Category Archives: Budgets

Thinking Sensibly about Virginia State Police Salaries

Lawmakers proposes big increase for Virginia State Police salaries.

Virginia State Police graduates. Lawmakers propose a big increase in starting salaries. Photo credit: InsideNova.com.

Virginia State Police troopers would receive a $7,000 pay raise — a 22.3% boost for starting salaries — under a budget proposal that also would provide a 3% pay raise for all state employees, reports the Richmond Times-Dispatch. The dramatic pay hike comes in response to deteriorating morale and a surge in state trooper departures.

Is such a big pay raise justified in the midst of a budget crunch in which lawmakers are forced to cut other programs?

Clearly, the state police have a massive problem. In November, the agency had 257 vacancies in a sworn force of 2,148, according to the Daily Press. Over the past few years, the state police averaged six departures monthly, reports the T-D. That number increased to 13 per month in last year and shot up to 22 in just the first 20 days of 2017.

By my back-of-the-envelope calculations, paying 2,150 officers an extra $7,000 each will cost the state about $15 million per year. That is a considerable sum. However, if the pay increase staunches the loss of manpower, it will be offset by a reduced training costs. The Times-Dispatch article notes that it costs the City of Richmond about $100,000 to get a recruit trained and on the street. Assuming that the cost to the state police is roughly comparable, and assuming the pay hike reduces the number of departures back to the pre-crisis norm of six per month, the state police will need to train 80 to 90 fewer troopers each year. That would represent a savings of $8 million to $9 million. (I have made several assumptions here, which undoubtedly can be refined, but you get the gist.)

Thus, while the $15 million departmental pay raise will not fully pay for itself through reduced turnover, the adjusted cost when taking training expenses into account will be considerably lower.

Are there other ways to offset the expense? Presumably, some state police functions are more critical than others, and some offer more law enforcement bang for the buck than others. Could the troopers be relieved of low value-added tasks that soak up manpower?

For example, lawmakers enacted a policy last year as part of a bipartisan compromise on gun control, in which state police conduct background checks at gun shows. Implementing that policy cost $300,000 annually to pay for three full-time civilian positions, as the Times-Dispatch reports here. In its first six months, the program resulted in only one person being denied the purchase of a weapon at 41 Virginia gun shows. The man was wanted for failing to appear before a grand jury in September. Was that one detention worth $300,000?

Six months may not be sufficient time to fairly judge the effectiveness of the program. But that’s the kind of question we need to be asking. Instead of stroking the state police a $15 million check, legislators should ask the top brass to enumerate all the tasks state troopers are called upon to perform. How much manpower do those jobs require? What value do they provide? Can we reduce the number of troopers on payroll without harming public safety?

It seems clear that we need to increase Virginia State Police salaries, and equally clear that the state will recoup some of that expense through reduced training expenditures. However, we should not assume that the only way to pay for higher salaries is to pump more money into the agency. Perhaps we can scale back tasks of marginal value. Unfortunately, I see no indication in the news coverage of this issue that anyone has even considered that alternative.

Virginia Higher Ed Faces Legislative Backlash

Virginia higher ed, and the University of Virginia in particular, are facing toughest General Assembly scrutiny in twenty years.

Virginia higher ed, and the University of Virginia in particular, are facing toughest General Assembly scrutiny in twenty years.

Frustration with Virginia’s higher education establishment boiled over during a press conference in the state Capitol building this morning as 15 senators and delegates from both political parties expressed their intention to curtail tuition hikes at public colleges and universities.

Legislators have introduced some 20 bills so far in the 2017 session addressing affordability and access at Virginia universities, and they expect more will be filed. A primary source of concern is how the state’s elite institutions are steering millions of dollars into financial aid to out-of-state students even as Virginians find the cost of attendance increasingly unaffordable.

Del. Tim Hugo, R-Centreville, a graduate of the College of William & Mary, decried the high percentage of out-of-state students at his alma mater. Referring tongue-in-cheek to William & Mary as “the College of New Jersey-Williamsburg campus,” he said, “We need more in-state students.”

The University of Virginia is spending $20 million to $30 million in scholarships for out-of-state students, said Del. Dave Albo, R-Springfield. He found that dispensation ironic given the fact that “for years we were told we needed out-of-state students to fund the schools.”

Another source of resentment was the accumulation of large financial reserves, particularly at the University of Virginia. UVa had cobbled together a $2.2 billion “strategic investment fund,” expected to generate $100 million a year in investment returns, even as the board of visitors raised tuition aggressively and lobbied for more state support.

The press conference followed the release of a poll released yesterday by Partners 4 Affordable Excellence @ EDU, a group created to fight runaway college tuition hikes (and a sponsor of this blog). That poll of registered Virginia voters found that a large majority overwhelmingly believe that the cost of college attendance is too high and support greater transparency of university budgets and decision-making.

Dr. James V. Koch, a former president of Old Dominion University and president of Partners 4 Affordable Excellence, opened the event with a review of data. Since 2000, he said, the Consumer Price Index had increased 35.2%. Over that same period the national Higher Ed Price Index had jumped 52.9%. In Virginia, the cost of in-state tuition and fees had shot up even faster, even as incomes have stagnated. The number of work-hours that it took a Virginian earning the median hourly wage to pay average tuition and fees for a four-year college increased from 227 in 2001-2002 to 438 this year.

Bills before the General Assembly would cap the percentage of out-of-state students at 25% at Virginia higher ed institutions, forbid colleges from using in-state tuition revenues to pay for financial aid, restrict the amount of out-of-state tuition that could be applied to financial aid, and limit tuition increases to the rate of inflation, among other measures.

University officials justify high enrollments of non-Virginians on the grounds that out-of-state students on average pay 160% of the tuition cost, in effect subsidizing Virginia residents. If lawmakers cut out-of-state enrollments, they will increase pressure on universities to jack up in-state tuition. Also, providing financial aid to some out-of-state students, they argue, is necessary to make attendance affordable for lower-income students and preserve socio-economic and racial diversity.

Del. Lionell Spruill, D-Chesapeake, was more concerned with helping poor, minority Virginia students. In Virginia, the percentage of students receiving Pell grants for low-income students is around 20%, the lowest rate in the nation, he said. The reason for the low participation, he explained, is that tuition, fees and other costs are so high in the Old Dominion that low-income students can’t afford to attend. Poor Virginian students should be first in line for student loans, he contended.

A similar argument was advanced by Del. Terry Kilgore, R-Gate City, who represents an district in far southwest Virginia. As unaffordable as costs are for a family in affluent, suburban Fairfax County, he said, they create an insurmountable barrier for many families in Appalachia.

While legislators at the press conference shared a common concern about the cost of Virginia higher ed, they indicated no agreement upon which bills to support. Indeed, the issue of financial aid may prove divisive. While Spruill and Kilgore focused on the need of their lower-income constituents, a disproportionate percentage of of whom rely upon financial aid, other lawmakers represented middle-class households who are tired of seeing some of their tuition money diverted to financial aid for others.

“The high tuition, high aid model is out of control,” said Sen. Bill DeSteph, R-Virginia Beach. Continue reading

Chesterfield Finds $83 Million Unfunded Liabilities

Somehow Chesterfield County schools missed $83 million in unfunded liabilities until late last year.

Somehow Chesterfield County schools missed $83 million in unfunded liabilities until late last year.

Our society is riddled with unfunded liabilities. Nowhere is the magnitude of short-term thinking more egregious than the federal government. As case in point, the U.S. military has put off maintenance and repairs to the point where we don’t have the money for the military we have, much less the military we would like to have.

“The Department of Defense “has breathtaking liabilities — as much as $88 billion a year — that ought to be addressed before procuring a single additional plane, ship, or tank,” says Tom Spehr, as quoted by Robin Beres in her Richmond Times-Dispatch op-ed today.

But Virginians can’t get sanctimonious. Not only do we have the example of Petersburg to to keep us humble, we now hear of scandalous inattention to hidden liabilities afflicts one of Virginia’s most populous jurisdictions — and one with the reputation, no less, of being exceptionally well run.

In Chesterfield County, school officials are grappling with massive unfunded liabilities for a supplementary teacher retirement benefit. Under the program, teachers can retire then get re-hired under the program working part-time, temporary jobs similar to their pre-retirement work. As incentive, they get a lucrative supplement to their normal Virginia Retirement System benefits.

In 2014, reports the Times-Dispatch, unfunded liabilities were found to be $58.7 million. Now they are $83 million.

Here’s the amazing part. The T-D quotes Donald Wilms, president of the Chesterfield Education Association, as being shocked when he learned of the program’s underfunding for the past five years. “Teachers were continually told that the program isn’t going away. So I think it was natural to assume that the program was healthy,” he said. “Nobody told you it was in danger.”

Nobody, that is, except for MGT America, which provided an efficiency review of Chesterfield schools in 2010 (!!!) and noted that the  supplemental retirement plan faced a large unfunded liability in the next few years as Baby Boomer teachers began retiring. “The increased number of participants will dramatically increase the cost of this program,” warned the report.

Somebody wasn’t paying attention.

Forget the federal government. Let Donald Trump and Congress worry about that. Here in the provinces, we need to worry about how we handle our own business. Do other school systems have supplemental retirement programs like Chesterfield’s? How many other unfunded liabilities, the existence of which lurk deep within Comprehensive Annual Financial Statements, are ticking time bombs? Is anyone paying attention?

You’ve Heard of Unfunded Pension Liabilities. Unfunded Infrastructure Liabilities Are Huge, Too

Lafayette, La., like many other U.S. cities, is running a huge hidden deficit in the form of backlogged infrastructure maintenance. Charles Marohn, founder of the Strong Towns movement, has done a brilliant job of illuminating the time bomb ticking away in municipal budgets around the country. This week he has honed in on Lafayette, a midsize city of about 125,000. His tale probably could apply to many Virginia localities.

In “The Real Reason Your City Has No Money,” he lays out the problem:

Lafayette had the written reports detailing an enormously large backlog of infrastructure maintenance. At current spending rates, roads were going bad faster than they could be repaired. With aggressive tax increases, the rate of failure could be slowed, but not reversed. The story underground was even worse. Ironically, this news had historically been the rationale for building even more infrastructure (theory: this is a problem that we’ll grow our way out of). …

When we added up the replacement cost of all of the city’s infrastructure — an expense we would anticipate them cumulatively experiencing roughly once a generation — it came to $32 billion. When we added up the entire tax base of the city, all of the private wealth sustained by that infrastructure, it came to just $16 billion. This is fatal. …

The median house in Lafayette costs roughly $150,000. A family living in this house would currently pay about $1,500 per year in taxes to the local government of which 10%, approximately $150, goes to maintenance of infrastructure (more is paid to the schools and regional government). A fraction of that $150 – it varies by year – is spent on actual pavement.

To maintain just the roads and drainage systems that have already been built, the family in that median house would need to have their taxes increase by $3,300 per year. That assumes no new roads are built and existing roadways are not widened or substantively improved. That is $3,300 in additional local taxes just to tread water.

That does not include underground utilities – sewer and water – or major facilities such as treatment plants, water towers and public buildings. Using ratios we’ve experienced from other communities, it is likely that the total infrastructure revenue gap for that median home is closer to $8,000 per year.

Freaking out? We haven’t even talked about schools and unfunded pension liabilities yet.

Can we find the information in local government’s Comprehensive Annual Financial Reports to make these same calculations ourselves? I don’t know. But every local government officials are living in La La Land if they can’t calculate the unfunded maintenance backlogs for their community.

There is a solution to the problem, by the way, but it isn’t raising taxes, and it isn’t unleashing infrastructure spending in Washington — it’s changing the land- and infrastructure-intensive pattern of development commonly called suburban sprawl. A few localities in Virginia get it. But most will have no appetite to make the necessary changes until they reach a Lafayette-level of desperation. Too bad.

How Budget Cuts Will Affect Virginia Colleges

Proposed budget cuts for Virginia's public institutions of higher education.

Proposed budget cuts for Virginia’s public institutions of higher education. Data source: SCHEV. Click for more legible image.

Proposed cuts in state support for higher education in Virginia next fiscal year will effectively wipe out the extra money the General Assembly had allocated to public colleges and universities at the beginning of the budget cycle, Peter Blake, director of the State Council for Higher Education in Virginia (SCHEV), told his board yesterday. “We’re back to where we started,” he said.

The cuts will come in two forms. In the face of the current revenue shortfall, Governor Terry McAuliffe has proposed a 5% General Fund reduction in appropriations for higher ed over the two-year budget cycle. Plus, the budget amendments would reduce institutions’ appropriations by $24.2 million to recover  adjustments to Virginia Retirement System rates for employees

Besides the cuts to individual institutions, as shown in the table above, the governor proposes cuts to SCHEV itself, the INOVA Global Genomics and Bioinformatics Research Institute, and other line items. The state also is clawing back $5 million in interest earnings and credit card rebates from the colleges and universities.

Blake said that legislators have told him that they will try to restore some of the funds, but added that there were no guarantees.

Marge Connelly, chair of the resources and planning committee, observed that Virginia’s higher education sector needs a more stable revenue stream from the commonwealth but offered no specific suggestions. SCHEV took no formal action in response to the data.

Blake said that the increased state contribution to higher ed in the current fiscal year made possible the lowest tuition hikes in years. Indeed, a legislative analysis presented to SCHEV in November found that state cuts accounted for about half the tuition increases over the past 20 years. However, that doesn’t include increases in fees, room, board and other expenses, so the state budget cuts explain only about 14% of the increased Cost of Attendance.

Budget Shortfalls Will Dog States for Decades

Projected state/local budget shortfalls as percentage of GDP absent policy changes.

Projected state/local budget shortfalls as percentage of GDP absent policy changes.

Over the next 44 years, state and local governments face chronic budget shortfalls driven by Medicaid spending, government employee health care costs, and underfunded pensions, warns the U.S. Government Accountability Office (GAO) in a report issued earlier this month.

“Absent any intervention or policy changes, state and local governments are facing, and will continue to face, a gap between receipts and expenditures in coming years,” states the report. Closing that gap would require cutting spending by 3.3%, increasing revenues by a like amount, or implementing some combination of the two, stated the report.

Budgets eventually will come back into balance around 2060 when the demographic bulge of the Baby Boomer population passes from the scene, reducing pressure on Medicaid and pensions. However, fiscal pressures could become acute long before then.

The increase in health care expenditures will be relentless, drip-drip-drip year after year, driven not only by the cost of delivering care but the cost of providing care to an aging poor population. Unfunded pension liabilities are easier to sweep under the rug in the short-term but could become a crisis as pension funds burn through their accumulated assets.

States the GAO report:

While most state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more, plans have experienced a growing gap between assets and liabilities over the longer term. Our simulations suggest that state and local governments will need to increase their pension contributions, absent any changes to benefits or employee contributions in the future. Alternatively, state and local governments may need to take steps to manage their pension obligations by reducing benefits or increasing employees’ contributions.

Bacon’s bottom line: Analyzing the state/local government sector as a whole, the GAO report did not differentiate between the states. Clearly, some states will experience more severe budget shortfalls than others. My impression is that Virginia is better off than the average but that we still face a reckoning.

Virginia’s exposure to higher Medicaid costs should be less than the national average because Republican legislators blocked Governor Terry McAuliffe’s bid to expand the program as encouraged by the Affordable Care Act. Long-term, Virginia would have been responsible for funding 10% of the expansion. There is a trade-off, of course. The Old Dominion is foregoing an injection of federal dollars to fund medical coverage for the near-poor.

Also, Virginia did reform its state/local government pension plans under the McDonnell administration, keeping the old “defined benefit” plan for older state employees but implementing a hybrid defined benefit/defined contribution plan for new employees. State funding to the Virginia Retirement System also assumes a 7% annual return on VRS’s investment portfolio, less than the 7.5% assumed by other states. The actual return likely will be lower, I have argued, requiring everyone to pony up more cash than expected. Regardless, Virginia’s adjustment to economic reality will be less traumatic than that of many other states.

Meanwhile, House Speaker William J. Howell, R-Stafford, has been exploring a second round of reform at VRS. The state could save millions of dollars a year by paying less to outside money managers. Also, Howell has backed a 401(k)-like defined contribution plan for new employees, which shifts the risk of under-performing stock and bond indices from the state to employees.

Press reports have suggested that Howell is having difficulty getting traction. Perhaps Virginia should emulate the Social Security and Medicare Trust Fund trustees who annually publish projections of how long the Social Security and Medicare trust funds will last before the money runs out. It would be useful to know (1) how long the money in the Virginia Retirement System will last before the coffers run dry, (2) how much it will cost the state at that point to restore benefits to promised levels. Such knowledge might focus Virginians’ attention on the need to act sooner rather than later.

(Hat tip: Tim Wise.)

Medicaid, the Blob that Ate the Budget

Medicaid, the blob that ate the budget

The Medicaid blob swallows all in its path.

Details on that runaway Medicaid budget…

Spending per Medicaid enrollee has been relatively flat the past five years, having increased less than 0.4% annually (adjusted for inflation) between FY 2011 and FY 2015. The cost driver has been enrollment, which increased 16.5% over the same period, according to a Joint Legislative Audit and Review Commission (JLARC) report, “Managing Spending in Virginia’s Medicaid Program.”

JLARC summarizes the consequences for Virginia’s General Fund budget:

Medicaid general fund spending has grown by an average of 8.9 percent annually over the past 10 years, while total general fund spending increased by just 1.3 percent. Medicaid spending comprised 22 percent of the general fund budget in FY16, increasing from 14 percent in FY07.

Chart source: JLARC

Chart source: JLARC

No wonder the Commonwealth can’t afford to give employees a pay raise and shore up their pension benefits (see previous post).

But there is potentially good news. The state still has room to squeeze costs by as much as $40 million per year.

In FY16, Virginia could have saved $17–36 million by not paying [Managed Care Organizations] for the inefficient provision of services. [Medicaid] also does not adjust administrative spending for enrollment increases, and these adjustments would have reduced spending by as much as $8 million in FY16.

Tackling Virginia’s Hidden Budget Deficit

Like a black hole, Virginia's hidden budget deficit is invisible but immense.

Like a black hole, Virginia’s hidden budget deficit is invisible but immense.

Restoring a pay raise for state employees outranks pension reform in the recommendations of the Commission on Employee Retirement Security and Pension reform. The legislative commission voted yesterday to prioritize a 3% pay raise for state employees that Governor Terry McAuliffe has proposed putting on hold in the face of $1.5 billion revenue shortfall.

House Speaker William J. Howell, R-Stafford, who chaired the commission, “struggled” to keep the panel’s focus on his own priority, creation of an optional 401(k)-style retirement plan for newly hired state employees, reports Michael Martz with the Richmond Times-Dispatch. Under the current arrangement, new employees have a hybrid defined benefit/defined contribution plan.

Virginia faces a long-term unfunded liability of $23 billion for the $70 billion Virginia Retirement System (VRS). The liability mounted in the past two fiscal years as the VRS fell short of an assumed 7% investment, although the VRS reported Monday that investment returns the past 12 months, spurred by a booming stock market, achieved 8.7%.

While pushing for the pay raise, the commission gave a watered-down endorsement of Howell’s priority, recommending that the General Assembly “consider” creating a defined contribution plan.

Bacon’s bottom line: In theory, the Virginia Constitution requires the Commonwealth of Virginia to balance its budget every year. The trick is, what constitutes a “balanced” budget? Accruing $23 billion (and that’s probably under-stating the problem) in unfunded pension liabilities technically does not count as “deficit spending.” Neither does short-changing the compensation of state employees, which creates major issues for recruiting and retaining a competent workforce when long-term Baby Boomer employees retire. But these shortfalls are only one step removed from a budget deficit. They pile up future obligations just as the state would if, say, it deferred maintenance on roads and highways year after year.

Legislators face hard, hard choices in a world in which sluggish economic growth and expanding Medicaid enrollment crowd out other spending.  Short of raising taxes, which would create a new set of problems, Virginia has no choice but to radically re-think government from stem to stern.

First principle: State and local governments should focus exclusively on core functions, excel at those functions, and abandon the rest. Corollary of the first principle: It takes good employees to achieve excellence. Second corollary: It takes competitive pay and benefits to recruit and retain good employees.

Second principle: State and local government should not rack up a budget deficit disguised as unfunded future obligations that will bedevil the next generation.

Govern accordingly.

Alexandria’s Capital Spending Problem

Alexandria faces 10-year capital spending tab of up to $500 million more than budgeted.

Alexandria City Hall — city faces 10-year capital spending tab of up to $500 million more than budgeted.

Alexandria City Manager Mark Jinks is right: It’s probably a good idea to put on hold the $1.4 million design work for a proposed $20 million expansion on the Chinquapin Recreation Center pool, as well as series of $25,000 “way-finding” signs. The city has massive capital spending commitments that are not so discretionary.

As reported by the Washington Post, Jinks has tallied up some major expenditures for the city of 150,000.

  • The city’s share of the escalating cost of the Washington-area Metro heavy rail and bus system will increase $90 million over the next 10 years.
  • Repairs to schools will cost $200 million, while repairs to other city facilities could add $80-$239 million over the $85 million already budgeted.
  • Storm and sanitary sewer projects will cost $150-$200 million, although the state may cover some of that expense. Households will be dunned an additional $120 to $180 per year to cover the cost.

Of course, none of these capital expenditures cover the cost of unfunded pension liabilities faced by the state and every Virginia locality — a shortfall that could well come due within the next ten years.

Questions: Alexandria is said to be one of the few counties in the country that maintains a 10-year capital improvement budget. Are other Northern Virginia localities taking their long-term Metro exposure into account? Are other Virginia localities planning for the long-term cost of facilities maintenance and storm-water improvements? Do governing bodies appreciate that when they build expensive new facilities that they are incurring maintenance/repair obligations down the road? Just asking.

Virginia Dodged the Medicaid-Expansion Trap

Medicaid expansion enrollment double the projected numbersThe 24 states lured into Medicaid expansion under provisions of the Affordable Care Act (Obamacare) collectively experienced twice as many new enrollments as they expected, according to a new report by the Foundation for Government Accountability. While the federal government has picked up the tab for 100% of the costs until now, states will start paying next year an escalating share of the budget that will reach 10% by 2020.

“Newly obtained data from these 24 states shows that at least 11.5 million able-bodied adults have now enrolled in ObamaCare expansion — an overrun of 110 percent or more than double projections,” states the report, “ObamaCare Expansion Enrollment is Shattering Projections.”

House Speaker William J. Howell, R- Stafford, understandably feels vindicated. He and other Republicans in the legislature took heavy flak for blocking a Medicaid expansion that would have extended health care to thousands of near-poor Virginians lacking health insurance.

Howell issued the following statement yesterday:

The report is further proof that Virginia’s decision not to expand Medicaid under the Affordable Care Act is the right decision. Medicaid expansion states have enrolled more than twice as many able-bodied adults as expected, resulting in large cost overruns that create significant budget gaps.

Earlier this month we learned that Virginia’s current Medicaid program will cost nearly $300 million more than expected for FY2018. Every additional dollar spent on Medicaid is one less dollar that can be spent on public safety and education. By not expanding Medicaid, we have protected the Commonwealth from the financial disasters being experienced in other states.

Not only would state taxpayers be liable for bigger expenditures, the Foundation for Government Accountability report argued, able-bodied adults would consume resources that otherwise would go to seniors, children with developmental disabilities, individuals with brain injuries and other vulnerable individuals ” languishing on waiting lists for needed Medicaid services. Mounting overruns will soon exacerbate pressure on policymakers to shift even more money away from the truly needy and toward Obamacare’s able-bodied adults.”

Although the overall enrollment increase was 110%, the actual percentage varied widely between the states — from only 2% above projections for Hawaii to 322% for California. With its large population, adding 3.8 million to its Medicaid rolls, California skewed the national average higher. Among states close to Virginia, Maryland went 62% over projections, West Virginia 84% over, and Pennsylvania 18% over.

Medicaid expansion was supposed to cost West Virginia $429 million in FY 2015. But the actual tab ran $627 million, 46% more than anticipated. Assuming flat enrollment in future years and a 10% state cost share, the expansion will cost West Virginia taxpayers $63 million a year instead of $43 million by 2020.