to raise
taxes.
But
Chichester, Warner and the rest are wrong, flat
out-and-out wrong, and they're spreading their
wronghoods far and wide. The reality couldn't be more
different.
Let's
take a closer look at the numbers. According to the
governor, Virginia has...
"...Eliminated
more than 50 agencies, boards and commissions."
I
asked Ellen Qualls, the governor's press secretary to
list the "50 agencies, boards and commissions"
that had been "eliminated." She provided the
list of "boards and commissions" reproduced in
the right-hand column.
I
then asked how much money the Warner administration
estimates it saved from eliminating these entities. She
responded by e-mail as follows:
"The
honest answer is very little since the reason for
eliminating most of them was that they had ceased to
function and either the past few Governors didn't bother
to appoint members to them or the members never met.
"There
may have been some incidental savings in consolidating
all the individual scenic river boards into one but none
had staffs and the members served as volunteers without
expenses reimbursed."
So,
there's less than meets the eye to
"eliminating" all those boards boards and
commissions. But everyone knows those things don't have
big budgets. How about the agencies the state
eliminated? Well, lets see... (These quotes come from a
document that Qualls supplied.)
Commission
on Local Government – The Executive Director
position, a full-time appointee of the Governor, and
the office staff were eliminated.
The staff assistance to the Commission is now a
responsibility of the Department of Housing and
Community Development.
Wow,
this looks like a real cut. An executive director plus a
staff of -- I'm guessing here -- one or two people.
Savings? Maybe $200,000?
Department
for Rights of Virginians with Disabilities
– This Executive Branch department was abolished and
the Office of Protection and Advocacy was
created as an agency independent of the Executive
Branch.
In
other words, one "department" was abolished
and an independent "office" was created in its
place. Savings? Not much.
Department
of Veterans Affairs
and Virginia Veterans Care Center were
consolidated into a new Department of Veterans
Services."
A
"center" was consolidated with a
"department" to create a new department.
Savings? Maybe a little administrative overhead. But
probably not much.
Department
of Information Technology, Department of Technology
Planning and
the Virginia Information Providers Network
Authority were eliminated as Executive Branch
entities and the functions were consolidated into the Virginia
Information Technology Agency.
Here, three different agencies were consolidated into
one. However, the secretary of technology has assured
state tech workers that none would lose his or her job
in the transition! Savings? Back when Cheryl Clark was
interim director of VITA, she said that the agency
expected to save $10 million this fiscal year. The big
savings won't kick in until the next biennium.
At
last we're talking real money. But let me remind you,
this is the centerpiece of the Warner
administration's government reform. I'm sorry folks, but
out of an alleged $6 billion budget shortfall, we're
talking chump change! Eliminating all those
"agencies, boards and commissions" translated
into one half of one percent of the budget fix!
(By
the way, kudos to Qualls for forthrightly supplying me
this information. She easily could have put me off. Her
candor stands in refreshing contrast to the House of
Delegates, the champion of the anti-tax movement, which
wants to exempt
itself from the Freedom of Information Act! If
there's been a redeeming aspect to the Warner
administration during this tax debate, it's been its
willingness to share information.)
"...Eliminated
5,000 positions from state government."
According
to Pamela Currey, the total number of state employees
dropped from 115,361 at the start of the Warner
administration to 110,471 in December 2003, two years
later – a net reduction of 4,890.
That
translates into a 4.2 percent reduction in head count
over two years, a not insignificant accomplishment given
the civil-service like protections afforded state
employees. But there may be more to the story. There are
two factors to consider.
First,
agency heads can play a lot of games when forced to cut
costs – and one is hiring contract employees off the
state books. The state hasn’t tracked the number of
contract employees until the Warner administration, to
its credit, started taking head counts. Trouble is, the
first count didn’t take place until June 2003, when
4,809 contract employees were listed. So, we'll never
know the extent to which, if at all, agency heads offset
the loss of on-the-books employees by hiring temp
workers or contract employees.
Second,
payroll savings have been marginal. The whole purpose of
cutting head count is to control payroll expenses,
always an uphill battle when cost-of-living increases
are factored into the pay scale.
Drawing
upon Virginia Employment Commission numbers, I reproduce
here the payroll numbers for calendar 2001, the last
year of the Gilmore administration; calendar 2002, the
first year of the Warner administration; and the first
two quarters of calendar 2003, the most recent data
available.
State
Government Gross Wages
(in
millions)
|
1Q
2001
|
2Q
2001
|
3Q
2001
|
4Q
2001
|
Total
|
$1,177
|
$1,125
|
$1,253
|
$1,217
|
$4,772
|
1Q
2002
|
2Q
2002
|
3Q
2002
|
4Q
2002
|
Total
|
$1,209
|
$1,148
|
$1,310
|
$1,215
|
4,882
|
1Q
2003
|
2Q
2003
|
|
|
|
$1,200
|
$1,128
|
|
|
|
Source:
Virginia
Employment Commission, Quarterly
ES-202 data
Because
of seasonal fluctuations in state employment --
particularly adjunct faculty at state universities -- it
is not a valid exercise to compare total wages paid in a
particular quarter with the quarter immediately
preceding it. However, it is valid to compare a quarter
to the same quarter the previous year. Despite eight
percent across-the-board "agency" cuts enacted
soon after Warner soon after coming into office, year-to-year comparisons show that
total wages continued increasing for the first three
quarters of the new administration. Part of the problem
was that cost-of-living increases offset some of the
Warner administration's cuts in head counts.
Total
wages did turn south by the 4th quarter of 2002, and
continued to do so for the next two quarters.
Bottom
line: Although Warner eliminated nearly 5,000 positions
in state government, about 4.2 percent of the head
count, total payroll for the first half of 2003 was only
1.1 percent lower than the same period in the last year
of the Gilmore administration. As additional data comes
in, the comparisons may improve but not enough to change
the picture of only marginal reductions in government
spending.
"...Cut
every agency by an average of 20 percent."
The
operative word here is "agency". As Warner
conceded in his remarks to the technology council, the
number doesn't count spending on education. Nor,
elaborates Deputy Secretary of Finance Pamela Currey,
does the definition of "agency" spending
include any state aid to localities or entitlements to
individuals. Basically, the governor is referring to
cuts in administrative overhead and other spending
accounting for about 20 percent to 25 percent of the
total budget.
In
other words, the Warner team made administrative cuts
that added up to four to five percent of the entire
state budget.
In
analyzing Gov. Warner's rhetorical strategy, it's worth
noting that he engaged in some double
counting in his PowerPoint presentation. First he
claimed credit for slashing 5,000 positions, and then he
told audiences he'd agency spending by an average of 20
percent. What he glossed over, however, is that those
two savings were largely one in the same: The way he
achieved those agency savings was largely by eliminating the
5,000 jobs!
Some
of these "agency" savings represented real
reductions in spending, especially the eight-percent
agency cuts imposed during Warner's first six months in
office, when the governor discovered he had to close a
revenue shortfall in the budget he inherited from the
Gilmore administration. However
deep these cuts may have seemed at the time,
they were of an ephemeral nature. Despite all the
wailing, gnashing of teeth and cries of irreparable harm
to state programs, state spending continued to increase
in Fiscal 2003 and 2004.
Here's the trick:
Some of the
"cuts" represented
reductions of the budget submitted by the Gilmore
administration but never adopted -- not real cuts
in comparison to actual spending in Fiscal 2002.
Let's
take a closer look. For your viewing pleasure, we have
presented the numbers showing: (a) total state spending
for Fiscal 2001/2002, of which the first 18 months took
place in the Gilmore administration and the last six
months in the Warner administration,
(b) Gilmore's proposed budget for Fiscal
2003/2004, and (c) actual expenditures after numerous
modifications by Gov. Warner and the General Assembly:
State
Spending
Rhetoric
vs. Reality
(in
$ millions)
|
|
Fiscal
2001-2002
|
Gilmore
Proposed
Fiscal
2003-2004
|
Warner
Amended
Fiscal
2003-2004
|
Total |
$45,424 |
$49,386 |
$49,227 |
Sources:
Fiscal
2001-2002:
Secretariat
of Finance
Gilmore
2003-2004,
as proposed Dec. 19, 2001: Secretary
of Finance budget documents
Warner
2003-2004, Secretariat
of Finance; fiscal 2004 expenditures are Warner
administration estimates.
By
the time it was all said and done, the politicians in
Richmond managed to "slash" Gilmore's
dotcom-era proposals by about one half percent!
Call the ambulance! I've got a paper
cut, my finger's bleeding, I'm hemorrhaging!
Despite a recession, an unprecedented
"$6 billion shortfall" and the "worst
revenue crisis in the state's history," spending
leaped ahead by 8.4 percent over two years!
"...Produced
significant savings through government-wide efficiency
plans"
Here,
I'll give Warner partial credit. His administration has
made a promising start in bringing
information-technology expenses under control, advancing
procurement reform, reining in cost overruns in
road-building projects and doing a better job at
managing state facilities. One day, these reforms will
generate real savings for Virginia.
Trouble
is, these initiatives had virtually no impact on Fiscal
2003/2004 finances! As noted above, Warner's signature
issue, the consolidation of IT functions, is expected to
save only $10 million this year. Other programs haven't
been in place long enough to have had much impact yet.
Smoke
and Mirrors
All
told, the Warner administration claims to have closed a
"$6 billion shortfall" -- a combination of
revenue shortfalls of approximately $3 billion and
unbudgeted but legislatively required expenditures of
about $3.1 billion -- over three years. Gov. Warner and
the General Assembly offset those numbers with about
$3.3 billion in cuts, much of it in administrative
spending.
How
did they offset the rest? They beg, borrowed and stole
from a variety of sources, including:
-
$841
million from the Rainy Day fund
-
$420
million in increased "fees"
-
About
$1.5 billion in one-time revenues and accounting gimmicks
such as making major retailers accelerate payments
of July sales taxes in June, which allowed the state
to book 13
months of sales tax revenue.
Just
imagine you're the bond analyst at Moody's whose job is
to track Virginia's fiscal integrity. You see a $6
billion revenue shortfall. You see continued increases
in spending, and "cuts" amounting to one half
of one percent of the spending proposed by Gov. Gilmore. You
see politicians making up the rest through
budgetary hocus pocus. Is there any wonder that Moody's
put the state's AAA bond rating on the watch list?
The
fiscal wizards who balanced our budget with accounting
tricks that, if they'd been tried in the private sector
would have landed them in court next to Tyco's Dennis
Koslowski and Enron's Jeff Skilling, tell us there's
nothing left to cut. But they're wrong. They're just
looking in the wrong places.
Here's
the problem: Legislators scrutinize the budget agency by
agency, line item by line item. Every program seems
justified. As Sen. Ken Stolle, R-Virginia Beach,
challenged members of the Republican Party state central
committee earlier this month who balked at higher taxes,
what would they propose to cut? (See Peter
Ferrara's story, "Heading
for Divorce," in this issue.)
That
may have been an effective rhetorical ploy, but it's no
way to run a government. The frontier in streamlining
government isn't slashing programs, it's identifying
redundant business functions that cut across the welter
of state secretariats, agencies and departments. These
expenses are largely invisible to legislators viewing
agency-centric budget presentations. But with the proper
analytical tools, the state should be able to trim a
billion dollars or more per year in spending without
harming programmatic spending one iota. This
process-based analysis of the state budget is still in
its infancy.
Warner
and Chichester, to their credit, want to put a halt to
the accounting shenanigans. But no one, it seems, is
willing to slow the surge in spending. Until
Virginia's political class figures out how to do that,
it's only a matter of time until the drum beat begins
again for another round of tax hikes.
--
March
1, 2004
1.
Because December 2003 numbers are
"preliminary", BLS has not yet published an
"average" figure for 2003 average. The number,
which I calculated, assumes that the December figures
are accurate.
|