Tag Archives: Boomergeddon

Enjoy It While It Lasts

Woo hoo! Tax cuts and spending increases — it doesn’t get any better than this. The United States is about to enjoy its biggest fiscal stimulus since Barack Obama’s American Recovery and Reinvestment Act of 2009. All this spending and tax cutting is going to feel great for the next couple of years — especially here in Virginia, which could be the single biggest beneficiary in the country of the budget deal’s $165 billion boost to Pentagon spending over the next two years. Who needs Amazon when you’ve got the federal government with its limitless credit card?

Let’s enjoy the booming economy while it lasts. But let’s not fool ourselves either. When Virginia’s GDP suddenly perks up and revenues start surging, let’s not pretend that we have somehow “turned the corner” and are experiencing a “new normal.” It would be a huge mistake to see the fiscal stimulus as anything more than superficial prosperity purchased largely through the massive accumulation of federal debt. (I’ll give corporate tax restructuring and deregulation credit for being more than passing phenomena, but much of the economic euphoria will come from old-fashion deficit spending.)

Unfortunately, if something is too good to be true… it’s probably not true. Inflation, which has been quiescent for a decade, is now surpassing 2% annually. When you cut taxes, increase spending, and tighten monetary policy in the face of increasing inflation while the private-sector economy is booming, you get higher interest rates.

Higher interest rates will do two things. They will dampen the economy, acting as a regulator on growth. And they will increase the cost of borrowing for the world’s largest debtor, Uncle Sam, with $20 trillion in national debt. As new debt is financed and old debt rolls over, each 1% increase in interest rates eventually will add $200 billion a year to federal spending. We could find that a strong economy is actually worse for the deficit and national debt than a weak economy!

Since I wrote “Boomergeddon” almost eight years ago, the United States has squandered its opportunity to get its fiscal house in order. The problem, as I outlined back then, is that Democrats refuse to cut domestic spending, Republicans refuse to cut defense spending, and Republicans talk about cutting entitlements but are too scared to act because Democrats would crucify them. As we’ve seen in the latest budget deal, nothing about that political logic has changed.

Meanwhile, the Medicare Hospital trust fund is scheduled to run out be depleted in eleven years, and the Social Security trust fund is scheduled to run out in sixteen years. In 2019 when the Medicare trust fund runs out and Congress looks for ways to maintain benefits, the U.S. budget will be running annual deficits of about $1.5 trillion a year — and that’s according to a June 2017 forecast that doesn’t reflect the recent tax cuts and spending hikes, and assumes no big recessions between now and then. Faced with the prospect of putting Medicare and Social Security on a pay-as-you-go basis or dramatically raising payroll taxes, the U.S. will be facing the greatest fiscal crisis since the Great Depression. This political armageddon — or, as I call it, Boomergeddon — is only a decade away.

Oblivious to all this, the General Assembly is perilously close to agreeing to expand the Medicaid program in Virginia predicated upon federal promises to pay for 90% of the expansion — and even then the state is committing itself to adding roughly $300 million to its biennial budget. The Republicans’ insistence upon restricting the program to adults who are working or seeking work is nothing more than a face-saving device that will not alter the underlying fiscal dynamics. Ten years from now, when Uncle Sam is dealing with an exploding Medicare system, Virginia’s retired state employees, local employees, and teachers will be depleting the Virginia Retirement System. The VRS’s $20 billion in unfunded liabilities are, for reasons I have explained previously, likely to get get bigger, not smaller. At some point between now and ten years from now, we’ll also have to acknowledge that the Washington Metro isn’t the only component of the state’s transportation infrastructure facing a multibillion-dollar unfunded maintenance backlog.

Sadly, human nature being what it is, Virginia state and local governments will interpret the Trump boom as the sign of enduring prosperity, not an unsustainable spurt, and elected officials will crank up borrowing to pay for the endless list of “unmet needs,” which never seems to shrink in good times or bad.

I don’t know why I bother sounding the alarm. No one’s going to listen. Nothing’s going to change. But I can always hope, when it comes time to dissect the greatest social and economic tragedy in nearly a century, maybe someone will remember that someone saw it coming.

The New Normal: Rising Interest Rates

U.S. Treasury Department

The United States enjoyed a three-decade decline in interest rates, beginning with the early-1980s quashing of inflation by Federal Reserve Board Chairman Paul Volker and culminating with Ben Bernanke’s Quantitative Easing in the mid-2010s. Lower interest rates, which made equities look more favorable by comparison, helped drive stock market indices like the Dow Jones Industrial Average and the S&P 500 to record highs.

Now the age of declining interest rates is over. Dead. Pound the nail in the coffin. Dig the grave.

The implications of this seismic shift are dire for the world’s largest debtor, the U.S. federal government. But state and local governments have cause for concern, too.

The manic bull market for stocks took its first big drubbing earlier this week when U.S. Treasury yields took an unexpected uptick. It is finally dawning on financial markets that as good as the Trump tax cuts may prove to be for the economy, they will increase federal budget deficits and borrowing, which will pressure interest rates higher. Even accounting for a stronger economy that pumps up tax revenues, nonpartisan groups say the tax law could add $1 trillion to deficits over the next 10 years.

Meanwhile, the Treasury Borrowing Advisory Committee has estimated that the Treasury will need to borrow a net $955 billion in the fiscal year ending Sept. 30, 2018, up from $519 billion the previous year. Borrowing will increase further to $1,083 billion next year and $1,128 billion the following year. That’s with a strong economy, not a recession.

The Treasury borrowed even larger sums back in 2009 and 2010 as the U.S. economy struggled to pull out of the global recession. But the economic picture looked very different back then, allowing the U.S. to finance $1.6 trillion annual deficits without driving interest rates higher. As the Wall Street Journal explains:

Back then, global demand for safe assets was high and investors gobbled up U.S. Treasury issues, pushing up Treasury prices and down their yields. The Federal Reserve had also cut short-term interest rates to near zero and was beginning a series of programs to buy government debt itself, putting further upward pressure on Treasure prices and downward pressure on interest rates. …

Treasury’s increased borrowing now comes against a much different economic and financial backdrop. The economy is strong and inflation is expected to rise gradually in the months ahead. In response, the Fed is pushing short-term interest rates higher and allowing its portfolio of Treasury and mortgage debt to shrink as bonds mature.

Another factor, I might add, is the weakness of the dollar, which also discourages foreign purchases of U.S. debt and adds to inflationary pressure.

Why am I writing about the end of the era of low interest rates in a blog dedicated to Virginia public policy? Because state and local governments, colleges, universities, economic development authorities, and public service entities are big borrowers, too. Higher interest rates makes life harder for all of them.

To draw from the latest headlines, Mayor Levar Stoney wants to increase the City of Richmond meals tax to fund school building improvements because the city has maxed out its debt capacity and can borrow no more without undermining its AA bond rating. Likewise the Commonwealth of Virginia has borrowed close to its cap, constraining the state’s ability to issue new debt.

Virginia policy limits annual service on its long-term debt to 5% of General Fund revenues. Debt service can be broken into two main parts: the principal borrowed and the interest paid. It is axiomatic: If interest rates increase, so does the annual debt service…. Which means the state can borrow less.

Most important of all, Virginia has a massive unfunded pension liability. That liability, about $20 billion now, has shrunk modestly in the past couple of years thanks to the strong performance of the Virginia Retirement System (VRS) equities portfolio. The next VRS report, reflecting results from the astonishing Trump-era bull market, likely will be positive. Virginia, it will appear, is making continual progress in whittling down its liabilities. No one will be concerned.

But the stock market cannot possibly extend the past decade’s performance into the future. While earnings may continue to improve, stock prices will be dampened by interest rates and shrinking price-earnings multiples. Do not be deceived. The turning point in the bond market does not augur well for either the United States with its $20 trillion national debt or Virginia with its more modest obligations.

The GOP’s Hail Mary Pass

House Speaker Paul Ryan savors his biggest legislative victory.

Faced with a chronically slow-growth economy, expanding deficits, mounting federal debt, and a looming funding crisis for the U.S. welfare state, Republican congressmen are, to borrow a football metaphor, throwing a hail Mary pass into the end zone in the desperate hope of scoring a winning touchdown. They are gambling that tax cuts combined with President Trump’s deregulation agenda will boost economic growth from roughly 2% per year to 3% or more, reducing the tax burden for millions of Americans, creating new jobs, boosting wages, and bending the curve on long-term deficit projections.

Convinced that the tax cuts will prove to be a disaster for everyone but the rich, Democrats and the mainstream media have subjected the tax plan to relentless, unremitting attacks. Viewed in terms of static economic analysis, we are told, the tax cuts will inflate federal deficits by a cumulative $1.5 trillion over the next ten years. Suddenly, deficits matter!

Republicans respond that measures in the bill — accelerating write-offs for business investment, encouraging the repatriation of hundreds of billions of dollars in corporate profits to the U.S., and making the corporate tax rate more competitive internationally — will stimulate economic growth. Unlike the Democrats, I think that much will prove to be true. My question is: Will faster economic growth generate enough new tax revenue to offset that $1.5 trillion? Longer term, will it avert Boomergeddon?

Let’s dig into the numbers. The Congressional Budget Office’s current 10-year budget forecast assumes a modest 2.1% annual growth rate over the next ten years, a slight uptick from the trend established during the Obama years. But economic growth has accelerated to roughly 3% in the past couple of quarters, and the Trump administration’s deregulation + tax cuts strategy could nudge it even higher. Let us assume for purposes of discussion that, thanks to the tax cuts, the U.S. can grow the economy at a sustainable rate of 3.1% annually. What does an extra percentage point in economic growth get us in deficit fighting?

Well, the latest CBO federal revenue forecast for the next ten years is $43 trillion. A 1% boost in federal revenues will yield $430 billion, not nearly enough to close the $1.5 trillion gap. The analysis gets a bit more complicated because economic growth and higher incomes push Americans into higher tax brackets while a roaring stock market generates massive capital gains. So a 1% increase in economic growth could produce more than a 1% increase in federal revenue. Let’s go for the gusto and double the growth-to-revenue ratio, assuming that federal taxes increase actually increase by $86 billion per year over current projections. That’s still doesn’t close the ten-year $1.5 trillion gap.

Could the economy grow much faster than 3.1% over the decade ahead? I’m skeptical. First, Baby Boomers are retiring in droves, and the working-age population is stagnating. A growing labor force supports economic growth; a stagnant labor force undermines it. Second, the Federal Reserve Board, intent upon unwinding the monetary stimulus of the Obama years, will continue to raise interest rates. It goes without saying that higher interest rates are a damper to economic growth.

In summary, in my untutored opinion, I think that the U.S. will see modestly faster economic growth over the next few years. The Dems have predicted economic Armageddon. They won’t get it. The lives of millions of Americans will improve… in the short run. But Republicans are deluding themselves if they think modestly faster economic growth will reduce the nation’s long-term structural budget deficit. Entitlement spending is still running out of control, and the nation still faces a hideously painful fiscal reckoning. Our 20-year future still looks like Boomergeddon.

Bacon Bits: Film Flam, State Workers, Fun & Games with Chicago Debt

Yummmm. So tasty.

Film incentives a money loser for state. Incentives for producing films in Virginia doubled under the McAuliffe administration, reaching $14.3 million in 2015-2016 and totaling $43 million over five fiscal years. But Virginia’s film industry has returned about 20 cents for every dollar it received in tax credits and 30 cents for every dollar in grants over the five-year study period, according to testimony yesterday before the Joint Legislative Audit and Review Commission (JLARC). Legislative auditors concluded that 95% of the productions would not have been filmed in the state were it not for the credits, reports the Richmond Times-Dispatch.

State employment compensation needs reform. Compensation for the state’s 105,000 employees is “nearly equivalent in value” to that of private-sector employees in Virginia. Although salaries lag the private sector by about 10%, the state makes up the difference with generous health insurance policies. The compensation package does have challenges, however, hiring employees in the fields of health care, health and safety inspection, public safety, and information technology, finds a new JLARC report. “State employee salaries could be more strategically managed if they were … prioritized for jobs that exhibit the most pressing workforce challenges.”

Boomergeddon watch: Chicago. Despite $36 billion in public pension debt, a prospect of $550 million in budget deficits over the next three years, and a reliance upon the state of Illinois, the budget of which also is in a shambles, Chicago just issued a AAA-rated bond. How is this possible? Chalk it up to creative financial engineering. The city is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds. This securitization insulates bondholders from the city’s finances. Chicago is using the proceeds to pay off old, higher-coupon paper, so it will ease its interest burden for a while. However, writes financial blogger John Rubino, “since [the city] runs a chronic deficit, it will soon be back in the market to borrow more, at which point it will have to pay up – since those AAA bonds are siphoning off so much money. Then the downward spiral will resume, with no more tricks available to delay the inevitable.”

Entitlements, Fiscal Limits and the Looming Age of Rage

Now that Democrats are close to parity with Republicans in the House of Delegates, there is renewed talk of Medicaid expansion in Virginia. Meanwhile, in Washington, President Trump and Republicans are pushing a tax-cut plan that would spur economic growth but, even with stronger growth, would increase deficits by $1.5 trillion over the next ten years. Nobody is talking about the $14.6 trillion national debt except as a cudgel against partisan foes. Even as Medicare, Disability, and Old Age and Survivors trust funds are projected to run out within a single generation, entitlement reform is not up for discussion.

Just a reminder… Here’s are U.S. budget deficits forecast by the Congressional Budget Office without counting proposed GOP tax cuts:

The “on-budget” deficit is what we conventionally think of the deficit. It does not include the draw-down of “off-budget” Medicare and Social Security trust funds. Data source: Congressional Budget Office.

Within eight years, the U.S. will be running $1 trillion-per-year deficits every year, pretty much forever. And the CBO forecast does not take into account the likelihood of a recession or two over the next ten years, in which case deficits will metastasize.

And here’s the off-budget forecast. Payouts for Medicare hospitalization, Social Security disability and Social Security old-age programs exceed tax revenues, but interest income on the assets will keep the respective trust funds in the black for the next couple of years. By 2020, however, the off-budget numbers shift  into deficit mode and plunge rapidly thereafter.

Barring major changes in U.S. spending programs or economic growth, here’s when the trust funds are expected to run out, according to Medicare and Social Security trust estimates:

  • 2028: Disability trust fund runs out of money.
  • 2029: Medicare hospitalization trust fund runs out of money.
  • 2035: Social Security trust fund runs out of money.

Back when the Simpson-Bowles commission tackled the deficit issue in 2010 — the last time Americans thought seriously about entitlement reform — the county had 25 years before keystone social safety net programs imploded. If Congress had acted then, it could have put the trust funds into fiscal balance with relatively minor tweaks (slightly higher payroll taxes, slightly reduced benefits, slightly older retirement ages) that had a large cumulative effect over many years. But a decade of delay will require more painful sacrifices, which means they likely never will be made.

If nothing gets done until the trust funds run out of money — what I call Boomergeddon — the programs will have to cut benefits to match revenues generated. We are only twelve years from massive dislocations to the Medicare program, and 17 years from disruptions to Social Security. Baby Boomers beware, your retirement will be a lot uglier than you realize.

As for those $1 trillion+ on-budget deficits every year, they put Virginia at special risk. Any Congressional effort to tame deficits without touching entitlements will require cuts to discretionary spending, the biggest pot of which is related to defense, intelligence and homeland security…. which happens to be Virginia’s biggest industry sector. Son of Sequester will subject the Virginia economy to chronic economic stress and fiscal pain. But instead of dealing with Virginia’s long-term structural issues, the next session of the General Assembly could well consume itself in a renewed debate over expanding Medicaid.

As Americans speak no evil, see no evil, and hear no evil, we hurtle toward an era of brutal fiscal limits, broken promises to millions of Americans, and polarization and rage that will surpass anything we see today.

How to Build Strong, Resilient Cities and Towns

Chuck Marohn

Cities and counties across the United States are experiencing chronic fiscal stress, and the reason has nothing to do with Republicans or Democrats and everything to do with what Chuck Marohn calls the “growth Ponzi scheme.”

“Why are cities going broke?” he asked at a forum hosted by the Partnership for Smarter Growth, Coalition for Hanover’s Future, and the Virginia Conservation Network at Randolph-Macon College last night. “We can’t we keep the grass in the parks mowed? Why can’t we keep the library open past 5 o’clock?”

After World War II, the United States embarked upon a massive, society-changing experiment that departed from the accumulated wisdom of millennia of experience of building cities. That experiment, commonly referred to as suburban sprawl, changed the growth paradigm from building places with a pedestrian orientation to building places with an automobile orientation. Over the course of just two or three decades new zoning codes and highway construction transformed the character of cities across the country. Initially, that experiment seemed to work out well. Now the fiscal flaws are evident for all to see, and the system is on the verge of collapse.

In the post-World War II era, developers and government struck a deal: Developers would build a subdivision or shopping center, including roads and utilities, and then would turn over the infrastructure for local government to maintain. Early on, the arrangement seemed like a great deal for government. Taxes on the houses and commercial buildings generated loads of cash flow while the infrastructure cost almost nothing to maintain. In a typical cul de sac development in the mid-1990s, infrastructure would cost the builder $6,600 per development. Less visibly, localities had to spend thousands more on infrastructure outside the subdivision, such as arterial roads and highway interchanges. Everyone ignored the fact that it would take, say, 37 years to recoup the cost of all that infrastructure through property tax revenues. Because infrastructure costs little to maintain when it’s new, new subdivisions proved to be revenue gushers. But over time, roads required more and more maintenance and subdivisions began operating tax-wise at a net loss.

What was the solution? Build more new subdivisions and use the surplus revenues to cover deficits from the old subdivisions. Use good money to cover bad, like a Ponzi scheme. But at some point it’s impossible to build enough new subdivisions (strip malls, office parks, etc.) to cover the deficits. That’s where the nation is now, said Marohn. For thirty years, local governments enjoyed the “illusion of growth.” Now they’re facing the reality of chronic fiscal stress. Absent changed policies, they’ll follow Detroit into the abyss. For many, it is too late.

“We need growth so bad today that we’ll do all sorts of crazy stuff,” Marohn said. “We’re lending money to people we know can’t pay it back. We’re desperate for growth. We have to have it or everything falls apart.”

The United States is hitting the limits of its ability to fund more growth. There is no rabbit to pull out of the hat to rescue the nation from its predicament.

As an example, Marohn cited Lafayette, La., a city that is reasonably well run administratively yet experiences chronic fiscal stress. An in-depth analysis of its development patterns revealed that its downtown and older neighborhoods, which are compact and densely developed, net out fiscally positive but that the majority of the city, especially newer areas built according to suburban zoning codes, net out negatively. The median family in Lafayette makes $45,000 a year and pays $1,500 in local taxes. To cover the cost of the its growing infrastructure liability, the city would have to raise taxes to $9,000. “That will never happen,” he said. “Lafayette will have to make some very hard decisions about what to maintain and what to let go.”

Not all cities are in equally bad shape. Some grew more slowly and built less hop-scotch, low-density sprawl that inflated the expense-to-revenue ratio of its neighborhoods. Some have more flexible zoning codes that allow more adaptive reuse. And some are more willing to change than others.

“We should not accept decline as normal,” Marohn said. The answer is not some top-down Marshall plan. It’s the opposite — a bottom-up approach that emphasizes small, low-risk, high-return investments based on intimate local knowledge. Over time, small incremental improvements — bike lanes, cross walks, tree plantings, sidewalk widenings — can go a long way to rebuilding the tax base. The highest-return investments, he suggests, are those that enhance pedestrian and bicycle mobility. They make places feel safe and inviting. Their scale is a single block or intersection at a time.

The advantage of making small, safe bets is that if nothing gets better, you haven’t squandered much money. You haven’t mortgaged the farm, so to speak. But if the small bets do work out, you learn from experience and replicate the successes. In every community, Marohn says, there is a abundance of “pennies, nickels and dimes laying on the ground.” Over time, small improvements, leveraged by private investment, can create enormous value. “This is how we build wealth: slowly and incrementally.”

Marohn also abhors the rigidity of zoning codes and preaches the virtue of flexibility. Municipal planners suffer from the illusion that they can divine the future and anticipate the proper mix and location of residential, commercial and industrial property for the foreseeable future. But markets are too dynamic for anyone to predict long-term demand for different categories of real estate with consistent accuracy. A resilient city, he says, is flexible. A big-box building surrounded by a huge parking lot, typical of suburban development, is difficult to recycle into a different use. A single building set in a downtown street grid is very easy to switch from one use to another. Flexible development patterns like those found in downtown areas will prove more resilient in times of change than inflexible patterns. “Zoning codes are some of the most destructive things we have,” he said. “We need to rethink them.”

Thirdly, Marohn suggests that cities need to make it easier for entrepreneurs to bootstrap new businesses. While some 240 cities and regions across North America decided to chase the Amazon second headquarters, the economic-development deal of the decade, only one can win. Will Amazon HQ2 be a net gain to a community after a realistic accounting of costs and tax revenues and adjustments for incentives? Color him skeptical. It is more prudent, he says, to foster new business formation, which can be helped through a prudent relaxation of building codes, zoning codes and other regulations.

“If we play the Wall Street game, if we play the Washington game, we’ll get wiped out,” he said. By embracing new fiscal analytics, relaxing zoning codes, and embracing a philosophy of making small, low-risk, high-return public investments, America’s cities and towns can prosper.

Boomergeddon Watch: The Elderly Require Millions in Local Government Services

The Lorton Senior Center in Fairfax County. Photo credit: Washington Post

A decade or so ago when I worked for the Boomer Project, principals John Martin and Matt Thornhill warned that local governments in Virginia needed to prepare themselves for the age wave. The elderly have special needs, not all of which can be met by Medicare, Medicaid and Social Security. People in the health care and social services communities seemed interested in what John and Matt had to say, but nothing much happened. Now we’re ten years down the line, and localities are beginning to feel the pinch.

Take Fairfax County for example, a jurisdiction of 1.1 million population which is expected to see its elderly population grow from 135,000 to 172,000 over the next eight years. A Washington Post review of 13 agency budget reports found that services for seniors drove spending increases of $43.8 million since 2014, or nearly 10 percent of the county’s total spending growth.

Old people? Who would have figured?

The Fairfax County Fire and Rescue Department is on pace to exceed 100,000 emergency calls this year — 10,000 more than in 2014. People age 65 or older represent 40 percent of the volume. The agency’s budget has grown nearly 19 percent in the past four years. …

Fairfax’s Division of Adult and Aging Services, which connects elderly residents to county programs and operates a hotline for seniors and their caregivers, has increased its budget by $986,000 since 2014.

Last year, the hotline took in nearly 17,000 calls, up from 15,400 in 2013. They varied from pleas for Medicaid assistance to arranging rides to doctor’s appointments and setting up in-home care. Calls to the hotline led social workers to open 2,714 cases for adult protective services, which applies to people who are no longer able to function independently. …

Elderly slip-and-fall cases are a huge concern as senior citizens become less mobile, officials say. That has contributed to a rising demand for assisted-living centers and nursing homes. In Fairfax and elsewhere, proposals for new or expanded facilities have sparked major zoning battles and concerns over the cost of and effect on roads, sewers and other services.

“The vast majority of people want to stay in their communities as they age, but many of those communities weren’t designed for that,” said Rodney Harrell, a public policy director at AARP. “We’ve spent decades, and maybe even centuries, not planning for aging and designing for aging.”

Seniors’ needs don’t just crowd out operating budgets, they make demands on capital budgets. Last year Fairfax voters approved $37 million in bonds to replace an aging senior center in Chantilly and build a new one in Lorton. Given competing demands for capital funds — parks, sewers, and other infrastructure — the county has deferred asking voters to approve $16 million in bonds for a senior center in Springfield.

Bacon’s bottom line: Wake up, people! The age wave is not some abstract thing that will happen a decade or two from now. It’s here. Federal government deficits amounted to $688 billion in the fiscal year just closed, due in large measure to age-related entitlements that neither Republicans nor Democrats have the stomach to fix. Deficits will be running $1 trillion a year within a few years even if the economy remains strong. Meanwhile, local governments, which are fiscally stressed already, are under increasing pressure to deliver senior-related services on an unprecedented scale. Local governments can’t take over the role of care-giver, but they can do a lot through zoning and transportation reforms to help seniors remain independent for longer. It’s time for creative thinking.

How Medicaid Is Cannibalizing Virginia’s Budget

Source: JLARC

Three big trends are worth noting from the Joint Legislative Audit and Review Commission 2017 state spending update, a review of state spending over the previous 10 years.

First, General Fund spending has been constrained by limited revenue growth resulting from Virginia’s weak economy. The increase in spending has averaged 2.0% per year. Adjusted for inflation and population growth, General Fund spending actually declined 1% over the decade.

Second, the Medicaid program has crowded out spending for other priorities. Medicaid hogged 60% of all General Fund revenue growth over the decade. Medicaid’s share of the General Fund pie increased by 73%.

Third, the healthy growth in non-General Fund spending was driven in large part by tuition increases at Virginia’s colleges and universities. In other words, when faced by stagnant revenue and untouchable Medicaid spending increases, legislators cut what was cuttable. They reduced state support for higher education knowing that colleges and universities could fall back upon the expedient of raising tuition.

Cheerful thought of the day: As Virginia’s population ages, Medicaid spending will go one way — up — and it will continue to squeeze other spending categories. Here’s the spin that Republican legislators put on the JLARC report:

House Speaker William J. Howell, R-Stafford: “Once again, this annual report from JLARC shows that the increasing cost of Virginia’s current Medicaid program is crowding out needed funding for our public schools, colleges and universities, roads, and law enforcement officers. We consistently argued that Virginia can barely afford its existing Medicaid program, let alone the massive cost of expansion, and this report vindicates that position.”

Speaker-designee Kirk Cox, R-Colonial Heights: “It’s a simple proposition: if you cannot afford your mortgage payment, you don’t build a new addition to your house. Virginia’s current Medicaid program covers around 1 in every 8 Virginians, and as this report shows, the costs are staggering and continue to climb, despite ongoing reform efforts. It would be financially irresponsible to ask taxpayers to fund the massive expansion contemplated under the Affordable Care Act.”

Del. S. Chris Jones, R-Suffolk: “Even as we instituted major reforms aimed at bending the cost curve, and controlled spending growth in other areas of state government, Medicaid costs continue to increase dramatically. This growth eats into funding that could be used for our teachers, law enforcement officers, and hard working state employees.”

Bacon’s bottom line: Yeah, the Republican leaders are stingy bastards for not expanding Medicaid. But the alternative is worse. Latest news on the Boomergeddon front: The state of Illinois, which expanded its Medicaid program in 2013, incidentally, and now has to cover 10% of the expanded costs not funded by the federal government, has $16.5 billion in unpaid bills. The state also has $200 billion in total liabilities, including pension debt. Meanwhile, pundits are asking if debt-ridden Chicago will become the next Detroit. One good recession, and it will be.

To see what it’s like to operate a government bordering on insolvency, watch Puerto Rico flail as it tries to recover from Hurricane Maria. It’s not a pretty picture. It’s easy to be compassionate when you’re paying with other peoples’ money. When other peoples’ money runs out, everything goes all to hell.

Disaster + Fiscal Insolvency = Puerto Rico

Lights out in San Juan. Photo credit: Los Angeles Times.

I can watch only so much CNN and MSNBC before I get nauseated, but I have seen enough the past day or two to be appalled at how the media are spinning the post-hurricane disaster of Puerto Rico: It’s another Katrina. The Trump administration hasn’t responded fast enough or aggressively enough to help the battered territory, where two hurricanes shut down electric service, cell phones, the transportation system and government services. Others can engage in the blame game if they want to, but I want to point out the obvious: Puerto Rico illustrates the incapacity of a bankrupt government to carry out basic functions under highly stressful circumstances.

And let that be a warning to everyone. Puerto Rico is the future of many U.S. states unless we get our acts together. Garnering less attention than the human tragedy in Puerto Rico, the states of Pennsylvania and Connecticut have made headlines, too, in the past week. After Pennsylvania passed a budget without enough revenue to pay for its spending, S&P Global Ratings downgraded the state’s debt to A+, down two notches from the coveted AAA rating. Meanwhile, despite having the highest median household income in the country and the second highest tax burden (taxes as percentage of income), Connecticut faces a $3.5 billion biennial deficit. The state, notes the Wall Street Journal, is groaning under heavy debt load, large unfunded pension liabilities, and a shrinking population. S&P has placed nine Connecticut localities on negative credit watch.

Those two states have a long way to go before they achieve Puerto Rico-levels of insolvency, but they indicate the direction the U.S. is heading. On a national level, Republicans have abandoned any pretense at crafting a tax reform plan that will shrink the deficit (something that can be pinned on the Trump administration). The national debt is $20 trillion and growing, even in the absence of a recession, at a rate of more than $600 billion a year. It’s not a question of if we will share Puerto Rico’s fiscal fate, but when.

So, what happens when governments approach fiscal insolvency? One thing they do is starve infrastructure maintenance. Puerto Rican roads were in worse physical condition than roads in any U.S. state. Of the island’s 2,280 bridges, 55.8% were considered structurally deficient or functionally obsolete before the hurricanes struck. The territory has chronically under-invested in its water systems, which also failed during the hurricanes, and the government-owned electric system, the Puerto Rico Electric Power Authority (PREPA), has been a disaster-in-waiting for years now.

Reports the Los Angeles Times:

As of 2014 the government-owned company was $9 billion in debt, and in July, it filed for bankruptcy under the provisions set by the Puerto Rico Oversight, Management, and Economic Stability Act, a law signed by President Obama in 2016.

Problems accumulated. Cutbacks in tree pruning left the 16,000 miles of primary power lines spread across the island vulnerable. Inspections, maintenance and repairs were scaled back. Up to 30% of the utility’s employees retired or migrated to the U.S. mainland, analysts said, and the utility had trouble hiring experienced employees to replace them.

The neglect led to massive and chronic failures at the Aguirre and Palo Seco power plants. The three-day blackout in September 2016 underscored how fragile the system was, and that the company was “unable to cope with this first contingency,” the Synapse Energy report said.

No wonder the island’s electric grid collapsed. No wonder officials say it will take four to six months to restore electric power.

If you want your city, county or state to show resilience in the face of natural disasters, you need to have governments and utilities that are fiscally resilient. Entities hobbled by excessive debt scrimp on maintenance and upgrades, leaving roads and utilities more vulnerable to disruption and depriving authorities of resources with which to respond to emergencies.

Puerto Rico would be in terrible shape no matter what. Hurricane Maria wrought devastating destruction, and recovery is impeded by the fact that the island, unlike Houston and Florida, is inaccessible to help by land. But the incapacity of bankrupt government and utilities have made the challenges immeasurably worse.

Uh, Oh, Look Who’s “City B”

The city of Richmond is “City B,” the unnamed locality, which, along with Petersburg, Bristol and two unnamed counties, was noted by the Auditor of Public Accounts as in severe fiscal stress, reports the Richmond Free Press. While State Auditor Martha S. Mavredes has not identified Richmond publicly, the city’s name is included in a report that has circulated widely within government circles.

That classification, which was based on 10 financial ratios taken from localities’ Comprehensive Annual Financial Reports (CAFR), might come as a surprise to investors in Richmond’s AA rated bonds. But the city’s score under Mavredes’ methodology has plummeted in the past two years from 50 in fiscal 2014 to 13.7 in 2016. The weekly did not provide the data behind the scores.

The low rating is all the more astounding given the fact that the city is not an aging mill town like Petersburg and Bristol, but has a diversified economy with strong government and finance sectors, and has enjoyed extensive real estate re-development, a growing population and an expanding tax base. The main warning sign has been the inability of city administrators to consistently meet deadlines for publishing their CAFR.