Bacon's Rebellion

James A. Bacon


 

Baconometer

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What’s a “Budget Shortfall?

 

Gov. Warner has cited the existence of a “$6 Billion Budget Shortfall” as justification for higher taxes. Just what is a “budget shortfall"? Your intrepid correspondent digs for answers.


 

A key to winning in politics, as fellow columnist Paul Goldman often reminds me, is to put your number out there first. The first guy to get his number into the public domain will frame the terms of any debate.

 

That’s exactly what advocates of tax and spending increases have done in Virginia. The number hovering over this year’s debate over budgets and taxes – the infamous “$6 billion budget shortfall” – has given Gov. Mark Warner and his pro-spending allies the initiative throughout the session. Given the presumption of massive imbalances between revenues and needs, “anti-tax” forces in the House of Delegates have made concession after concession. The only questions left to be resolved are how much taxes, fees and revenue enhancements will increase, and who will pay them.

 

Remarkably, no one has seen fit to ask, just what is a “budget shortfall”? Where does that oft-cited $6 billion figure come from? And what does it mean?

 

Your enterprising correspondent has undertaken the mission of penetrating this budgetary penumbra. My findings: The $6 billion number is based on real, defensible numbers. At the same time, it is politically inspired – crafted to create the impression that a short-term budgetary shortfall is in fact a revenue shortfall that requires higher taxes for the long-term fiscal health of the Commonwealth.

 

I tip my hat to the author of this number, whoever you are. The $6 billion figure is a political master stroke. I admire your ingenuity. Having framed the issues to your advantage, you are very close now to winning your higher taxes. By yanking the veil from the "budget shortfall," I feel like the killjoys who plan to reveal the secrets of Houdini’s escape stunts. Yet as a resolute foe of tax increases, I have no choice.

 

Before digging into the numbers behind the number, let us see how the $6 billion figure has been used. Here’s what Gov. Warner said in his January State of the Commonwealth Address:

 

“Since I have been in office, we have cut state government more than any administration in Virginia history.

 

·         We have closed the largest budget shortfall in Virginia's history - more than $6 billion.

 

·         We have reduced state agency spending by 20% on average.

 

·         We have eliminated more than 50 agencies, boards, and commissions - and thousands of positions in state government.

 

·         And we are fundamentally changing the way we do business in government to achieve maximum efficiency and savings.”

 

Note how the governor couples the “$6 billion” figure with the phrase “cut state government more than any administration in Virginia history” and other actions, such as slashing agency spending, eliminating agencies, boards and commissions and boosting government efficiency.

 

Gov. Warner repeated that formulation over and over when he took his case for “tax reform” on the road. Although the governor added some caveats and clarifications in the speech that I heard, the thrust remained very much the same. Here’s how his PowerPoint presentation summarizes the picture:

 

"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:

 

o        Eliminated more than 50 agencies, boards and commissions

 

o   Eliminated 5,000 positions from state government

 

o   Cut every agency by an average of 20 percent

 

o   Produced significant savings through government-wide efficiency plans"

 

I have scrutinized the budget-cutting claims elsewhere. (See “Paper Cuts,” March 1, 2004.) My intention here is to show how, by linking the “$6 billion shortfall” to his budget-cutting initiatives, the governor has created considerable confusion.

 

Before reading on, pause a moment and think: What impression does the juxtaposition of these numbers create in your mind? What conclusions do you draw regarding how the Warner administration addressed the budget crisis?

 

Let's see what impression such words created for others. The first example comes from a column penned by Dr. Ronald E. Carrier, former president of James Madison University and a veteran of Virginia budgetary battles, which we carried in Bacon’s Rebellion ("What's Right About Warner's Tax Plan", January 19, 2004). Wrote Carrier: “A record $6 billion in revenue shortfalls has challenged Warner since he took office in early 2002.”

 

Then comes this from an op-ed written by former Congressman G. William Whitehurst, now a lecturer at Old Dominion University and no neophyte when it comes to government budgeting, published in the Richmond-Times Dispatch: “State services and institutions are still reeling from the impact of more than $6 billion in budget cuts over the past two years.”

 

What is a "budget shortfall" -- a revenue reduction? A budget cut? A spending cut? Or something else entirely? Read the editorials in your own newspaper, and I’m sure you’ll find the confusion replicated endlessly. As I will show below, both Carrier and Whitehurst used the numbers inaccurately, though it's easy to see why, given how the Warner administration has packaged them.

 

One could argue that the Warner administration should not be held accountable for how friends, allies and sympathizers mis-handle the $6 billion number -- especially given the fact that, as far as I have seen, the governor has stuck to the literal truth in his speeches and presentations. However, I would argue that the fuzziness of the term serves the governor’s ends by fostering the sense of fiscal crisis that justifies a $1 billion-per-biennium in tax hikes.

 

One more note before I plunge into the thicket of figures: my goal is not to diminish Gov. Warner’s accomplishment in dealing with an exceedingly difficult budgetary challenge when coming to office in January 2002. He took quick and decisive action to balance a budget that was badly out of kilter, and he took proactive measures to ensure that the budget stayed balance over the next two years. Good job! (Round of applause! )

 

My quarrel with the governor is the way he has characterized the budget crisis in order to advance his cause of raising taxes. Shame, shame! (Jeers and catcalls.)

 

I asked Pam Currey, deputy secretary of finance, how the Warner administration derived the $6 billion figure. She pulled together a detailed explanation and answered all of my questions. Should you entertain any doubts or questions about my analysis, you can refer to her own words here.

 

Here are the key points that will help the public put the "$6 billion shortfall" in Virginia's General Fund budget in perspective:

  • The "budget shortfall" stretches over three budgetary years -- fiscal 2002, 2003 and 2004 -- not two years as one might suppose for a state that budgets biennially. That averages out to a $2-billion-per year impact instead of $3 billion.

  • The budget shortfall consists of two main components: a $3 billion revenue shortfall over three years, attributable to the recession, and $3.1 billion in "required new spending" that hadn't been provided for in the budgets. This spending, explains Currey, consists of greater-than-budgeted obligations that the state legally must meet unless there is a change of legislation. Major categories include Medicaid, prisons, K-12 education, a juvenile youth program and reimbursements for local car-tax relief.

  • Gov. Warner and the General Assembly enacted approximately $3.3 billion in spending cuts over the three years -- for a net cut in General Fund spending of about $200 million over three years! These cuts were perceived as acutely painful because they were concentrated in the area of administrative overhead, but it is grotesquely erroneous to suggest, as some observers have, that the state has "cut spending" by $6 billion.

  • Lawmakers made up $420 million of the shortfall through permanent new fee increases and other revenue enhancements.
  • Lawmakers made up $841 million of the "shortfall" by drawing down the Revenue Stabilization Fund (better known as the Rainy Day fund).
  • Lawmakers made up the rest, about $1.5 billion, through "alternate sources of funding" and "resource adjustments," most of which which can be fairly described as one-time sources and accounting gimmicks.

Currey argues, persuasively, I think, that those accounting gimmicks represent one-time fixes that can't be repeated and, indeed, in the name of fiscal responsibility, should be eliminated. They represent a form of borrowing against the future -- a temporarily distasteful measure to get through hard times -- and a claim on state resources going forward.

 

Gov. Warner deserves kudos for wanting to restore integrity to the budgeting process. But he also needs to be straight with the public. If he'd said, "We need to raise taxes to redress the billion dollars or so in funny-money accounting we used to get through the recession," I wouldn't have a problem. I can't say I'd agree with him on the need to raise taxes, but I'd respect him for stating the problem clearly and fairly.

 

But it's not kosher to tell Virginians that the state had a "$6 billion shortfall" in such a way that people mistakenly draw the conclusion that the state has gone through some hideous downsizing. Yes, the governor did hack out a lot of administrative overhead, but program spending has expanded without let-up, and state government is no smaller today than it was when the recession began.

-- March 29, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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