With all of Columbia abuzz about government restructuring, H.4625 has passed through the House Judicial Committee without incident. As the Department of Transportation’s budget woes come to light, state lawmakers decided the time has come to fix the Department’s structure of governance (though no move has been made so far to actually address the Department’s funding). H.4625 completely eliminates the state Transportation Commission and creates a Secretary of Transportation in the executive branch. It also requires the Department of Transportation to submit an itemized budget annually to the General Assembly, from which lawmakers can fund or defund specific line items in the general appropriations act.

Another transportation restructuring bill – with key differences – has been filed in the Senate, S.1162. Instead of abolishing it, this bill replaces the Transportation Commission with a “Joint Transportation Review” committee made up of select legislators, and requires the development of a long-term Statewide Transportation Plan to guide the Department’s selection of projects. The new Joint Transportation Review Committee would be charged with “advising” the Secretary of Transportation about what the Statewide Transportation Plan should include.

This effectively ignores the whole reason for restructuring DoT in the first place – namely that a more robust, cabinet-level position would allow the Department some autonomy from regional lawmakers seeking state funds for political reasons: legislative “advice” and “review” about project priority should be viewed with some suspicion.

But that’s not the only committee this bill would create. A second legislative committee, the Review and Oversight Committee, would be granted the ability to decide whether or not the governor’s appointed Secretary of Transportation is qualified for his or her position: hardly a leap forward for executive-legislative separation of powers, as we’ve repeatedly called for in our other restructuring research.

One common complaint about the structure of the Department of Transportation is that it breeds parochial infighting over earmarks and other regional spending. The state is split into six regional transportation districts, and a commissioner for that district is elected from each (the seventh is appointed to serve as an at-large representative). Structured this way, it’s clear where the incentives of these commissioners lie: in bringing home as much state money for their own district as possible. Some transportation districts are naturally better than others at doing so, which means “priority” projects are just as often the result of crack negotiating skills as they are true priority. Of course, one could argue that regional representation is vital to state transportation expenditures, since construction projects (or a lack thereof) have powerful effects on local economies. It should be clear by now, however, that a greater balance of interests – and a different method of funding, as we’ve discussed in past research – would be required to allow state priorities to take equal weight.

Other state transportation departments are structured similarly to South Carolina’s, though the differences that do exist are telling. In Georgia, the Department of Transportation is governed by a thirteen-member board elected from congressional districts. This board has the authority to appoint the transportation commissioner directly, cutting the executive branch largely out of the process. North Carolina has a Secretary of Transportation appointed by the governor, and the state’s DoT is governed by a board of nineteen other appointees, representing transportation districts or at-large regions similar to South Carolina’s. Florida has a Secretary of Transportation and a commission, though Florida’s commission is “prohibited from involvement in day-to-day operations” and “may not subordinate state needs to those of any particular area.” (How this is enforced is unclear.)

Vague language prohibiting involvement isn’t a smart way to balance out parochial infighting among regions and counties; nor is replacing the Transportation Commission with a legislative body, as lawmakers in the Senate have predictably proposed. The legislature, too, is a body whose members hold loyalty to particular districts: if the General Assembly can fund or defund specific Transportation projects at will, the free-for-all will merely shift from the Transportation Commission to the chambers. Deals will be made, powerful legislators will bring home pork for their districts while other districts go untended, and South Carolina will continue to have the most dismally maintained roads in the nation.

There has been no single solution so far that will end the “problem” of regional favoritism, but making the Department of Transportation a full cabinet agency is a good first step. The Secretary of Transportation and whatever other representatives the executive branch appoints would have full responsibility for DoT’s performance during their tenure. If things aren’t going well, the governor can appoint different representatives or set different priorities for the agency. This isn’t a fix-all, however: a secretary can go awry just as easily as a commission, but it’s far easier to hold a secretary (and the governor who appointed him) accountable for such mistakes.

Certain legislators have alternately suggested that the Transportation Commission simply needs more commissioners to function better: comparable states, as above, have three times as many commissioners, which allows each one to take a more active role in representing a district of a manageable size. Considering the vast amount of comparative road mileage apportioned to the state government directly (South Carolina possesses the 4^th highest percentage in the country), it certainly seems reasonable to consider staffing an appropriately sized advisory body.

Restructuring the Department of Transportation, done properly, could cut down on wasteful earmarks, administrative costs, and regionally focused projects that don’t make sense for the entire state. Done poorly, it could result in an even greater ability for certain legislators to select favored projects for funding, with potentially catastrophic consequences.

Yesterday the Senate passed what many are calling the most significant restructuring plan this state has seen in decades. By a vote of 44-0, the South Carolina Senate passed H.3066 – a bill creating a Department of Administration and dissolving the anomaly that was the state Budget and Control Board. 

Unfortunately – and despite all the claims of victory from elected officials – very little has changed. So, what happened?

Earlier this month, senators adopted a comprehensive amendment full of diffused accountability and legislative power grabs. Subsequently, scores of amendments were introduced – some of which would have improved the legislation, but some that would have made things worse.

SCPC analyzed the original amendment and concluded it did little more than maintain the status quo. Citizens made it clear they didn’t want half-measures, and several amendments were introduced that would have implemented SCPC’s recommendations to fully divide power and bring real reform to South Carolina’s government. However, the President Pro Tempore raised a point of order on these amendments that had not been raised on two previous amendments violating the same rule the real reform amendments were said to be violating. Those amendments passed and still stand in the legislation today.

Ultimately, lawmakers chose not to restore power to the citizens of South Carolina, but to diffuse accountability, shuffle a few agencies around, and preserve – or expand – their power. Here’s what months of debate and legislative decision-making delivered in place of real reform.

Authority to authorize bond debt

Real reform: Citizens wanted to force legislators to publicly debate and vote on every bond they authorized.

What citizens got: The Senate created a new hybrid board (just like the Budget and Control Board) to split the authority to authorize state debt; continuing to shirk their responsibility for indebting taxpayers.

Mid-year Budget Cuts and Deficit Recognition

Real reform: Citizens wanted legislators to come back into session and make responsible cuts in the event of a revenue shortfall in mid-year. Citizens wanted lawmakers to face the public for their choices and be held accountable.

What citizens got: Lawmakers gave themselves the option to do nothing and allow an unelected, unaccountable state employee the authority to make mid-year budget cuts.

Legislative Oversight of the Executive Branch

Real reform: Citizens wanted lawmakers to mandate regular objective and public audits by the Legislative Audit Council on a schedule that is independently determined – not a schedule set by politicians.

What citizens got: The Senate broadened its power through legislative “investigative committees” – which have the authority to question and depose not only state employees, but private citizens if they deem them to have relevant information. In addition, decisions regarding which agencies are “investigated” are left up to legislative leaders – the same ones who control most of state government already. The public cannot be confident these politicians will investigate the agencies they control the same way they would the agencies the governor controls.

Procurement Oversight

Real reform: Citizens wanted the responsibility for issuing state contracts to lie with one person whom the citizens of South Carolina could hold accountable if there was any wrongdoing or negligence in the process.

What citizens got: The Senate created a mixed system of doling out state contracts. The final plan gives the Department of Administration oversight over all contracts related to Information Technology – which amounts to approximately 35 percent of expenses generated through contracts, but leaves the remaining 65 percent to be overseen by a three-person panel – allowing politicians to avoid full responsibility. South Carolinians should have the right to hold one person accountable for any function of state government.

Board of Economic Advisers

Real reform:  Citizens wanted the chairman of the BEA to be appointed by the governor with advice and consent of the senate.

What citizens got: The Senate created a BEA chairman who reports not only to the governor, but also directly to legislative leaders that are not elected statewide and who write the state’s budget based off the BEA’s forecast.

In the end, it’s debatable as to whether this “reform” is a step forward. Some state entities were transferred to the appropriate level of government, but ultimately lawmakers balked at the opportunity to reform major functions of state government.

Remember, for the one hybrid board they eliminated, they created two more.

For the authority they vested in the executive branch, they empowered themselves with the ability to investigate the decisions made by that branch.

And – what is arguably the most dangerous thing to come out of the legislation – lawmakers explicitly gave themselves the authority to depose and question private citizens, ensuring they are the only oversight over a government they already largely control.

After 70 years, is our state any better off?

Dowload pdf of this report.

Despite lawmakers’ disingenuous claims that South Carolina has some of the “lowest taxes in the nation,” the truth is that South Carolina taxpayers and businesses pay far too much to the state. The principle is simple: Taxes should be low and equitable, and South Carolina’s tax structure, for the most part, is neither.

Consider:

• South Carolina’s manufacturing property tax rate is the highest in the country.
• South Carolina’s sales tax is higher than its neighbors, the 13^th highest in the nation.
• South Carolina exempts billions of dollars in tax collections, which increases the overall rates for everyone in the state.

Things are even worse with regard to the state’s personal income tax structure. The average South Carolina family pays a top marginal rate of 7 percent. By comparison, only 12 states in the country have a higher rate than South Carolina’s. In New Jersey, for example, people making $450,000 pay a lower marginal rate than average South Carolinian families. In Connecticut, not even millionaires pay 7 percent of their income. Many states have opted to tax all citizens at the same rate – a flat tax – but none of these states has a rate over 6 percent.

Governor Nikki Haley recently put forward (along with her executive budget) a tax reform proposal to remedy the state’s poor tax climate. There’s only one problem with assessing it, namely that there are actually two proposals, and it’s not clear which is the real one. Below is an analysis of both.

The Announced Plan

In her press conference announcing her budget, the Governor proposed introducing a lower, flatter tax system. Her announced plan would lower the tax rate on all taxable income over $5,600. Citizens making under $5,600 would pay at rates of 0 percent or 3 percent. People making over $5,600 would see their rates – currently 4, 5, 6, and 7 percent – cut to 3.5 percent. This would make it so just about half of tax filers pay either 0 percent or 3 percent, and the other half would pay 3.5 percent.

In essence, this plan would reduce the marginal tax rate from 7 percent to 3.5 percent for all taxpayers making over $5,600.

Judging by our criteria – taxes should be low and equitable – we believe that combining multiple tax brackets and reducing the top rate to 3.5 percent is a good idea. The plan would lower taxes and return a substantial sum to taxpayers. Under this plan, an average family of four would save $919 dollars a year.

Reducing the rate to 3.5 percent for income over $5,600 would give South Carolina the third lowest top marginal rate in the country, not including those states that have no personal income tax whatsoever. In addition, it would end the practice of taxing middle class South Carolinians at an inordinately high marginal tax rate.

The Written Plan

There’s a significant difference between what the governor verbally announced as her tax reform, and the initiative that she attached with her executive budget. Unfortunately for taxpayers, her written plan essentially maintains the state’s status quo.

In her written proposal, the governor proposes reducing the marginal rates only on income between $5,600 and $14,000. The rate would be reduced to 3.75 percent for income within this range. All income above $14,000 continuea to be taxed at a 7 percent rate.

The governor’s plan would provide some tax relief to taxpayers. Some is the key word. A middle class family of four would save just around $104 dollars a year under this plan. While any money returned to taxpayers is good, $104 for a middle class family is a pittance relative to that family’s overall tax burden. At $104, this tax plan would return less than 1/5th of 1 percent of a family’s yearly income back to them.

In addition to providing only minor tax relief, the governor’s written proposal does nothing to address the inherent injustice in the fact that middle class families are paying a rate of 7 percent. This rate is unfair to middle class families, and it makes our state uncompetitive. Any tax reform that’s serious about restructuring our system must address this high rate. 

The Rest of the Plan

The governor’s proposal also includes a plan to phase out the corporate income tax over 4 years starting on January 1, 2013. Presumably the plan would cut the corporate income tax 1.25 percent each year for 4 years, until the rate was 0 percent. By eliminating the corporate income tax, we would join the ranks of 5 other states.

Eliminating the corporate income tax would be one of the best ways to generate real economic growth in the state. The elimination of the corporate income tax is one tangible step the state could take to increase our business competitiveness and decrease unemployment. Lowering taxes for all companies – as opposed to the current practice of only giving tax credits to those with good lobbyists and good connections – would signal to out-of-state firms that South Carolina is a fair place to do business.

Considering the fact that the corporate income tax generates so little revenue ($186 million out of a budget of $21.9 billion in FY11-12 – see here), it would be better if the state eliminated the corporate income tax immediately – thereby providing immediate relief to South Carolinians ailing economy.

In order to “pay for” eliminating the corporate income tax (assuming one thinks tax cuts need to be “paid for”), the state would only need to cut .85 percent of its budget. One could start with the millions paid by the state in tourism advertising dollars, or the $25 million proposed dollars for the “State Port Development Fund,” or the tens of millions of dollars spent on the Department of Commerce’s failed economic development projects.

What’s Not in the Plan(s)

Sales Tax

Some of the most critical and overdue reforms are not included in the Governor’s budget. For example, one of the most crushing and job-destroying aspects of our tax code – our sales tax – isn’t addressed.

South Carolina has a higher sales tax than either of its neighbors. That puts our state retailers as a competitive disadvantage, as people who live near a border can easily cross state lines and pay less money for the same items. What’s especially egregious about our sales tax is that there’s no reason it should be so high. The state exempts more sales tax than it collects. Why? Because state lawmakers use the tax code to dole out favors to well-connected industries.

If we simply ended the exemptions, we could significantly reduce the overall sales tax. At a time when jobs are scarce, the state can’t afford to put its retailers at a disadvantage. Instead of handing out favors via the tax code, the state should immediately end sales tax exemptions and substantially lower the overall rate.

Exemptions

In fact, the state should go a step further and put an immediate end to all exemptions in the tax code, not just sales tax exemptions. As it currently stands, the state gives out many generous special-interest tax credits to everyone from Hollywood producers to multinational companies. But these handouts cost money. By eliminating them, not only do we make the state’s business climate more competitive: we also can lower overall taxes for everyone.

The governor’s proposed tax plan would require the BEA to release a biennial report on the beneficiaries of tax credits and exemptions, as well as its impact on the State Treasury. One questions the impact this will have on actual tax policy. Instead of commissioning more reports on the issue, the state should actually get serious about ending exemptions.

Property tax relief

South Carolina has the highest manufacturing property tax in the nation. It is more than double the national average. If we are serious about job growth, we need to stop crippling industry with highest-in-the-nation tax rates.

The governor’s budget proposes changing the constitution so that property tax rates are set by law, and not by the constitution (as is currently the case). Whether or not property tax is constitutional or statutory is inconsequential and does not address the immediate problem of a job-destroying tax rate. It’s essential that the manufacturing property tax be lowered as quickly as possible in order to spur immediate economic growth. 

South Carolina elected officials claim to be restructuring government, but is anything changing?  Are we moving toward real separation of powers, or is the status quo being preserved?  Below are the major problems with the current plan, and the solutions that would finally make South Carolina’s government fully accountable to the citizens.

Bonding authority

Problem:  Legislators don’t take full responsibility for indebting taxpayers, but instead create a hybrid board to authorize bonds – just like the Budget and Control Board!  

Lawmakers have created a new hybrid board to split the authority to authorize state debt. Even worse, the makeup of the board is almost exactly that of the Budget and Control Board.  Furthermore, the current plan exempts some entities (such as the “Jobs and Economic Development Authority”) from authorization – meaning these agencies can authorize state debt on their own authority.

Solution:  Force legislators to fully debate all bonds and vote on the record to approve them. 

It’s time for legislators to do their job – they owe citizens a public vote every time the state indebts taxpayers.  No more “passing the buck” to an anonymous board that citizens can’t hold fully accountable.

Mid-year Budget Cuts

Problem: Lawmakers give an unelected, unaccountable state employee the authority to make mid-year budget cuts if they choose not to return to session!

When revenue falls short mid-year, the Budget and Control Board would impost across-the-board cuts, treating every agency and program equally.  That approach made no sense, but it certainly gave politicians political cover.  The current plan starts to do the right thing by requiring lawmakers back to Columbia if revenue falls short, but then they sneak in language that says if they don’t return within 15 days (for whatever reason!), the duty of cutting government spending falls to an unelected state employee in the State Budget Office.

Solution:  If there is a revenue shortfall in mid-year lawmakers must return to Columbia to make targeted cuts and face the public for their choices.

Lawmakers should be required to return in statewide session to make targeted budget cuts should the state face a revenue shortfall.  No more across-the-board cuts that avoid the tough choices; and certainly there should be no “out” that allows an unelected state agency official to do the job of the legislature.

Legislative Oversight of the Executive Branch

Problem: Legislators give committees investigative powers in state agencies, but leave the decision of which agencies are “investigated” to legislative leaders, and they allow committees to question and depose anyone – including private citizens!

This amendment is takes the restructuring plan from status quo to worse, and even dangerous.  Legislators already control most of state government through boards and commissions – the current proposal gives legislative leaders authority to decide which agencies are “investigated.” That will allow them to protect their own programs while potentially harassing agencies they don’t control.  Citizens cannot hold legislative leaders accountable for their choices and investigative practices.

The potential for abuse of power in this amendment  – which passed on a voice vote – is high. Private citizens aren’t protected from being deposed and questioned by legislative committees. Clearly no lawmaking body in the nation should have such power, but especially not in South Carolina where legislative leaders are already among the most powerful, least accountable politicians in the country.

Solution:  If the legislature is serious about oversight it should mandate regular audits conducted and made public by the Legislative Audit Council on a schedule that is mandated by law, not by politicians.

The Legislative Audit Council is already empowered to conduct thorough audits of state agencies, which are then made public.  A simple change mandating those audits of all agencies on a rolling, pre-determined schedule would take the politics out of the process and allow taxpayers to see where potential problems existed. This process would accomplish exactly what legislators claim they want – full, public auditing of state government without potential for abuse of power.

Procurement Oversight

The Problem:  The current plan allows legislators some authority over procurements – a direct conflict of interest given that legislators write the laws determining the specifics of the contracts, and also have a say in who gets the contracts.

Lawmakers should not have any authority to issue contracts and negotiated deals on behalf of the state.

The Solution:  Give all procurement powers directly to the Department of Administration, with no involvement by the legislature. 

Once the law is written, the Governor should have the authority to execute contracts, and all procurements should be made public by the Department of Administration.  If there is any wrongdoing or negligence in the process, taxpayers can hold one person directly accountable.

Board of Economic Advisers

The Problem: The person responsible for telling the legislature how much it can spend would be forced to report directly to unaccountable legislative leaders who appropriate the dollars.

Once again, the current plan preserves power for legislative leaders who are not accountable statewide. No state agency employee should report to legislators – the public cannot hold the legislature accountable for running state government.  If legislative leaders were inclined to “tweak” forecasts, it would be difficult to stop them.

The Solution: The chairman of the BEA should be appointed by the governor with advice and consent of the senate.

There should be oversight and due diligence when choosing the BEA chair, but once appointed the Chair should report to the governor, who is directly accountable for the accuracy and objectivity of revenue forecasting.

Retirement System

The Problem: Lawmakers do not establish the governance structure of the state’s retirement system, but instead appoint a “transition” committee of retirement system stakeholders.

The current plan allows the BCB to exist for another year to appoint the transition committee and oversee the process, thus preserving the Board and delaying necessary reform of the pension system.

The Solution:  Lawmakers should establish the retirement system as a cabinet agency directly accountable to the governor.

The Budget and Control Board should be immediately eliminated and any transition committee should be advisory only and comprised of objective members who are not stakeholders in the system, including an accountant, an economist, an actuary and a retirement planner.

Some Decisions Simply Don’t Make Sense

Some agency/duty assignments make no sense. For example:

The State Energy Office (SEO) is moved to the Office of Regulatory Staff (ORS).  Both entities are vague – the SEO appears to manage federal dollars and some regulations, while the ORS is supposed to represent the public in complaints against public utilities.  There is no logic behind one overseeing the other.  The SEO should be managed by the Department of Administration.

The Office of Precinct Demographics is moved under the House and Senate Clerks – that means the legislature (which draws district maps) has sole control of the data upon which they rely.   That data should be housed in the Election Commission and available to the public.

Unfortunately, none of the plans proposed has completely eliminated the Budget and Control Board and truly separated the powers. This leaves our state exactly where it has been for decades, even centuries: controlled by a handful of politicians who are not elected or accountable statewide. South Carolina politicians are busy “designing” a government when they should be restoring the Founders’ vision of government comprised of separate branches of power that check/balance each other but that do not hold more power over citizens than citizens hold over government.

The South Carolina Department of Transportation has one of the largest budgets in state government, yet it can’t afford to maintain the state’s roads. Why? Because most of DoT’s money isn’t state money – it’s federal. 

The mission of the Department of Transportation is to maintain a public transportation system “that is consistent with the needs and desires of the public.” Increasingly, state transportation departments have been distracted from this core mission by politicians, whose needs and desires often differ greatly from those of their constituents. When politically convenient, lawmakers attempt to “stimulate” the economy through transportation spending by championing new construction projects eligible for federal funding, attempting ill-researched economic development projects, and spending excessive sums of money on administration and consulting.

South Carolina has the fourth largest state-owned highway system in the country, which makes raising the money necessary to fulfill its mission very difficult for the Department of Transportation. State lawmakers’ use of state transportation funding for pet projects (like the Clyburn Center) and economic development schemes (like the I-95 Corridor Authority, thankfully abandoned) doesn’t make that challenge any easier.

State funding for the Department of Transportation comes largely from South Carolina’s gasoline tax, one of the lowest in the nation at 16.8 cents per gallon. This doesn’t mean that the solution to the Department’s well-publicized cash crunch is a tax increase, especially since such gasoline taxes are a poor measure of actual wear and tear on highways. There are other ways the DoT can address its financial woes, including (transparent and accountable) public private partnerships that allow for the private funding and construction of toll roads. The state could also allocate wasteful spending in other areas to the DoT; considering the size and importance of the agency, the fact that it receives less than $100,000 per year in non-federal and non-gasoline tax funding is worth reconsidering.

Federal and Stimulus Funding

Federal funding for state highway departments is provided primarily through the federal SAFTEA-LU Act, which reimburses state highway departments for qualifying projects. According to the Federal Highway Administration, South Carolina’s DoT received $651,449,553 in federal funding for various transportation projects in 2010. For comparison’s sake, the total annual budget of the state that year (including federal grants) was roughly $21.1 billion. The federal grant South Carolina receives is therefore equivalent to 3 percent of the total state budget. The DoT’s total budget in ’09-10 is equal to twice that, roughly $1.2 billion, or 6 percent of the total state budget.

Six percent of the state’s total budget is a great deal of money, and if those funds were primarily devoted to maintaining South Carolina’s roads and bridges, the state would have a top-quality transportation infrastructure. Unfortunately, the high amounts of federal funding the Department of Transportation receives makes spending state money primarily on road maintenance impossible. According to the DoT’s own website, the agency “must shift dollars from maintenance in order to have matching dollars for the federal-aid highway program.” Less than a third of the roads miles maintained by the state in 2008 were in “Good” or “Very Good” condition.

2008 Road Conditions (from the Federal Highway Administration)

Of course, neither the Department of Transportation’s annual federal fund authorization request nor its expenditures report from the Budget and Control Board would provide an interested taxpayer with any real accounting of the astronomical amount of federal money that flows through the Department. These funds are, confusingly, classified as “other funds” within the agency’s budget as reported by the Budget and Control Board.

DEPT OF TRANSPORTATION BUDGET (’09-’10)

Ultimately, only a small fraction of South Carolina’s total transportation spending goes toward maintenance (the Department’s website claims South Carolina’s road maintenance is “the lowest in the nation”). The clear majority of the DoT’s spending goes toward highway engineering, including new construction. Politicians in both Washington, DC and South Carolina enjoy the opportunity to tout the construction of highways as economic stimulus, but fail to remind taxpayers of the true cost of diverting much-needed state maintenance funds towards flashy new projects.

According to the federal government, South Carolina has so far received $662,984,515 in stimulus funds for the Department of Transportation, creating 497.5 jobs (for those counting, that’s roughly $1.3 million per job).  Of course, job creation wasn’t the only purpose of stimulus spending, though it’s certainly the one most frequently cited by politicians. The only state agencies that spent more money than the Department of Transportation in stimulus money were the Department of Education ($1,284,233,484) and the Department of Energy ($1,756,291,971).

At a recent House Transportation Committee Meeting, DoT Secretary Robert St. Onge enthusiastically promised not to leave a single federal dollar “on the table.” To receive the federal reimbursement that comprises the majority of South Carolina’s federal funding, the Department of Transportation must provide 100 percent of the initial money spent, then receives only 80 percent of that total in return. Little wonder that the DoT needed a mid-year bailout from the federal government simply to pay its contractors.

Our research has shown repeatedly that federal money, while sorely tempting to state lawmakers, isn’t “free.” It comes with strings attached, endless spending requirements through maintenance-of-effort laws, programs designed by the federal government, and (perhaps worst) requirements that the state match the amount of money spent in order to receive federal funds for projects. This incentivizes the Department of Transportation to spend heavily throughout the year to complete federally-approved projects in order to fight to be reimbursed for them later.

Conclusion

This year’s legislative session will see consideration of the S.C. Truth in Spending Act, H.3067, which requires the Department to post a monthly itemized list of transactions for public viewing online. Of course, this information will only provide true transparency if it’s clear where exactly the money spent is coming from and what strings come attached. The sheer breadth of the Department of Transportation’s budget – it includes state, federal, and gasoline tax dollars, plus funds raised through the Transportation Bank – makes it incredibly difficult even for legislators to understand the true, long-term costs of undertaking new construction projects.

South Carolina’s transportation needs and challenges are unique, and efforts are currently being made to address both its contracting issues and the amount of road mileage the Department of Transportation is responsible for. In the 2012-2013 Executive Budget, for example, $75 million in budget surplus is dedicated to returning the maintenance responsibilities of certain local roads to counties in the Highway Turnback initiative. If passed, this will allow counties the option to accept total responsibility for local roads, taking a considerable amount of mileage out of the Department’s hands. And while a 2006 Legislative Audit Council audit of the Department found that it “had not implemented adequate controls to ensure that it was obtaining pre-construction contracts at a reasonable price,” a 2010 follow-up report, conducted by independent auditing firm MGT of America, found that the contracting reforms recommended by the Legislative Audit Council had been partially implemented by the Department.

Whatever happens during the legislative session this year, South Carolina should seriously consider replacing its outdated, insufficient method of transportation funding with a strategy that will 1) put expenditure totals in front of South Carolinians for consideration, and 2) allow the state to meet its transportation needs without total dependency on fluctuating federal funding. Road safety, state resources, and a great deal of taxpayer money are at stake in the solution.

The state Senate is currently debating what could turn out to be the most important piece of government restructuring legislation to come along in a quarter-century. Among other things, the bill would create a Department of Administration, putting some executive functions where they belong (under the governor), and eliminate the Budget and Control Board. A new amendment has just been added to the bill, and that amendment would give South Carolinians more ability to hold state government accountable. Unfortunately, it doesn’t fully achieve the separation of powers that ought to exist in any American government. 

(1)   The legislature gives itself a loophole to avoid taking responsibility for mid-year budget cuts. Under the current plan, if the legislature fails to act within 15 days of a recognized budget shortfall, budget cut decisions will be made by an unelected state official in the Office of State Budget. That “out” ought to be removed so that legislators have no choice but to return to session and make responsible cuts to state spending for which they will be held fully accountable by the public.

(2)  Senators created a new “hybrid board” with authority to approve bonds. Indebting taxpayers is a clear function of the General Assembly, but for decades the virtually anonymous Budget and Control Board took the heat off of lawmakers to publicly vote to authorize bonds. While there is an executive branch role in administering the funds from the bonds, there should be no more unaccountable “boards” that shield either the governor or the legislature from their duties. Bonding decisions involve revenue collection and appropriation, and should go through a public legislative committee process and then to a full floor vote. Under the new plan, the Authority will consist of the governor, treasurer, comptroller general and two legislators – virtually the same system we currently have for bond approval. Furthermore, the amendment specifically exempts some bond issuers from approval by the Authority, including the Jobs and Economic Development Alliance, or JEDA, and political subdivisions. There is no reason that any entity indebting taxpayers shouldn’t have to receive approval by the legislature by public vote.

(3)  The Chairman of the Board of Economic Advisors, or BEA, reports to three politicians, only one of whom is directly accountable to the whole state’s taxpayers. The BEA provides revenue forecasts to the legislature – essentially telling lawmakers how much revenue they have to work with. The new plan has the BEA chairman reporting to the governor, but also to the chairmen of the House Ways and Means and Senate Finance committees. It’s not clear why those charged with forecasting revenue should report to those who spend revenue. Nor is it clear why the BEA chairman should report to officials who are elected only by the residents of their districts. Those charged with revenue forecasts should be accountable to the entire state’s taxpayers. Anything else will result in more revenue shell games that benefit specific districts for political reasons. The governor should appoint the BEA chairman, with advice and consent of the senate.

(4)  The legislature is given broad power to investigate state agencies, and the decision as to which agencies are investigated lies entirely with legislative leaders who are not accountable to citizens statewide. Too much power is vested with the legislature under the guise of “oversight.” While the legislature is able to infer such powers from the Constitution, this new law goes far beyond simple oversight and determination of duties. It gives legislative committees broad power to acquire information through “any lawful means,” including the power to subpoena and take depositions. A deposition or oral examination “may be taken from any person that the investigative committee has reason to believe has knowledge of the activities under investigation.” And the authority to decide which agencies are investigated is given entirely to the Senate President Pro Tempore and the Speaker of the House.

Needless to say, the legislature itself is specifically exempted from any investigation into its activities.

Such authority goes far beyond oversight. If lawmakers are serious about true oversight, then our original recommendation of mandatory, regular and objective audits by the Legislative Audit Council should serve that purpose. The LAC should audit all agencies on a rolling schedule, which should be presented to the public at the beginning of the year.

(5)  The Retirement system becomes a new state agency for which the governing structure is not addressed. The retirement system will be part of a new agency, but it isn’t clear how the agency will be governed. In the meantime, it’s managed by the Budget and Control Board for another year while a “transition” committee comprised largely of government employees will make recommendations as to how the new agency should be managed. The legislature should address the governing structure by making the new agency a cabinet agency with the director appointed by the governor with advice and consent of the Senate. Taxpayers and participants in the system deserve to hold the governor directly accountable for the management of the pension system, which is currently in dire straits and must be reformed quickly to protect taxpayers and retirees.

(6)  There are agencies and functions that are placed under authorities that do not make sense and do not allow full transparency and accountability. For example, all precinct demographic information is placed under the clerks of the House and Senate – that data should not be housed in the entity that draws the maps and thus has a direct interest in the data, but rather with the Election Commission, which is more objective and can be responsive to the public should any questions arise regarding the validity of the data. Another example is the State Energy Office, a vaguely defined agency that should belong under the Department of Administration but is inexplicably placed with the Office of Regulatory Staff, the agency that ostensibly represents the public in the Public Service Commission process. Lawmakers should explain why this Energy Office shouldn’t be accountable to the governor and thus to the public.

View a pdf of this analysis here.

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A new amendment to the Department of Administration bill has hit the Senate floor. Although it’s a moving target, here’s an overview of what the bill would do with state government’s most basic functions. Download as pdf by clicking here.

Eliminated: Budget & Control Board, State Financial Affairs Authority

The Senate’s first shot at eliminating the Budget & Control Board (BCB) simply replaced it with another hybrid agency – the State Financial Affairs Authority (SFAA). The current proposed amendment strikes all references to the new SFAA.

Unnecessary and Duplicative State Agencies Still Exist

As we’ve reported in the past, there is no good reason the State Energy Office should exist. In a truly free market, consumers and businesses should be trusted to make efficient energy-use decisions. While no version of reform has eliminated the agency, others have at least placed it under the Department of Administration. The current legislation puts the State Energy Office under the Office of Regulatory Staff, and the amendment does nothing to change this.

Moreover, if there’s one thing this state doesn’t need more of, it’s bureaucracy – which is precisely what this amendment seeks to do by creating the Legislative Fiscal Office to assist the legislature on budget matters. There’s no reason why the General Assembly shouldn’t simply empower an existing agency – the Legislative Audit Council – to perform the necessary functions of an agency tasked with providing budget analysis.

The Board of Economic Advisors still exists

The BEA exists as an independent agency of state government. Under the current plan, however, the chairman of the BEA would report to the Governor, the Chairman of the Senate Finance Committee, and the Chairman of the House Ways and Means Committee.

Final decisions on state debt vested in quasi-legislative executive board

The amendment creates a new five-member board – the Bond Review Authority – which would receive recommendations for proposed bonded indebtedness from the legislative Joint Bond Review Committee. The new Bond Review Authority would be comprised of the following elected officials: the governor, state treasurer, comptroller general, one member of the Senate (elected by a majority the body), and one member of the House of Representatives (elected by a majority the body).

Indebting taxpayers is a function of the legislature, which should take full responsibility for appropriating dollars and raising revenue. Lawmakers should be fully accountable to the public while the executive branch should be fully charged with managing bond projects.

Legislature Would Recognize Agency Deficits

The amendment would require that any agency intending to run a deficit must notify the General Assembly within fifteen days of the deficit taking effect. If the legislature chooses to recognize that deficit, it must do so in a separate joint resolution, and that resolution must be approved by a majority of the members of each body. This is a step toward greater accountability: the legislature should be solely responsible for all debt and appropriations.

Legislature Responsible Mid-Year Cuts

If the state’s revenue collections are 2 percent below the BEA’s projections in any of the first three quarters, the General Assembly is tasked with making necessary cuts to avoid a deficit at the end of the year. If this were to occur when the General Assembly was not in session, the Senate President Pro Tem and the Speaker of the House have the authority to call the legislature into session to avoid a year-end deficit.

The amendment, however, provides somewhat of an “out” for lawmakers by allowing the director of the Office of State Budget to make across-the-board cuts if the General Assembly doesn’t take action within fifteen days. But the legislature shouldn’t be allowed to avoid responsibility for making targeted cuts.

State Retirement System Transferred to Public Employee Benefit Agency

The Budget and Control Board remains the oversight body for the Retirement System for two years. After that, the BCB must appoint an eight-member transition committee responsible for facilitating the transfer of the Retirement System from the BCB to the Public Employee Benefit Agency.

Procurement Placed under Department of Administration

The amendment would place responsibility for procurement (purchasing goods and services for the state) under the Department of Administration. However, the amendment provides for significant legislative oversight of the process through the Joint Bond Review Committee.

Overall Analysis

While the amendment makes significant strides by eliminating both the Budget and Control Board and State Financial Affairs Authority, and by requiring the legislature to take responsibility for agency deficits, it also lacks the intent of true separation and diffusion of powers. In too many areas, it places decision-making authority within two branches of government – instead of placing those powers within either the legislature or the executive.

Download the .pdf of this research here.

NOTE:  The analysis of H.3066 that follows is based on the version amended by the Senate in June, 2011.

The Senate is currently debating potentially the most important government restructuring legislation in decades (H.3066). The bill is intended to concentrate accountability by separating executive from legislative functions. But what’s “intended” and what gets signed into law are often two different things, and for that reason it’s worth taking a closer look at what the bill would actually do and whether it can be improved.

The first and most fundamental problem with the bill is that it perpetuates the hybrid semi-legislative, semi-executive system that has plagued South Carolina’s state government for generations. While the bill technically dissolves the Budget and Control Board – the five-member hybrid agency in charge of administering state government – it creates another agency with many of the same problems. The State Financial Affairs Authority, or SFAA, would also be run by five members from different branches of government.

But the whole problem with the Budget and Control Board is that taxpayers can’t hold a five-member board accountable for bad decisions.

Furthermore, as it stands now, the legislation proposes several unwarranted checks by the legislature on the executive. For example: the legislation sets up automatic “committees” by which the legislature could “investigate” executive agencies for any reason or no reason. This goes well beyond necessary legislative oversight and opens the door to legislative dominance – one of the very problems the legislation seeks to solve.

What follows is an overview of the legislation – its original (amended by the Senate) version, the proposed version with additional amendments, and the best or ideal version. We’ve divided the analysis into four major areas – procurement, bonds, retirement, and deficit recognition.

Procurement

The amended bill: Instead of placing procurement (the purchasing of goods and services) within the executive branch, where the governor would be accountable for government contracts, H 3066 puts that power under the SFAA. Allowing legislators to have power over the state procurement process perpetuates the wasteful and non-accountable system we have now – no-bid contracts, legislative favors for friends, etc.

As currently proposed by the Senate: Procurement review would move to the Administrative Law Court, an executive branch agency.  However, the six judges that make up the court are elected by the General Assembly and serve five year terms – and while the panel overseeing procurement might or might not be beholden to legislatively appointed judges, it’s unclear why a supposedly independent procurement panel should be put under the Administrative Law Court instead of under the executive.  In the amended version, the all “large” procurement are to be reported to the chairmen of the House Ways and Means and Senate Finance Committees – further raising suspicions that the legislature would have its hand in procurement. There’s no good reason why the executive Department of Administration should be beholden to  legislators for its decision: the executive is accountable to the voters, not to the legislature.

A better option: Procurement should be an exclusively executive function. If goods and services are purchased for unwise or ethically questionable reasons, accountability lines should be clear.

Bonds

The amended bill: The authority to issues bonds should lie solely in the hands of the General Assembly: lawmakers alone should be responsible for overseeing state debt. Currently, however, the legislative Joint Bond Review Committee recommends bonds to the Budget and Control Board – allowing lawmakers to avoid direct responsibility for bond debt. The only thing this bill would change is that, instead of the BCB, approval would come from the State Financial Affairs Authority.

As currently proposed by the Senate: The Joint Bond Review Committee would recommend bonds to the Department of Administration. So, under the amended bill, lawmakers would be even less accountable for issuing debt, and there’s little guarantee that the process would be any more transparent.

A better option: The Joint Bond Review Committee should make recommendations to the General Assembly, and legislators, in turn, should vote on stand-alone bond legislation that’s fully transparent.

Retirement

The amended bill: The bill creates the Public Employee Benefit Agency and gives it control over the state’s pension plan. A transitional committee would advise the legislature on what the structure and governance of the new agency would be. This doesn’t clarify whether the agency would be an arm of the executive or legislative branch. In any case, the legislature would have significant influence – it would retain the power to set employee contributions – but the lines are blurry.

As currently proposed by the Senate: The amended legislation still has language creating a retirement board whose members are appointed by the governor and various members of the House and Senate. Worse, the amended version closely circumscribes the governor’s appointment power: one appointee must be a representative of local government, and for others the governor “must consult with and receive nominations from” organizations like the Municipal Association. (Strange, too, is the provision that appointees would get subsistence and mileage reimbursements as well as salaries.)

A better option: The current legislation’s creation of a Public Employee Benefit Agency is a step in the right direction, but it should be a cabinet-level agency, and shouldn’t be run by yet another board whose members are appointed by the legislature and the governor. A board should assist the agency’s director (and we’ve commented on what that board should like in previous research).

Deficits

The amended bill: Fiscal impact analyses are currently conducted by the Office of State Budget (OSB) and the Bureau of Economic Advisors (BEA). This bill moves OSB to the Department of Administration and strips it of its power to write fiscal impact statements, moving it to a Legislative Fiscal Office. Fiscal impact statements should be done by the LAC. While the LAC is de jure a legislative office, but it’s independent from the General Assembly and required by national standards to remain objective. In effect, moving fiscal impact analysis to the LAC would remove it from the legislature.

As currently proposed by the Senate: The latest amendment puts fiscal impact analysis with a new agency called the Legislative Fiscal Office. But there seems to be little justification for creating new agencies when current agencies are equipped to do the job.

A better option: The LAC should be doing fiscal impact analysis and it should be required to do it on all relevant legislation – not simply upon request of the General Assembly.  The OSB, meanwhile, moved to DOA, should be required to do fiscal impact analysis, but from the perspective of the taxpayer. This moves us towards a “dynamic impact analysis” approach that enables us to show how government activity – taxes and regulations – influences individual behavior and the economy.

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In summary: There are other problems with the legislation – for example, it does nothing to eliminate what are clearly unnecessary state agencies currently under the Budget and Control Board like the State Energy Office. Still, the Senate is moving in the right direction.

What’s important now is that senators, and especially taxpayers, distinguish real reform from rhetorical reform. Stay tuned for more analysis from the Policy Council.

This piece was originally published in June of 2011, when the Senate was considering major restructuring legislation. That legislation has just come before the Senate again. Download the .pdf of our fact sheet here.

The Senate is currently considering legislation (H 3066) that would  eliminate the Budget & Control Board (BCB), devolving the BCB’s  responsibilities to a cabinet-level Department of Administration and a  newly created entity called the State Financial Affairs Authority  (SFAA). The Budget & Control Board would also continue to manage the  state retirement system until July 1, 2013, at which time the BCB would  be abolished and the retirement system would come under the purview of a  new agency, the Public Employee Benefit Agency.

Background

The House passed the Department of Administration bill (H 3066) in March, but the current bill is very different. As originally passed, H 3066 would have created a Department of Administration that would handle some of the functions currently delegated to the BCB. The bill would not have eliminated the BCB and would not have brought about any substantial cost-savings. It also would have allowed the BCB to retain those functions – for instance, retirement system management, bill analysis, and budget oversight – at the core of the BCB’s power, making the BCB what is arguably a fourth, hybrid branch of government.

On June 2, 2011, the Senate passed an amendment to H 3066 that would eliminate the BCB altogether. The amended version of H 3066 would do the following:

• Create a Department of Administration that would take over many of the day-to-day agency management activities previously housed at the BCB. These include the Division of General Services; the Division of State Information Technology; and the Office of Human Resources.
• Create a State Financial Affairs Authority in charge of fiscal oversight (including making across-the-board budget cuts), procurement, bond approval and related services, and insurance services. The SFAA would comprise the governor, state treasurer, comptroller general, one senator elected by the full Senate, and one House member elected by the full House.
• Create a Legislative Fiscal Office that would write fiscal impact statements and assist the General Assembly in writing the budget.
• Create a Public Employee Benefit Agency, delegating the details of what this agency might look like to a transition committee appointed by the BCB.

All in all, the amended version of H 3066 is an improvement over the current system, if only because the bill removes the Senate Finance Committee chairman and the House Ways & Means Committee chair from their ex officio posts on the BCB. As indicated above, legislative appointees to the new SFAA would be elected by a majority in each chamber. That said, the SFAA would essentially be a pared down version of the BCB, with a resulting loss in accountability and transparency.

The better option is to eliminate the BCB altogether in a manner that disperses power, but concentrates accountability. After all, that is the end goal of restructuring. With that aim in mind, we recommend the following reforms:

Abolish Both the Budget & Control Board and the State Financial Affairs Authority

Under the current version of H 3066, the BCB would be abolished as of July 1, 2013. But in its place will be a new agency, the SFAA, only marginally better than the last. As indicated above, the SFAA would be responsible for fiscal oversight (including making across-the-board budget cuts), procurement, bond issuance and related services, and insurance services. These activities, however, properly belong to either the legislative branch or the executive branch – not a hybrid agency, such as the BCB or the SFAA.

Take Responsibility for Enacting Targeted Budget Cuts

While the BCB exists to assist lawmakers in crafting the budget, the Board’s ability to make across-the-board budget cuts has served the practical function of enabling the Legislature to avoid making difficult budget decisions.  State law (§11-9-980 and §1-11-495) authorizes the BCB (and, second to the Board, the Director of the Office of State Budget) to make across-the-board budget cuts if revenue collections do not meet projections set by the BCB itself (specifically, the Board of Economic Advisors). Such cuts may be made by the BCB even when the General Assembly is in session. In addition, the BCB (by a vote of four members) may authorize agency deficit spending and may take money from surplus funds to make up the shortfall.

H 3066 continues this practice by giving the SFAA the same power to make across-the-board budget cuts and authorize agency deficits.

The BCB’s/SFAA’s power over the budget is highly unusual. In most states, either the legislature or the governor is responsible for making mid-year budget cuts. In 20 states, the legislature’s approval is required to cut the budget; in 10 others, the governor may reduce allocations, but not appropriations. A good rule of thumb here, as suggested by the S.C. Supreme Court decision Jackson v. Sanford (2011), is that governors may cut spending, but not in a manner that alters legislative intent.

Given that the Legislature is constitutionally obligated to make budget appropriations, the General Assembly should be solely responsible for making mid-year budget cuts and addressing agency deficits. At the same time, the executive branch should exercise oversight over agency spending. For these reasons, we recommend the following reform:

No deficit spending may occur without specific authorization from the full Legislature. Upon a finding that an agency expects to run a budget deficit, the governor must certify the existence of this deficit and request that the General Assembly address this deficit. If the General Assembly is not already in session, the governor must call the Legislature into special session, per Article IV, §19 of the state constitution, so as to address this shortfall. In turn, deficit spending by any agency must be authorized by the General Assembly as standalone legislation. Similarly, in the event of an overall budget shortfall, the General Assembly must be called into session to address the shortfall.

In other words, because the state constitution (Article X, §7) requires a balanced budget, state leaders should treat an unbalanced budget as an “extraordinary occasion” requiring the General Assembly to meet in special session.

Requiring a special session to authorize deficit spending/cut the budget is a solution that respects the division of powers between the executive branch and the legislative branch, upholding in particular, the Legislature’s authority over budget appropriations. It is also a reform that would bring greater accountability to lawmakers and promote debate over making targeted, more efficient cuts, as opposed to across-the-board cuts.

Revitalize the Legislative Audit Council (LAC)

Instead of creating a separate Legislative Fiscal Office, we recommend policymakers expand the Legislative Audit Council’s responsibilities to include writing fiscal impact statements.  Such statements generally provide a static analysis of how certain legislation will affect state revenue.

In addition, the LAC should be empowered to conduct audits of every state agency, perhaps on a staggered five-year schedule. Currently, the LAC is limited to conducting performance audits, program evaluations, and policy studies. But a review of best practices by the National Conference of State Legislatures suggests the LAC should also be performing sunset reviews, providing financial analysis of the state budget, and producing best practices advisories to state agencies. As recommended below, the LAC should also be required to annually audit the state retirement system. Most important, the LAC must continue to maintain its independence, functioning as a nonpartisan, objective source of analysis for lawmakers and the public.

Require the Office of State Budget to Write Dynamic Impact Statements

H 3066 would move the Office of State Budget (OSB) under the Department of Administration. According to its website:

The Office of State Budget is responsible for the development and oversight of the process for preparing the annual state budget. This includes requests for funds, allocations of funds, and the responsible utilization of funds to achieve the needs of state  government. The Office provides data to the Governor’s Office for its use in making annual budget recommendations to the General Assembly and works closely with the legislature throughout the budgetary cycle.

The OSB is also responsible for writing fiscal impact statements (along with the BEA). H 3066 would strip this power from the OSB and transfer it to a Legislative Fiscal Office. A better option, as mentioned above, is to empower the LAC to write fiscal notes. Similarly, the OSB should retain its current ability to write fiscal impact statements.

What would make the most sense is to develop a complementary approach to bill analysis requiring distinct methodologies. Under this reform, the LAC would continue to write fiscal notes that show the impact of various bills on state revenue. (Currently, the BEA is responsible for doing this, per §2-7-71.) By contrast, the OSB should approach the writing of fiscal impact statements from an opposite perspective – that is, from the perspective of the taxpayer.

Such an approach, otherwise known as dynamic impact analysis, would show how government activity – i.e., taxes and regulations – influences individual behavior and the economy. In particular, dynamic impact statements predict how government policies, such as tax increases or cuts, affect job creation, personal income, and state gross domestic product.

While a handful of states are using dynamic impact analysis approaches, Texas probably has the best model. In Texas, a dynamic impact analysis must be conducted on every bill that would raise or lower taxes or fees by at least $75 million. The analysis must project out to five years the bill’s impact on the following areas:

• Tax and fee revenue;
• Program costs;
• “The effects on incentives to work, save, invest, and conduct economic affairs”;
• “The resulting change in the overall level of economic activity.”

In addition, the law requires that dynamic impact statements be audited after five years. Conducted by the Texas comptroller, the audit must assess “the accuracy of the relevant fiscal note prepared for the bill and the accuracy of the relevant dynamic fiscal impact statement prepared for the bill.” Such audits are carried out on every impact statement for a bill or joint resolution passed into law.

Along these same lines, the OSB should be tasked with writing dynamic impact analyses on important bills and joint resolutions. Such statements would show the overall effect of state policies on job creation, personal income, and state gross domestic product.

Write a Robust Executive Budget

The Office of State Budget is also responsible for helping write the budget. H 3066 would essentially remove this power and transfer it to the Legislative Fiscal Office. Similarly, the Office of Research and Statistics, except for the employees required to  support the governor’s executive budget writing duties, would be transferred to the Legislative Fiscal Office.

A better option would be to empower the Office of State Budget to assist the governor in preparing a robust executive budget. State law requires the governor to write and submit a state budget to the presiding officer of each legislative chamber. The law reads as follows:

Within five days after the beginning of each regular session of the General Assembly the [governor]  shall submit to the presiding officer of each house printed copies of a budget, based on its own conclusions and judgments, containing a complete and itemized plan of all proposed expenditures for each state department, bureau, division, officer, board, commission, institution, or other agency or undertaking, classified by functions, character, and object, and of estimated revenues and borrowings for each year, beginning with the first day of the next fiscal year. Opposite each item of the proposed expenditures the budget must show in separate parallel columns the amount appropriated for the last preceding appropriation year, for the current appropriation year and the increase or decrease (§11-11-70).

In most states, the governor is primarily responsible for writing the state budget. In neighboring North Carolina, for instance, the governor is officially recognized as the “director of the budget” and is constitutionally obligated to prepare, recommend and administer the budget (cf. Article III, § 5). As cited above, South Carolina law likewise requires the governor to prepare a comprehensive budget. Given this responsibility, the governor should work with agencies in a proactive manner to set spending priorities, with the Legislature retaining its duty to actually appropriate funding for these priorities.

Moreover, expanding the governor’s budget writing responsibilities would complement recent legislation requiring state agencies to provide the governor with “detailed statements of the sources of all federal and other funds contained in their budgets,” including programmatic and financial information for all federal funds (cf. S 312). The legislation also requires the governor to specifically review and request all federal funding.

In addition to improving transparency regarding federal funding, the governor should prepare a budget using multiple budgeting formats – for instance, using detailed program descriptions and supporting justification for budget increases and cuts.  In short, the governor’s executive budget should be a model of transparency that prompts the General Assembly to actively debate state spending priorities.

Reform the State Retirement System and Limit the Influence of Lobbyists

Most major public education retirement plans, according to a 2010 study by the National Education Association, are administered by boards of trustees with fiduciary duties. In many states, active/retired participants make up about half of trustee board appointments. Many boards also include gubernatorial appointees. South Carolina’s BCB is the only retirement board among these plans in which every member serves ex officio. The result is a lack of accountability regarding a state pension plan carrying a $12 billion unfunded liability.

Improving upon the current system, H 3066 would transfer control over the state’s pension plan to a Public Employee Benefit Agency. A transitional committee, that would likely include several lobbyists, would then advise the Legislature on what the structure and governance of this new agency would be.

In theory, creating a commission “to conduct a comprehensive survey of the structure, trustee governance, and operations of other [retirement] systems throughout the United States and make recommendations to the General Assembly concerning the legislative actions that are needed to implement” an efficient and effective retirement system is a good idea. Likewise, it is a good idea to invite vested participants in the plan to serve on this committee.

A few caveats, though:

• The General Assembly needs to clarify whether this new agency would be controlled by the executive branch (good idea) or the legislative branch (bad idea). In turn, H 3066 should clarify that the transitional committee is essentially a study committee and will in no way determine the governance of the Public Employee Benefit Agency.
• In particular, the General Assembly should clarify that authorizing language that would create a Public Employee Benefit Agency must be passed as standalone legislation by the General Assembly, following the transitional committee’s report.
• Even more important, lobbyists and any individuals employed by entities that otherwise employ lobbyists, should be prohibited from serving on this transitional committee. We might also suggest that a private sector actuary, an economist, and a certified financial planner serve on the committee. Under the amended bill, it is  likely lobbyists and vested bureaucrats will dominate the committee, as well as any future retirement board of trustees. A better option is to have experts in retirement planning and economics develop a commonsense, innovative approach to restructuring the state’s ailing retirement system.

As far as the governance of the Public Employee Benefit Agency goes, we recommend the creation of a cabinet-level agency, the director of which would be appointed by the governor, with the consent of the Senate. In addition, a seven-member advisory board should assist the director in his work. The members of this board could include two ex officio representatives and five gubernatorial appointees: the state treasurer, the comptroller general, a private sector actuary, a certified financial planner that specializes in retirement planning, and three active/retired participants in the retirement plan. (Again, excluding lobbyists.) Likewise, the Legislative Audit Council should be required to conduct an annual audit of the state retirement plan. This audit should be complemented by an outside audit by a private sector firm.

Make the Legislature Accountable for Issuing Public Debt

As indicated above, the SFAA would be empowered to authorize and execute bond sales, as well as coordinate the state’s liability insurance coverage. As far as insurance goes, this activity should be transferred to the Department of Administration. The Department would already be tasked with administering the state’s Insurance Reserve Fund, so handling state liability coverage makes sense.

Bonds are a more complicated issue. All government bonds are a form of public debt. Essentially, two types of bonds exist: general obligation bonds and various types of revenue bonds. General obligation bonds are backed by the state constitution’s full faith and credit clause. Such bonds must be approved by the Legislature – a task the General Assembly delegates to its Joint Bond Review Committee (cf. §2-47-20). Other types of revenue bonds – for instance, county industrial revenue bonds (cf. §4-29-10) or higher-education bonds (cf. §59-147-10) – are not subject to direct legislative oversight. Instead, the Budget & Control Board must approve of these bonds.

H 3066 retains the BCB’s approval authority over various forms of bond notes, transferring this power to the State Financial Affairs Authority. In other words, a hybrid legislative-executive board will continue to hold power over much of the state’s debt. Yet, this arrangement has done little to reduce South Carolina’s debt burden.

According to the Mercatus Center, South Carolina government is carrying $40 billion in debt, including state, local, and school district debt, as well as unfunded liabilities on public employee pensions and post-retirement health benefits. State and local governmental outstanding debt accounts for 22 percent of gross state product – 4th worst in the nation. Clearly, more accountability is needed, especially as regards revenue bond debt not technically backed by the state’s full faith and credit clause (but for which taxpayers are indirectly obligated).

Toward this end, the Legislature should create a task force dedicated to studying how other states issue bonds and where approval authority for bond debt resides. Doing so would give lawmakers time to bring more transparency and accountability to the bond approval process instead of merely dumping these functions into the SFAA.

In the meantime, neither the BCB nor the SFAA should be in charge of approving bond debt. Until the task force reports its findings (for instance, before the start of the 2013 session), the Joint Bond Review Committee should take over whatever bond approval authority currently resides with the BCB.

In many states – neighboring North Carolina, for instance – general obligation bond debt must be approved by referendum. North Carolina likewise requires legislative authorization for all debt, including non-general obligation debt (i.e., issued as certificates of participation).

Similarly, the S.C. legislature should be required to authorize all debt. For instance, the General Assembly could exercise oversight over the Joint Bond Review Committee by passing an omnibus joint resolution containing all of the individual bond requests for each fiscal year. In addition, though, the Legislature should be required to pass as separate legislation (i.e., a joint resolution) all general obligation and revenue bond requests exceeding a cumulative $75 million for one project or recipient. This reform would prevent a repeat performance of the constitutionally questionable issuance of $270 million in bond debt on behalf of The Boeing Company. Originally, legislators authorized $170 million of state debt on behalf of Boeing, but the final total was pushed to $270 million after the Joint Bond Review Committee and the BCB tacked on another $100 million.

Increase Transparency for Procurement Activities

In the majority of states, including every state in the Southeast, procurement activities are housed in the executive branch.  Yet, H 3066 would allow the SFAA to continue to control procurement in a manner similar to the BCB. The better option, as delineated in the House version of H 3066, would be to transfer the Procurement Services Division of the BCB to the proposed Department of Administration. Similarly, all caps on property acquisition and transfers should be removed. Under the amended version of H 3066, the Department of Administration may only approve transactions that do not exceed $1 million.

Eliminate Redundant Agencies

Finally, instead of simply moving agencies from under the BCB to other departments, restructuring reform should seek to eliminate redundant agencies. For instance, the State Energy Office is being transferred from the BCB to the Office of Regulatory Staff. But why not eliminate this agency altogether?

Per state law (§48-52-410), the State Energy Office is South Carolina’s “principal energy planning entity” tasked with developing and implementing an “energy strategy” and “increasing the efficiency of use of all energy sources throughout South Carolina through the implementation of the Plan for State Energy Policy.”

But why does the state need an energy policy at all? Shouldn’t the free market, that is individual consumers and businesses, be trusted to make efficient and prudent energy use decisions? For instance, whether to expand the use of alternative energy sources? In essence, the State Energy Office’s vague, wide-ranging mission is an invitation for state bureaucrats to use taxpayer dollars and government regulations to impose their own energy preferences on the people of South Carolina.

For the most part, the activities conducted by the State Energy Office are far outside the scope of a limited and free government. Necessary programs, such as disposing of radioactive waste, should be moved to the Department of Health and Environmental Control. As much as possible, the Office’s remaining functions should be privatized or left to the free market. Similarly, the Legislature should use this opportunity to eliminate BCB agencies that do not provide core government services, rather than simply spinning these agencies off to other departments.

Conclusion

By all accounts, South Carolina is in desperate need of governmental restructuring. In particular, the state must modernize its administrative functions by eliminating the archaic Budget & Control Board. Replacing the BCB with a proxy State Financial Affairs Authority, however, is not the answer. The General Assembly needs to get restructuring right by implementing reforms that would actually improve state operations, increase budget transparency and accountability, eliminate redundant agencies, and reign in state debt.