"Rick Perry 'balanced' Texas' budget with gimmicks

This article was a perfect example of how a budget can be "balanced" technically while being structurally completely unbalanced, by using various accounting tricks. These include:

• Delaying a $2.3 billion payment to public schools by a day to put it on the next year's budget.
• Assumption of no growth in public schools despite a surging population, expectations of 160,000 new students in the next two years.
• collecting $700 million ahead of schedule, taking it from 2013 to 2012
• $800 million from the Legislature instructing the Legislative Budget Board to predict a faster increase in property values and thus taxes
• intentionally underfunding Medicaid by $5 billion, hoping economy turns around
• in addition to $8 billion structural imbalance due to business tax cuts

Rick Perry "balanced" Texas' budget with gimmicks

State Budget Solutions | by Olivia Leonard | November 17, 2011

Texas Gov. Rick Perry has based his presidential bid upon a platform of fiscal responsibility that includes his "clear goal of balancing the budget by 2020," supporting this platform by pointing to Texas's reputation of fiscal health and claiming credit for six balanced budgets during his stint as governor. Unfortunately, as with many "balanced budget" claims, this one is questionable. Texas's budget, while appearing balanced on the surface, is a product of federal stimulus funds and budget gimmicks that included risky gambles with future funds, delayed payments, and underfunded programs; essentially, a convenient kicking of the budgetary can down the road until after the 2012 elections.

The National Conference of State Legislatures reported that Perry's Texas collected more stimulus funds in fiscal year 2010 than did any other state. Texas relied on the $6 billion it received from the American Recovery and Reinvestment Act to close almost 97% of its budget shortfall at the end of fiscal year 2010. While Perry publicly protested the Recovery Act in a Feb. 18, 2009 blog post, he requested the $6 billion in federal funds on the very same day. Without that federal money, Texas would have been forced to dip into its frequently-touted Rainy Day Fund--the $6.5 billion that remains of the $9.5 billion in savings that Perry has frequently used as an example of Texas's fiscal health--to address the shortfall. Now that stimulus funds are unavailable, the Rainy Day Fund is both the first line of defense and, unfortunately, essentially empty. Bill Hammond, president of the Texas Association of Business, grimly referenced the Rainy Day Fund when he commented, "effectively, they've used it...they just aren't going to fess up until January of 2013."

How did Texas get into this deep of a financial hole when its governor and legislature boast of a history of balanced budgets? The recent list of "disingenuous, money-shifting shell games," as Perry himself called them during his 2006 campaign, is painfully long. In one accounting game, Texas delayed a $2.3 billion payment to its public schools by one day, shifting the bill from this year's budget onto the next. Nor did the education fund juggling end there; the new budget operates under a strange assumption of no growth in the number of students enrolling in Texas's public schools, despite Texas's swift population increase and expectations that more than 160,000 new students will enroll over the next two years. Not only did the Texas legislature and governor delay payments until the next fiscal calendar, they also arranged to collect more than $700 million in taxes (including the sales taxes from large Texas retailers) ahead of schedule--taking that money out of the budget for fiscal year 2013.

In order to further create the image of a balanced budget, Texas Republicans "came up" with another theoretical $800 million when drafting this year's budget by instructing the Legislative Budget Board to predict a faster increase in property values (and their accompanying taxes). Additionally, the lawmakers intentionally underfunded Texas's Medicaid program by nearly $5 billion, a dangerous gamble based on a tenuous hope that the state economy might provide additional revenue by taking a drastic turn for the better. If that hope proves unfounded, the state will be forced to fill the gap with either the dregs of the Rainy Day Fund or further state debt. Increasing debt is nothing new for Gov. Perry, who supported a constitutional amendment that allowed the Texas Department of Transportation to borrow money to pay for road projects--contributing nearly $12 billion to theTexas debt that more than doubled under Gov. Perry from 2001 to 2009. All these budget troubles are in addition to the $8 billion structural deficit that plagues Texas biannually--the result of a gamble by the governor that transformed the state's business tax--which was not addressed in the supposedly "balanced" budget.

The line-by-line aside, a quick look at State Budget Solutions' own state debt research paints an even darker picture of the Texas that Rick Perry describes as fiscally healthy. This ranking, which presents the complete debt story by taking into account each state's unfunded pension liabilities and other public obligations, puts Texas at the very bottom when it comes to state debt: in 44th place nationwide for its total budget shortfall and in 47th place when it comes to outstanding debt. Texas' debt per-capita ranking is also below average, coming in at 29th place. Clearly, Texas is a far cry from the pillar of fiscal responsibility described by Gov. Perry.

Rick Perry and his legislature are neither the first nor the last to present the illusion of a "balanced budget" with accounting gimmicks. Perry's vocal opposition to such "shell games" and condemnation of dependence on federal bailouts, however, make his own reliance on federal money and budget dishonesty that much more unacceptable.

Public Sector workers feeling the squeeze

I thought this was a very relevant article to our subject this week of public employee pensions and more generally of how budget policymakers both do and do not have power. On the one hand they are getting savings by paying workers less, having less generous pensions. But on the other hand their projections may be thrown off by the uncertainty of these retirements, the need to replace the retirees with new workers, so now the government is paying a pension and a replacement worker.

December 5, 2011

Many Workers in Public Sector Retiring Sooner

By MONICA DAVEY

MADISON, Wis. — As states and cities struggle to resolve paralyzing budget shortfalls by sending workers on unpaid furloughs, freezing salaries and extracting larger contributions for health benefits and pensions, a growing number of public-sector workers are finding fewer reasons to stay.

The numbers of retirees are way up in Wisconsin, where more applications to retire have been filed this year than ever before. Workers in California’s largest public employee pension system have retired at a steadily increasing rate over the last five fiscal years. In New Jersey, thousands more teachers, police officers, firefighters and other public workers filed retirement papers during the past two years than in the previous two years.

In part, the flood of retirements reflects a broader demographic picture. Baby boomers, wherever they work, have begun reaching the traditional retirement age.

But increasingly workers fear a permanent shift away from the traditional security of government jobs, and they are making plans to get out now, before salaries and retirement benefits retreat further.

“You start to feel like, ‘What will they do next?’ ” said Bob McLinn, 63, a labor union president who left his job with the Wisconsin Department of Corrections in March, earlier than he planned, after political leaders pressed to cut benefits and collective bargaining rights for workers.

“There’s always been this promise that if you came to work and did your job, at the end there would be your reward — a defined retirement. The idea was you could retire with respect and dignity. But that whole idea has been slashed now, and I felt like, ‘What is the point?’ ”

In some places, the rise in retirement has brought welcome and needed financial news. Kansas announced last month that it would save $34.5 million over two years because more than 1,000 workers had agreed to accept cash and health insurance incentives to leave. State officials said they had yet to determine which of the positions of departing workers they considered critical enough to refill.

But some experts and workers question the ultimate result of so much leaving, saying it is already leaving some governments short-staffed (and, in some cases, obliged to pay overtime) and at risk of losing institutional knowledge and technical expertise as older workers vanish.

“What we’re going to see is a lot of young people reinventing the wheel,” said Karen Gunderson, 56, who retired this year from her information technology job with the State of Wisconsin after 26 years, a few years sooner than she had intended, saying she felt that public workers were being “turned into scapegoats” for a troubled economy.

“We’re going to waste a lot of tax dollars with young people attempting things that were tried before. You can get people cheaper, but whether you save money, I don’t know.”

The pattern of retirements, while pronounced in some states and towns, has by no means played out everywhere. In fact, a countervailing trend — of delaying retirement and staying put — has been clear since after 2008, when the national recession and the shortage of jobs (and of potential second careers in the private sector) made people queasy about making moves at all.

Certainly, the number of state and local public-sector workers has been shrinking since the second half of 2008, a necessary, useful scaling back in the eyes of some political leaders facing major budget shortfalls. Across the nation, there were 71,000 fewer state government workers in November than there were a year ago, and 180,000 fewer local government workers, federal Bureau of Labor Statistics data shows.

But a broad survey of about 100 public retirement systems suggests a rate of retirement that has remained within a relatively steady range in recent years, said Keith Brainard, research director for the National Association of State Retirement Administrators. “Before I would call this a trend, it would need to continue for another year or two,” he said.

Still, even with lingering queasiness over jobs and the larger economy, there are other signs that the mood of public workers is turning toward retirement, a worrisome possibility for some already precarious, underfunded pension plans.

In 2009, a survey of more than 400 state and local governments found that about 85 percent of public workers were postponing retirement (presumably because of the grave economy), while fewer than 9 percent were accelerating their retirement dates. This year, a similar survey by the Center for State and Local Government Excellence, a nonprofit research group, found 40 percent still delaying their retirements, with nearly a quarter speeding up their retirement dates.

Already, the trend is apparent in places where lawmakers have made the clearest calls for decreasing workers’ benefits or increasing their contributions for health care insurance and pension plans. And in the last two years, 41 states have made significant changes to at least one of their retirement plans, the National Conference of State Legislatures found.

In Alabama, an unusually high number of school employees — 1,600 — asked to retire this month, leaving some students uncertain midyear about who will be teaching them. Lawmakers there had approved increases to the cost of health insurance for those who retire before they are eligible for Medicare or have fewer than 25 years of service, and the law goes into effect on Jan. 1, setting off a flood of applicants who wanted to beat the change.

In Florida, more than twice as many workers applied to be part of a deferred retirement program in May and June as had the year earlier, protecting them from cuts to pension benefits that legislators put into effect as of July 1.

And in Ohio, where a law cutting collective bargaining passed this year (and was later repealed) and where bills are still pending over raising the age and years of service for eligibility for a public-sector pension, applications for retirement rose 39 percent in the first 10 months of the year compared with a year earlier.

But here, in Wisconsin, the battle over public workers may have been the loudest. Republican leaders said their only hope of balancing the state’s budget was to require workers to pay more for their pensions and health care premiums and to significantly reduce collective bargaining rights for public-sector unions.

Union supporters pushed back, leading an effort to recall Gov. Scott Walker next year over the issue. But government workers also left: 16,785 workers filed retirement applications as of Oct. 31, while in all of 2010, 11,750 workers had done so.

“It’s about fear,” said Jim Palmer, executive director of the Wisconsin Professional Police Association. “A lot of people are seeing this war on public employees and saying, let’s get out.”

Governor Walker, through a spokesman, declined to be interviewed for this article.

For some states, the increase in retirements has been a planned outcome, a budget fixer. In recent years, places like Minnesota and New York offered incentives for employees to retire sooner than they may have planned. In 2010, New York State processed 30,772 retirement applications, more than ever before, and state officials attributed 12,000 of those to an early retirement incentive.

The surprise, though, came in 2011, when no such incentive was offered. In a year after a special retirement deal, applications to leave usually drop off. This year, state officials said, they have not.

Distortions in Corporate Income Tax cause massive waste

Corporate Income Tax: Worry About Distortions, Not Investment

By Matthew Yglesias on Nov 18, 2011 at 12:15 pm

The blogosphere is aflame with a new set of posts of posts about the fact that the corporate income tax doesn’t cost corporate America very much money and seems largely uncorrelated with non-residential investment, though things may be different in developing countries.

The thing about the corporate income tax, it seems to me, is that we should be leery of a tax that manages have such a high rate and yet raise so little revenue. If a tax isn’t raising much revenue, then it ought to be either that you have a very low rate or else that you’re taxing something trivial. Here in DC, they levy a five cent tax on plastic bags at the supermarket, and nobody is shocked to learn that this doesn’t raise much money. But if you’re leveling a 35 percent tax on corporate income, it ought to raise a lot of money. In fact, it raises very little because the corporate income tax code is shot through with loopholes and firms squeeze tons of activity into exempt activities. But this — the distortions — rather than the burdensomeness of handing over the money is what we should worry about. The corporate income tax induces a lot of tax-related lobbying and accounting and lawyering activities. Or consider that interest on debt is tax deductible, which encourages firms to finance through leverage rather than through equity. It’s the high rate which makes that subsidy so valuable. Or even the now-infamous accelerated depreciation schedule for corporate jets.

This is all bad stuff. We could gain lot by lowering these rates and making up the lost revenue. That could be a classic “lower rates, broader base” reform. It could be higher taxes on rich people. It could be taking grand ma’s Medicare away. The conventional wisdom is totally right about this. The problem, obviously, is that rich people don’t want to pay higher taxes and non-rich people don’t want grandma to lose her Medicare benefits. If the CEOs who wine about the corporate income tax were serious about it, they could start lobbying for the “replace it with higher taxes on rich guys like us” plan. But they prefer lower personal tax burdens and a less efficient economy.

This is an analysis of Rick Perry's flat tax and how it has all the problems of a flat tax (regressivity, not being able to take into account people's different life situations), but lacks the benefits of simplicity and being a quasi-consumption tax. Basically is not a good idea unless you're rich and want to pay less taxes.

Rick Perry’s flat tax isn’t very good at being a flat tax

Posted by Dylan Matthews at 09:41 AM ET, 10/25/2011

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As flagged in Wonkbook this morning, Rick Perry’s flat-tax plan, or at least a précis of it in the form of a Wall Street Journal op-ed, is finally out. It actually comes with a few surprises. The plan calls for a flat income tax of 20 percent, which is higher than past notable flat-tax proposals. Steve Forbes, for example, called for a 17 percent flat tax in his1996 and 2000 presidential runs, as did a proposal introduced in Congress in 1995 by then-House Majority Leader Dick Armey and Sen. Richard Shelby.

(Nati Harnik - AP)But more notably, Perry’s plan doesn’t actually replace the existing tax code. Taxpayers would instead get to choose between paying taxes under the current system and paying the flat tax. The flat tax thus serves as a kind of upside-down version of the Alternative Minimum Tax. As it stands, taxpayers have to pay either their regular income tax burden or their AMT burden, whichever’s higher. Under Perry’s system, taxpayers will get to pay their flat tax burden or their regular burden, whichever’s lower. What’s more, the flat tax would preserve major tax deductions that benefit the middle-class (like the mortgage-interest deduction) for people making under $500,000 a year, though credits that largely benefit the poor, like the Earned Income Tax Credit, are eliminated.

This is good for people who benefit from middle class-targeted tax breaks, and for those whose income mostly fall in the current 10 and 15 percent brackets, because they can just keep paying taxes normally. But this approach also eliminates two of the flat tax’s main selling points.

For one thing, flat tax advocates frequently point to the plan’s simplicity, that tax forms could “fit on a postcard.” Indeed, Perry uses just this talking point in his op-ed. But by making the flat tax optional, Perry’s plan actually complicates the tax code. It would force households to determine whether they should pay the flat tax or the regular income tax, making the process more time-consuming and expensive, not less. And keeping major deductions for the vast majority of taxpayers means that even those who opt for the flat tax won’t face a much simpler code. The main cause of tax complexity is the plethora of credits and deductions, not the number of brackets. Perry’s plan greatly reduces the latter, but doesn’t do nearly as much as most flat tax proposals to reduce the former.

The second big selling point of flat taxes is that they, as Len Burman explained in a post yesterday, are secretly consumption taxes. Indeed, it’s a lot like a value-added tax. A VAT taxes the difference between a business’s revenue and the cost of its inputs. The corporate side of the flat tax does this, but also lets companies deduct wages. Individual wages are then taxed, albeit with a standard deduction, but the overall effect is basically identical to that of a VAT.

Economists like consumption taxes, as they tend to encourage investment and discourage consumption-based bubbles like the one that led to the financial crisis. VATs, and thus flat taxes, are particularly regressive consumption taxes compared with some alternatives, but the focus on consumption is at least an advantage. But because he keeps the traditional income tax around, Perry negates this advantage somewhat. By offering the choice not to pay the flat tax, Perry’s plan results in a more limited shift toward taxing consumption.

About how governments can get a lot of revenue from taxing inelastic socially detrimental behaviors, or if the behavior proves more elastic than expected, that's good too because the detrimental behaviors go down.

Taxes And Inelastic Goods

By Matthew Yglesias on Oct 4, 2011 at 3:15 pm

There’s not a ton of evidence out there, but what evidence we do have suggests that a tax on fatty foods such as the one Denmark is about to implement is unlikely to drastically change behavior. That makes sense. One reason people get so upset when grocery prices go up is that people aren’t really inclined to radically alter their meal behavior in response to modest price changes. They just eat the losses and grumble.

Still, as tax policy, that’s not necessarily a terrible thing.

The thing about Denmark is that it’s a very high tax country. It’s just been governed for a decade by an anti-tax center-right coalition government, whose big achievement was to get total taxes down to 50 percent of GDP. In the United States, I think the Progressive Caucus would laugh at you if you suggested making taxes that high. And now the Social Democrats just won an election and are coming back in office. Higher spending and higher taxes are, naturally, on the agenda. When seeking new sources of tax revenue, something like a tax on unhealthy foods has a lot of appeal. On the one hand, most people probably won’t change their behavior much in response to a tax, which means it’ll raise plenty of revenue. On the other hand, if people do change their behavior, the social consequences will be beneficial. The Nordic countries have become the world leaders in combining high levels of public services with strong economic growth precisely by being pretty relentless at seeking out economically efficient ways to raise tax revenue.

Something relevant to the U.S. debate is that the basic logic of a Financial Transaction Tax is actually quite similar. Such a tax will hardly kill off financial markets speculation, but that’s precisely the point — people will pay the tax and it’ll raise a chunk of revenue. But on the flipside, if it does somewhat discourage certain kinds of rapid asset-flipping, it’s not some tragic loss for our living standards.

Interesting comparison of percentages of spending

1. Numerical percentages of spending:

A. National Defense: There are several answers to this question, as both what is counted as defense and what is counted as total spending have multiple answers.

This site, http://www.usgovernmentspending.com/us_military_spending_30.html, says that the federal government spent $964.8 billion total on defense in Fiscal Year 2011, out of 3,818.8 billion total, for a percentage of 25.26%. The Center for Budget and Policy Priorities said the U.S. in 2010 spent $705 billion, or about 20% of the budget, on “defense and security-related international activities,” using a budget total of $3.5 trillion.

Here is an enlightening article about the debate about how a percentage of defense spending is calculated and the political and ideological ramifications: http://thinkprogress.org/security/2011/07/28/281841/fpi-hides-massive-military-spending-growth-by-framing-dod-budget-as-percentage-of-gdp-total-federal-spending/

The article, on the website for the liberal Center for American Progress, criticizes attempts by Foreign Policy Hawks to say that defense spending is staying neutral. Meanwhile a more conservative website, newsobserver.com, has this op-ed by the CEO of a defense contractor, arguing “deficits don’t stem from defense”. This is his argument, in which he acknowledges his bias without admitting that it might color his judgment: “As CEO of an aerospace and defense parts manufacturer, I am deeply concerned by the prospect of significant cuts to our national defense. At 4.9 percent, defense spending as a percentage of Gross Domestic Product is already below the postwar average of 5.3 percent. The U.S. aerospace and defense industry employs more than 800,000 high-skilled workers, and indirectly supports another 2 million jobs.” He does not source his information on defense spending as 4.9% of GDP. The CIA World Factbook, which apparently has not updated its number since 2005, says that the U.S. spends 4.06% of its GDP on defense. Of course a key question is what officially is counted as defense.

B. Medicaid, federal vs. state: As of 2009, the combined cost of Medicaid was $380.1 billion, with the federal government paying about two-thirds (66%), and the state governments paying about one-third (34%), according to the National Health Policy Forum of February 2011

There are contrasting changes to this ratio due to health care reform and then the current deficit-cutting emphasis in Washington.

On the side of cuts to the federal role is that both Obama and the Republicans have proposed varying cuts to federal aid to states on Medicaid, so the states are banding together to resist these changes, cutting across party lines, as described in this article.

On the side that the federal government will increase its role, this 2010 report, Medicaid and the Uninsured by the Urban Institute addresses the changes to Medicaid as a result of health care reform; it is being expanded, and it finds that “the federal government will pay a very high share of new Medicaid costs in all states,” 95.4% of all new Medicaid spending, with the result that “increases in state spending are small compared to increases in coverage.”

C. Education, federal vs. state vs. local:

In Fiscal Year 2009, out of a total of $550 billion spent, state governments spent 47%, state governments 44%, and the federal government 10% of elementary and secondary education spending, according to this report by the moderate New America Foundation. See the pie chart on the link. The article says that until the 1970s local governments did most of the funding, with states only supporting, but then major changes in that decade saw states overtaking local governments.

"Privatizing Government Often Turns Out to Be More Costly"

http://www.washingtonpost.com/blogs/ezra-klein/post/study-privatizing-government-doesnt-actually-save-money/2011/09/15/gIQA2rpZUK_blog.html

Important points from it, especially those I bolded:

"Project for Government Oversight decided to do something different than the usual method of comparing public- and private-sector salaries. Instead, the group scrutinized the actual contracts that were awarded to companies for specific tasks and compared them with what it cost the government to do the same job in-house. They looked at 550 contracts — all deemed “fair and reasonable”— for 35 different jobs across government agencies, from auditors and engineers to food inspectors and groundskeepers.

As it turned out, the private contractors cost more in 33 of those 35 jobs. On average, the service contracts paid private employees 83 percent more than the government would pay a federal employee doing the same job (and that’s even taking into account health care benefits, pensions, and so on). There’s a long debate about whether workers in the private sector actually make less than their federal counterparts, but it turns out this is all beside the point. The POGO analysis found that private contractors working with the government make, on average, twice as much as a comparable private-sector worker.

Maybe the most stunning revelation in the report is that the federal government doesn’t have a solid system for determining how much money it saves or wastes by outsourcing various functions to private firms.

And this seems like something we’d like to know: Since 1999, the number of federal workers employed by the government has stayed roughly constant at about 2 million. But the number of private contractors has ballooned, from 4.4 million to 7.6 million in 2005 (these numbers turn out to be surprisingly difficult to pin down, since records on contractors are fairly unreliable). Last year, the government spent some $320 billion on service contracts. And yet there’s no ready way to tell whether this outsourcing boom is actually saving taxpayers money."

Obama's Jobs Bill: It's Changing Who Bears the Burden of Taxes

http://www.nytimes.com/2011/09/14/business/economy/white-house-offers-tax-plan-for-jobs-bill.html?ref=politics

Much of the Jobs Act is a reduction in the payroll tax, on both employers and employees (and our textbook says that the tax on employers ultimately comes out of compensation that would be paid to employees). Obama seeks to pay for it by closing various tax loopholes for the rich and for corporations. Especially given the latest data showing the middle, working and poor classes having their real income go down, and income gaps getting bigger and bigger, making the tax code more progressive in this fashion is a very good idea.

First Post, September 9

This article from the New York Times, "Families Feel Sharp Edge of Budget Cuts," http://www.nytimes.com/2011/09/07/us/07states.html?_r=1&scp=3&sq=budget%20human&st=cse,

is about the human consequences of budget cuts. It shows that the dry discussion in the textbook about the size of government, about government's growth and decline in different sectors, which sounds so abstract, is really about human lives, and often the difference between a life of decency and one of constant stress. I'm happily surprised to see it in the New York Times; last year I wrote a paper about how the Times too often treated the budget in mathematical terms, making it seem like it's just these crazy politicians making too much spending, rather than that spending having significant consequences.