IT’S WON’T CAP SPENDING IF GOVERNMENT GETS TO KEEP THE MONEY

Yet another legislative session is about to pass in which there was some talk about controlling state spending, but nothing done.

Back in February, House members introduced a bill that aimed to limit state spending by capping General Fund (GF) appropriations. Specifically the bill would cap GF appropriations at 106 percent of the General Fund revenue estimate given by the Board of Economic Advisors on February 15. Of course, the bill also contains a provision allowing legislators to suspend the cap by a vote of two thirds in each chamber. More troubling than the ability to suspend the spending cap, however, is a provision ensuring that even if spending is slowed by this bill the size of government will be unaffected.

H.3533 creates a new spending limit reserve fund into which all General Fund revenues beyond the appropriations limit would be placed. The fund would be drawn from to replenish the General Fund if the balance of the General Fund is less than that required by law but could also be drawn from to fund a number of select projects, including temporary tax reductions, infrastructure improvements, schools buildings, school buses, and expenses incurred by the state from natural disasters. So while spending appears to be capped, in reality all that is accomplished is pushing spending from one year to the next and directing a higher percent of state spending to favored programs.

Even if the special limit reserve fund was limited to replenishing the General Fund, its creation would remain highly questionable. The state already has two special reserve funds, the capital reserve fund, and the contingency reserve fund. Both of these special funds serve the same purpose as the proposed special limit reserve fund. The capital reserve fund acts as a special fund for favored projects, and the contingency reserve fund’s stated purpose it to replenish the General Fund in times of need.

Lawmakers frequently like to act as if they are working to limit the growth of government, but the vast majority don’t actually do anything about it. This is why attempts to create a taxpayer rebate fund like the one proposed by Senator Davis’ last session – S.207 – which would have returned excess revenues to taxpayers, failed. It would actually have limited government growth.

As long as special reserve funds exist, spending caps won’t matter: government will take in the same number of tax dollars with as they would without them.

Beyond the funding of favored projects and the creation of another unnecessary fund, there is one more important aspect of H.3533 that deserves attention. Only General Fund appropriations are capped by it. But the General Fund only makes up around a third of the state budget and accounts for only $6.6 billion of last year’s roughly $23.6 billion budget, or 28 percent. The rest of the budget is made up of the ever growing federal and Other Fund appropriations. (The latter is made up of fine and fee revenue.) Confining a spending limit to the General Fund is worse than useless, though, not just because it only caps a third or less on the budget, but also because – as experience has shown – any time legislative budget-writers can’t find enough money for a particular agency or program in the General Fund, they simply siphon it off Other Funds, with the result that the fines and fees imposed on South Carolinians keep going up and up.

Limiting the growth of state spending and in turn the growth of state government is a worthwhile endeavor. What’s not worth doing is pretending to limit spending while not actually limiting anything.

WHY THE BUDGET TAKES HALF A YEAR TO PASS, AND WHAT TO DO ABOUT IT

It has become an almost yearly tradition for the South Carolina General Assembly to use its time so inefficiently that important legislation – including the state budget – doesn’t pass before session concludes on the first Thursday in June. With the budget still in the Senate, along with controversial and complicated legislation on ethics reform, transportation funding, and government restructuring, it seems extremely unlikely that the budget will pass on time, meaning that lawmakers will have to pass a sine die revolution allowing them to return to the State House to deal with specified topics (in this case, the state budget).

Last year, lawmakers took so long to deal with the budget that the new fiscal year actually started before they could pass it. The legislature had to pass a continuing resolution in order to keep state government from shutting down. Lawmakers appear ready to do the same thing again this year: a continuing resolution is already making its way through the Senate (debate scheduled for 3:00 p.m. today).

Despite all this, both House and Senate leaders make much of their “furloughs.” These are periods in which the House or Senate does not meet, thus – legislative leaders claim – “saving taxpayer dollars.”  The House has taken three weeks off (a two-week furlough from March 25th to April 5th, and a one-week furlough the week of May 6th) while the Senate has taken two weeks off (the weeks of March 25th and April 5th). House Speaker Bobby Harrell was particularly proud of the House’s three weeks of furlough, claiming that each week off would save the state $50,000.

Now that legislators have wasted the ample time allotted to them to get their work done – and remember that South Carolina has one of the longest legislative sessions in the country – they’ll almost certainly have to come back to Columbia over the summer.

Which means that taxpayers won’t save that measly $150,000 after all, and that citizens will probably have to endure media reports that state government could shut down unless lawmakers come to some kind of agreement before July 1st (the first day of the new fiscal year). But the real trouble with the legislature failing to get the budget done in a timely way is that major legislation will have to be ignored or rushed through. Serious deliberation is the casualty here. Early on Tuesday, for example, in the rush to get a government restructuring bill through the Senate, the chairman of the Judiciary Committee, asked which of the competing bills moved procurement services completely into the executive branch, initially couldn’t answer. Meanwhile on the House’s gigantic and complicated ethics proposal, senators who raise important questions about the details of the bill will be urged to keep their concerns quiet simply in order to get a bill passed.

There is no reason why the state budget should take up the entire legislative session – or, more accurately, more than the entire legislative session. Indeed, state law requires a much simpler and straightforward budget process in which the entire state spending plan is already drafted when the legislature begins meeting in January. The legislature’s role isn’t to write the entire budget from scratch through innumerable subcommittee and committee meetings, as is presently done twice every year, first in the House and then in the Senate. Its role, rather, is to hold “joint open meetings” on the governor’s spending plan, then to make adjustments to that plan as it deems necessary.

The present de facto budget process, in addition to being extra-legal, is grossly inefficient – with the almost yearly result that the budget crowds out other important legislation and often keeps politicians in Columbia well over half a year.

State law prescribes a better process. Taxpayers would be far better off if they simply followed it. And in any case, it’s the law.

(WITHOUT RAISING TAXES)

How do lawmakers propose to deal with the fact that South Carolina’s roads and bridges are in suboptimal shape? The governing assumption behind most answers to this question (including one Senate proposal supported by Senate Finance chairman Hugh Leatherman) seems to be that, in order to pay for road and bridge repair, the state must take more money from taxpayers.

But are there other answers?

In fact, there are. Before getting to those answers, however, it’s worth keeping a few facts in mind. Despite having only the 40th largest land area and the 24th largest population among all states, South Carolina’s DOT is responsible for 41,459 miles of road in South Carolina – the 4th largest state highway system in the country. In addition to the massive amount of roads overseen by SCDOT, the agency has a massive budget to match. This year it has a budget of $1.4 billion, or roughly 6 percent of the year’s entire state budget. If the trend of recent years continues we can further expect this budget to expand at a rapid rate, as the SCDOT budget grew, despite the recession, by $355 million from FY 09-10 to FY 12-13.

Not only does South Carolina proportionally own far more roads than other states; the state’s funding structure results in some of those roads being overserviced and most being neglected. One of the chief reasons for this state of affairs has to do with how state highway departments receive federal funding. SCDOT receives federal money primarily through the SAFTEA-LU Act (we’ve discussed that formula in detail elsewhere), which reimburses state highway department for qualifying projects. The Federal Highway Administration reports that in fiscal year 2011 South Carolina was apportioned $651 million from the Administration. Unfortunately, however, these federal dollars can only be used on about half of the state’s roads, and often help promote new expansionary projects that generate more miles of road for the SCDOT to maintain. Making matters worse, SCDOT must divert funding from maintenance in order to meet the match required to receive dollars from the Federal-Aid Highway Program.

The incentives created by this system lead us to our current predicament. At a time when the legislature is lamenting the condition of our existing infrastructure, SCDOT’s most recent budget request asks for $933 million for construction but only $203 million specifically for maintenance.

The problem, then, isn’t a lack of revenue, and the answer isn’t to deprive citizens of more of their income. The problem is one of priorities.

First, the state should begin to cede some of its roads to municipalities, making them responsible for more of the roads in their own area. SCDOT is currently responsible for 63 percent of all state roads, according to SCDOT’s website. An excellent article in The State points out that the national average for roads controlled by state transportation departments is 19 percent. South Carolina government should attempt to emulate this average.

Second, the State Transportation Infrastructure Bank (STIB) should be abolished. The STIB only exacerbates the state’s infrastructure problems by diverting funds from maintenance to expensive and unnecessary construction projects in a few select counties. To be more specific: 35 counties have received no funding at all from the STIB since it was created; 33 percent of all STIB money has gone to one county, Charleston; 95 percent of STIB monies have gone to six counties; and 0 percent of STIB funding has gone to maintenance and repair.

Third, a requirement should be put into law that requires no funds be spent on new construction until a large majority of the roads controlled by SCDOT are rated in good or very good condition by another agency such as the Federal Highway Administration. Even accounting for the loss of federal funds this change would cause, SCDOT would benefit by saving dollars that would otherwise go towards matching federal funds for new construction projects. This of course would have the added effect of slowing the growth of new road miles SCDOT would need to maintain.

The solution to every new problem is not that taxpayers should pay more – and it’s certainly not the solution in this case.

THE LATEST PROPOSAL TO FIX OUR ROADS ASSUMES STATE GOVERNMENT DOESN’T HAVE ENOUGH MONEY

Last week, H.3412 was placed on the Senate calendar for consideration. Originally the bill would have merely shifted revenue from the sales tax of motor vehicles – currently dedicated in part to the Education Improvement Act fund (EIA) – to the State Non-Federal Aid Highway Fund. Once it reached a Finance subcommittee, however, the bill changed dramatically: suddenly it became a catch-all transportation bill. At present it contains nearly every idea floated by the legislature over the course of this session regarding the state’s infrastructure needs, and almost all of them propose giving the state more money.

Provisions of the bill include:

1. Adding four new members to the State Transportation Infrastructure Bank (STIB) appointed by the majority and minority leaders of the House and Senate respectively.
2. Requiring the Department of Transportation to budget funds for bridge improvement equal to the amount of bonds issued by the STIB for bridge improvements plus an additional $100 million.
3. Raising the state gas tax annually by the average Consumer Price Index (CPI) inflation rate of the last ten years. This tax increase is not to exceed a raise of one and a half cents per year. Currently South Carolina consumers pay an additional 16.8 cents per gallon in taxes and fees, and this change would bring that rate to 17.2 cents the first year it takes effect.
4. Raising the biennial vehicle registration fee to $12 on all passenger vehicles, common carrier vehicles, farm trucks, and property carrying motor vehicles (“eighteen-wheelers” and other large trucks) under 6,000 pounds. The $12 increase from all of these fees will be directed to the Local Transportation Infrastructure Fund (created in this bill). That fund will distribute its revenues as follows: $500,000 annually to each county transportation commission, an additional $500,000 annually to each county transportation commission in a county that imposes by referendum a new 1 percent sales tax with the revenues to go to transportations projects, and the remaining funds will be distributed evenly between all county transportation committees.
5. A new fee – the biennial Highway Infrastructure Improvement Fee – on property carrying vehicles based on their weight. Consequent revenue will be deposited in the new Local Transportation Infrastructure Fund.
6. The “elimination” of sales tax on motor vehicles and the imposition of a Road Impact Registration Fee of the same amount. The revenues from this fee are to be divided between the EIA Fund, the Interstate and Bridge Improvement Fund (created by the bill), and the General Fund for one year. The following year the revenues will be split between just the EIA and Interstate and Bridge Improvement fund. (Note: The reason for turning sales taxes into “fees” is that fee revenue can be used to secure the issuance of bonds, which sales tax revenue cannot.)
7. The issuance of $500 million in new state bonds for transportation infrastructure upon the approval of the Budget and Control Board (BCB).
8. The creation of the Interstate Bridge Improvement fund with the power to issue bonds for existing mainline capacity, interstate, and bridge projects.
9. A new biennial road user fee of $120 on electric vehicles, and of $60 on hybrids. (In a classic case of government’s left hand not knowing what its right hand is doing, state law currently allows for an income tax credit for the purchase of a plug-in hybrid vehicle.)
10. A new fee on commercial motor vehicles in place of property tax. The assessment ratio for the new fees is the same as the previous assessment ratio for the property tax.
11. A new $87 fee in place of property tax on commercial motor vehicle trailers and semi-trailers. The first $17 million in revenue from this new fee will be divided among counties based on ratios of state and federal highway miles they contain, and any revenue above $17 million will go to the Local Transportation Infrastructure Fund.
12. Counties as mentioned above may impose a 1% sales tax by referendum with the proceeds to go towards transportation projects.

Estimates have placed the potential new bonding capacity created by this bill at $1.3 billion – nearly the size of the entire Department of Transportation’s budget for the current fiscal year. On top of this bonding capacity, the legislature saw fit to create the massive new Local Transportation Infrastructure Fund.

The fundamental assumption in all this is that the state’s roads are decaying for no other reason than that state government doesn’t have enough money to take care of them properly. Evidently the amended bill’s proponents, including Finance chairman Hugh Leatherman, have not considered the possibility of increasing funding for road maintenance by cutting other items in the massive $24 billion budget (some suggestions here). Nor, apparently, have the bill’s supporters wondered whether the state’s transportation problems have more to do with priorities than with a revenue shortage (more on that here).

South Carolinians already bear a high tax burden relative to their low per capita income, pay one of the highest sales taxes in the nation, and pay higher fines and fees than most other states’ taxpayers. State government’s failure to maintain our roads isn’t the fault of South Carolina taxpayers; it’s the fault of the state’s policymakers, and accordingly the remedy should deal with government structure and backward priorities rather than merely with revenue.

LOTS OF PUBLIC MONEY, VERY LITTLE PUBLIC INPUT

Budget debate will begin on the Senate floor today. The budget was passed out of committee May 3, and made publicly available May 8. The usual practice in the legislature allows members to have the budget for one week (three legislative days) for review. However, a vote last Thursday moved the debate up to today.

State law requires the House and Senate to sit jointly in open sessions to consider the Governor’s executive budget, but that has never happened. Had lawmakers followed state law, the House and Senate would have begun joint open hearings 125 days ago. Now, with just 3 ½ weeks remaining in the legislative session, there is a rush to get the bill passed by the Senate and back to the House.

Unsurprisingly, the proposed budget is absurdly large – over $24.2 billion when federal food stamp money (which both the House and Senate has omitted from the budget for the first time this year) is included. While the Senate Finance budget isn’t much bigger than the budget passed by the House, there are some significant differences; such as the already publicized one percent state employee pay increase worth $15.8 million and the $26.1 million statewide 4K program (which we have discussed here). Below are some of the other significant changes from the passed House budget, including section 1A, 1B provisos, and the Capital Reserve Fund.

Obamacare Light Proviso Expanded

The most current version of the budget also increases the costs of the hypocritical Obamacare Light Medicaid expansion alternative introduced by House republicans through proviso earlier this year. The Senate Finance Committee provision increases funding for federally qualified health clinics by $2 million, and increases the amount of funds available for the community residential care optional state supplement by $3 million. The Finance Committee also inserted a $2 million appropriation for free clinics. The proviso expanding state medical spending has grown since its insertion in the House, and with powerful interests in favor of further expansion of Medicaid spending, there’s every reason to expect further growth.

The Recurring “Non-Recurring” Deal Closing Funds 

Last year, the House and Senate attempted to increase the Department of Commerce Deal Closing Fund – a fund administered by the executive branch and used for economic development deals – by $15 million to a total of $25 million. Of those funds, $10 million would have been taken from the Mortgage Settlement Fund. While the governor successfully vetoed this $10 million last year, the proposal senators will consider today appropriates $25 million ($13.7 million in nonrecurring funds, $3.5 million from the Capital Reserve Fund, and $8 million in recurring money) to the fund. Not only does the Deal Closing Fund fall far outside the realm of a core government service, this budget proposal is a prime example of how one-time appropriations to state agencies become promises of recurring funds in the future.

Budget and Control Board Power Grab?

One Senate Finance proviso would have the Budget and Control Board (BCB) study the feasibility of assuming certain functions of state agencies that receive less than $5 million in appropriations in the current fiscal year. While the functions that would be considered include mostly administrative duties, there is no reason to believe that this unaccountable legislative-executive hybrid board would be any better at performing these duties more efficiently.

Another proviso deleted by the Senate Finance Committee (chaired by Hugh Leatherman, a member of the BCB) would have prohibited the BCB from pledging, borrowing, or transferring funds from the Insurance Reserve Fund for purposes other than those authorized by law.

Returning Non-Recurring Money to General Fund

We’ve recently argued for the elimination of Part 1B of the budget, the section of the budget used to direct money to agencies for special programs or pet projects through proviso. While the Senate Finance Committee certainly didn’t propose its elimination, their section 1B returns $34.6 million of the $159.8 million of non-recurring funds back to the General Fund. What they intend to do with it is unclear, but any tax revenue beyond what is necessary for core services should be returned to the taxpayers.

More Money for the State Farmers Market

The Finance Committee has more than tripled the Capital Reserve Fund Appropriation for the State Farmers Market from $3 million to $9.8 million, presumably for more land acquisition (an interest that has come under scrutiny for conflict of interest concerns in the past). Further, the Finance Committee seems intent on preventing any potential savings on funds previously appropriated for property acquisition by the State Farmers Market. The House version of the budget would have required remaining funds after the initial purchase to be remitted to the state General Fund, but the Senate Finance budget requires these funds be used for costs related to the acquisition of additional properties by the State Farmers Market.

The Senate is expected to complete deliberations on these and many other provisions of the $24.2 billion budget bill by the end of the week.

MANY SOUTH CAROLINA POLITICIANS HAVE SPOKEN OUT STRONGLY AGAINST OBAMACARE. THEIR ACTIONS TELL A DIFFERENT STORY.

In March, Governor Nikki Haley publicly stated that “as long as [she is] the governor of South Carolina, we will not expand Medicaid on President Obama’s watch.” Also in March, House Speaker Bobby Harrell lauded the House budget vote against outright expansion: “we knew the HHS section of the budget is where ObamaCare supporters would make the strongest push to opt-in,” he claimed, “and we stood strong against this multi-billion dollar expansion.”

Yet that same month the governor and Speaker threw their support behind a House GOP proposal – promoted as an “alternative” to ObamaCare – that mirrored some aspects of ObamaCare itself. The proposal, ultimately adopted by the House in this year’s General Appropriations Act, would reimburse select rural hospitals 100 percent of their uncompensated care costs – money these hospitals would have received through Medicaid expansion. The plan, which totals $83 million, would depend on $21 million from the federal government.

Fast forward to the end of April and elected officials are giving even more mixed signals.

Did South Carolina nullify ObamaCare?

The coalescing of one of the strongest and most unified grassroots movement in the country – the movement to nullify ObamaCare – led to the filing of H.3101, sponsored by Rep. Bill Chumley. The bill, as filed, would have declared the federal health care law null and void, imposed criminal penalties on agents of the state who tried to enforce the law, and would have provided individuals harmed by the law with civil remedies.

In subcommittee, however, the bill was significantly weakened. The bill that passed out of subcommittee did not nullify ObamaCare, did not criminalize the enforcement of ObamaCare at the state level, did not provide individuals with any civil remedy, and in one move took any authority the executive branch had to stop ObamaCare. That power it gave exclusively to the legislature.

The bill was further amended in full committee, and even further amended on the House floor the day the bill was given its initial approval.

House lawmakers passed a bill that:

• Declares that “the General Assembly of South Carolina has the absolute and sovereign authority to interpose and refuse to enforce the provisions of the Patient Protection and Affordable Care Act of 2010 that exceed the authority of the Congress.”¹ A literal reading of that would conclude that what little authority the executive branch had to stop any implementation of ObamaCare is now in the hands of the legislature.
• Does not declare ObamaCare illegal and unconstitutional. Rather, the bill declares that it is the “stated policy of the South Carolina General Assembly that provisions of the Patient Protection and Affordable Care Act of 2010 grossly exceed the powers delegated to the federal government in the Constitution.”² The key word is “provisions.” The bill doesn’t say which provisions exceed the authority of Congress, and so effectively leaves the legal status of the federal health care law unchallenged and untouched. And gone is any mention of ObamaCare itself being illegal or unconstitutional.
• Does not give individual citizens the opportunity for civil remedy if they are harmed by Obamacare. The state Attorney General is only authorized to bring action against a party in the name of the state, and it would have to be in the public interest – leaving individuals with no recourse.³

Not only did House Republicans claim to pass a bill “nullifying” ObamaCare while actually doing nothing of the kind. They may have made it much more likely that the state would participate in it.

Medicaid expansion still a possibility

On the day after final approval of H.3101 in the House, more than 70 representatives co-sponsored a bi-partisan proposal that would opt the state into the major provision of ObamaCare – Medicaid expansion. H.4095 goes even further towards compliance with ObamaCare than the alternative passed by the House in March.

The bill would establish the “Responsible Consumer Healthcare Program” funded by the acceptance of federal Medicaid expansion dollars for the first three years of the Medicaid expansion initiative, and running for that same duration.

There is created within the Department of Health and Human Services the Responsible Consumer Health Care Program for eligible individuals to receive health care services from January 1, 2014, through December 31, 2016, through Medicaid expansion funds provided to the State pursuant to the Patient Protection and Affordable Care Act, Public Law 111-148 of 2010.

The program would seek to enroll individuals with incomes under 138 percent of the poverty level (and who aren’t enrolled in Medicaid or Medicare) in a managed care program that would provide up to $500 in coverage for select preventative medical services. The bill would also require that individuals enrolled in a managed care program establish and make payments to a medical spending account.⁴

This bill has been framed as (another) “alternative” to Medicaid expansion. Despite some differences in the use of funding, however, the state will still be taking billions of dollars’ worth of federal funds associated with Medicaid expansion, a central point of contention on the issue. In fact, if at any point during the course of the “three year” Responsible Consumer Health Care program the state doesn’t receive 100 percent of the funds from the federal government, the program “shall terminate within one hundred twenty days.”⁵

The reason this bill only establishes the program for three years is that after three years, states must begin to finance 10 percent of Medicaid expansion themselves. This bill’s supposed purpose is to avoid putting the financial strain of Medicaid expansion (we’ve documented that elsewhere) on South Carolina taxpayers, but it’s extremely hard to imagine a new entitlement program simply going away after three years. After three years, the state would have to start footing the bill for this expensive new program. This would mean an additional $1.5 billion in additional state spending and $17 billion in federal spending through 2022.

South Carolina will have to request a federal waiver to use Medicaid expansion funds in the way envisioned by H.4095. When states get federal money for anything, the money comes with strings attached – meaning that states have to spend the money in ways prescribed by federal officials. The idea that federal officials would allow Medicaid money to be used in this way is far from certain.

Opting in to an ObamaCare Exchange?

While H.4095 doesn’t explicitly opt the state into the ObamaCare state healthcare exchange, it definitely makes an exchange a possibility. The bill, which establishes the Responsible Consumer Healthcare Program, would require participants in this new program (individuals 18 or older, not currently on Medicaid or Medicare, and below 138 percent of the federal poverty level) to enroll in a managed care plan available through the Department of Health and Human Services (DHHS).⁶

The question becomes: Does a managed care plan meet the criteria to be part of the state exchange?

The Affordable Care Act (ObamaCare) stipulates two types of federal requirements for exchanges: one, the minimum functions exchanges must undertake; and two, oversight responsibilities exchanges must exercise in certifying and monitoring the performance of Qualified Health Plans.

• A “health plan,” as defined by the Affordable Care Act, is “health insurance coverage and a group health plan.”
• “Health insurance coverage” is defined as “benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise and including items and services paid for as medical care) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer.”
• A “health insurance issuer” is then defined as “an insurance company, insurance service or insurance organization (including a health maintenance organization) which is licensed to engage in the business of insurance in a state.”
• The U.S. National Library of Medicine defines a health maintenance organization as a type of managed care program. And this brings us back to H.4095, which requires participants in the program to “enroll in a managed care plan” available through DHHS.

It certainly looks as though the managed care program established through H.4095 may be considered a “qualified health plan” under the ObamaCare state healthcare exchange – participation in which H.3101 prohibits.⁷

As a practical matter, in order for the Affordable Care Act to function, states would have to participate in exchanges and expand Medicaid. Otherwise it would become completely unworkable, beyond the capacity of the federal government to make it work. While other criteria must be met for a program to be classified as an exchange, H.4095 is vague enough to make participation in an exchange a possibility. Indeed, its passage may even make South Carolina automatically eligible to opt in to the exchange program through simple new amendments or additional laws.

For all the talk by elected officials of “standing strong against ObamaCare,” South Carolina appears to be well on the way to full participation in the federal health care law’s major provisions.

FINES AND FEES GO UP WHEN TAX REVENUES ARE DOWN … AND WHEN THEY’RE UP, TOO

For the last decade, the majority party in both chambers of the legislature has frequently claimed to espouse the principles of limited government and spending restraint. It’s striking, then, that in no sense has government been limited during these ten years. Indeed, not even a nationwide recession was able to produce actual decreases in the size of government. With debate over the state budget now in full swing, it may help to consider the extent of and reasons for the decade’s vast expansion.

Ten Year Comparison: FY 03-FY 13

Take a look at the total funds in perspective.  Note that the FY 2003 dollar amounts are in 2012 dollars, accounting for the 24.7 percent inflation we’ve seen since then.  Thus the increases we see here are nearly pure growth and can’t be blamed on national monetary policy.

The fact that the state budget has increased, and increased by leaps and bounds, is well known. However, it may surprise some to see which funds have seen the bulk of the increases.  While there shouldn’t be an excuse for the over 5 percent in pure growth in General Funds, the vast majority of the increases come from Other Funds and Federal Funds.

While the bulk of General Funds come from income tax and sales tax revenues, Other Funds come primarily from fines and fees.  And with the recent Supreme Court ruling on the Affordable Care Act, we can legitimately say that “fines and fees” are merely euphemisms for “taxes.” Although Federal Funds may be naively seen as in some sense “free money” by some, this money is still funneled from taxpayers around the country, including South Carolinians, and comes many times with strings attached – meaning we have to follow burdensome federal guidelines as a consequence of our acceptance of it.

Ten Year Department Comparison

It’s important to find which agencies account for the growth.  We took a look at roughly thirty agencies (excluding many of the smaller colleges and universities that saw significant increases in the past decade). These agencies account for roughly 75 percent of the total increase in the past ten years.  While again accounting for inflation, here are the agencies with the top ten percentage increases in budget.

† One of the compared years had no funding in this category, while the other year did have funding.

* Was Employment Security Commission in FY 02-03

The large increase in Lieutenant Governor’s Office funding comes mainly from the addition of the Office on Aging to the department, which brings in tens of millions of dollars from DC.  However, the increase isn’t just attributed to new federal funding, seeing that there is an over 1,500 percent increase in General Funds as well.

Notice that while several of these agencies actually had a decrease in General Funds, these decreases are more than made up for in large increases in Other Funds.  Other examples of agencies in which this is the case include the Governor’s Office: Executive Policy & Programs, Clemson, USC, the Judicial Department (which saw a 10,858 percent increase in Other Funds), the Department of Transportation, the Department of Labor, Licensing, and Regulation, and several others.

Who while many agencies have complained loudly about budget cuts, many of these same agencies have seen increases – in many cases more than making up for the “cuts” – in fine and fee revenue and federal money.

Effects of the “Great Recession”

To see the effects our recent economic downturn had on state budget practices, we compared the budget that was made right before the recession hit – FY 07-08 – with the FY 10-11 budget, which was the budget in which the General Fund hit bottom before increasing the next two years.

As would be expected through this three-year period, the recession had an adverse impact on the General Fund, since people were making less and spending less, resulting in lower sales and income tax revenue to the state. Through stimulus bills and an increased need for federal welfare benefits, we see the expected increase in Federal Funds.  And we see an increase in Other Funds in an apparent attempt to make up for the loss in General Funds.

At a time when states were allegedly cutting back, one might have expected to see department budget decreases across the board.  This wasn’t the case.  Here is a list of just some of the departments that saw a decrease in general funding, but still saw an overall budget increase through increases in Federal and/or Other Funds.

While programs like the Department of Employment and Workforce and Department of Social Services were mandated by law to increase via the rise in unemployment and welfare benefits during the recession, the other programs did not have the same excuse to keep growing.

One other interesting point to note: The only department of the roughly 30 that we analyzed actually saw an increase, inflation included, in General Funds during this time period: the South Carolina House of Representatives.

Post “Great Recession”

The General Fund hit a low point in FY 10-11. But since the recession ended – at least according to the technical definition of a recession – we’ve seen an increase in General Funds the past two years.  With this recent boost in General Funds, one might expect to see Other Funds return to previous levels, the supposed need to supplement the General Fund now having disappeared. But one would be wrong.

Again, still accounting for inflation, we in fact see an increase, not a decrease, in Other Funds as General Funds bounced back.  To compliment this point, here are just a few agencies that saw decent increases in General Funds during this rebound and were accompanied by continued growth in Other Funds:

Two conclusions. First, any effective spending limit legislation must apply to all three budgetary funds – General, Other, and Federal. Any spending cap that doesn’t is completely useless. (Spending cap alternatives are discussed here.)

Second, always take agency complaints of budget cuts skeptically. A closer look often reveals that they are not overall “cuts” at all – and in some cases that they are actually increases. In fact, you could legitimately broaden this principle to say: Always treat government’s claims about itself with skepticism.

DOES THE HOUSE BILL ‘MOVE THE BALL FORWARD’?

On Tuesday – just in time for the May 1st “crossover deadline” – the South Carolina House passed what supporters called major ethics reform legislation. The final vote was 113 to 7. The Nerve exposed the weirdly secretive process by which legislators rammed the bill through the subcommittee and committee process – it wasn’t made available to the public until after it passed out of committee – and was the first to report that originally the bill de-criminalized ethics violations. That change has now been removed, with the House majority leader bizarrely assuring colleagues from the floor that a major piece ethics reform bill didn’t decriminalize anything. Whether the decriminalizing language was a deliberate attempt to rid the code of criminal penalties – penalties that, for example, then-Lieutenant Ken Ard was forced to undergo – is impossible to say.

What can be said with certainty is that the amended bill has a number of problems, some of which would actually weaken our ethics laws.

(1) “Wilfully”? The bill would stipulate that criminal offenses, in order to fall afoul of the law, must have been committed “willfully.” (Initially the phrase was “knowingly and willfully,” but Rep. Rick Quinn was able to remove one of the adverbs.) Since it’s extremely difficult to prove or disprove intent, this clause provides an extra layer of protection for lawmakers – precisely the opposite of what an ethics reform bill is supposed to do.

(2) Self-policing. Even within the legislature, it has been almost universally agreed that lawmakers should not adjudicate the ethical violations of their friends and colleagues. The obvious solution to the problem is to abolish the House and Senate ethics committees and transfer that authority to the State Ethics Commission. Indeed, virtually the only ones to whom this solution is not obvious are lawmakers who’ve bought into a convoluted argument claiming that the state constitution won’t allow it.

The House bill’s solution to the problem is to throw legislatively elected members of the public into the mix. The bill would create a 16-member committee consisting of eight lawmakers – two Democrats and two Republican from each chamber – and eight members of the public. These electees, unlike members of the Ethics Commissioners, would not have be approved by any other public official or entity.

This is simply another form of self-policing – only with slightly more political cover.

(3) Income disclosure. The original bill contained a strong income disclosure requirement, and that requirement was still in the legislation when the House Judiciary Committee passed it two weeks ago. But it has now been weakened in significant ways. The bill in its current form establishes a $2,500 reporting requirement: income from a single source under that amount wouldn’t have to be reported. SCPC’s Project Conflict Watch, which is voluntary, follows the Congressional model by putting that threshold at an already lenient $1,000. It’s unclear why lawmakers wanted to increase the Congressional threshold by 150 percent. If anything, state lawmakers should disclose all income sources regardless of the amount: unlike their federal counterparts, they are not full-time lawmakers and thus remain active in profit-making activities.

Equally troubling are the exemptions carved out by the bill – exemptions that are not afforded to federal lawmakers. Elected officials wouldn’t have to disclose any income received from court orders, interest from checking or savings accounts, or mutual funds – none of which were exempted in the earlier version of the bill. These exemptions don’t make the bill’s income disclosure requirements meaningless, but experience suggests that once the trend toward dilution begins, the final product will be, if not meaningless, close to it.

With the bill now headed to the Senate, proponents of genuine reform shouldn’t be encouraged.

 WHAT’S THE PROBLEM: PRIORITIES OR FUNDING?

This week, the Senate Finance Special Subcommittee on Transportation Funding kicked off a series of meetings to discuss several bills that could make big changes to the state’s transportation system. At the April 23 meeting, the Subcommittee Chair said they plan to have these bills reported on by May 7th.

We’ve previously discussed how to fund road maintenance . . . and how not to. To summarize: The problem plaguing South Carolina’s transportation system is one of priorities, not funding. Some of the bills acknowledge this reality; most do not.

County Sales Tax Hikes, Registration Fee Increases, and Toll Roads

S.616 would, among many things, allow and impose several tax hikes. If enacted, counties could impose an additional one percent sales tax increase, which would be matched by the state in many instances, to fund county road and bridge projects. Vehicle registration fees would be increased across the board by an average of $12 for each type of registration, which would be a 50 percent increase for owners under the age of 65 for private passenger vehicles, in order to increase revenue to the State Highway Fund. Furthermore, the Department of Transportation would be required to perform regular comprehensive congestion analyses on each interstate highway and is given the authority to administer highway tolls to finance projects to increase capacity on these highways.

Shifting Revenue Sources to the Highway Fund

H.3412 would require that funds collected from sales, use, and excise taxes required from the sale or titling of a vehicle would go into the State Non-Federal Aid Highway Fund (SNFAHF). In the fiscal years 2013-2014 and 2014-2015, 50 percent of all revenues collected from these taxes would go into the SNFAHF, and following these years 100 percent of the revenues would go to the Fund. Previously, these funds were divided between the General Fund, and the Education Improvement Act Fund (EIF). An amendment further requires that the EIF must be kept whole and not deprived of revenue by this bill. Preliminary financial analysis indicates that in fiscal years 2013-2014 and 2014-2015 this bill will cost the General Fund $41.4 million in revenue and the EIF $10.35 million in revenue each year. For years thereafter it will cost the General Fund $82.8 million annually and the EIF $20.7 million annually.

Since the state spends, or anyhow keeps, every dollar of revenue it brings in each year, and any reduction in state spending is highly unlikely politically, the state will soon be forced to make up over $100 million in revenue annually. In the event of this bill’s passage, taxpayers can expect either tax increases or an increased level of state borrowing and debt taken on to finance the transfer of this revenue.

Perpetuating Irresponsible Highway Funding

S.14 would create a new funding mechanism, the Palmetto Highway Improvement Fund, for the Department of Transportation (DOT) and the State Transportation Infrastructure Bank (STIB) independent of the funds these agencies already receive from the state budget. This new fund would start as 1 percent of all General Fund revenues and would have the potential to grow up to 5 percent of all General Fund revenues.

The STIB is a largely unaccountable agency that has a history of serving only a few counties. Rather than expanding its funding, the agency’s responsibilities should be given to the DOT where the decisions made can be held more accountable. This is not to say the DOT should be receiving these new funds either, however. The DOT, like every other agency, should receive its funds openly in the budget process. (For a more detailed analysis on this bill, click here.)

Borrowing Money for Core Services

S.411 would authorize the issuance of $500 million in general obligation bonds to finance county transportation infrastructure. So instead of shifting revenue or adding new taxes, we’d be borrowing money to address the state’s transportation problems.

Restructuring and an Element of Fiscal Restraint

S.209 and H.3476 eliminate the board of directors of the STIB and place its administration under the Commission of the Department of Transportation. The bills also contain a clause stating an infrastructure project could not become eligible for STIB funding unless the agency, at the time of adopting the project, had enough funds to complete it. And H.3476 contains a notable provision requiring qualified projects, in order to be eligible for STIB funding, to be ranked according to SC code 57-1-370(8), a subsection of the Statewide Transportation Plan.

A Mixed Bag of Transportation Reforms

S.600 would seek to enact a number of transportation reforms of differing merit. The bill would place the administration of the STIB under the Department of Transportation Commission, ensure that infrastructure projects are not eligible to be STIB projects unless funding for the project is available at the time of the project’s adoption, impose a gas tax on fuel-grade ethanol, require individuals bringing gasoline into the state to apply for licensure as importers, shift the revenue from all motor vehicle sales tax to the State Highway Fund and STIB, substitute a road user fee (to be calculated by the ratio of miles driven in South Carolina) for commercial motor vehicles (tractor trailer trucks) in place of property tax for these vehicles, dedicate revenues greater than $17 million from trailer and semi-trailer fees to the State Highway Fund, annually dedicate 20 percent of projected growth in General Fund revenue to bridge maintenance, and increase the governor’s appointments to the Department of Transportation Commission from one to two.

Those who take our view – that the state’s transportation problem ought to be about priorities rather than additional funding – could support the first two and the last of these provisions, but not the others. It makes more sense to introduce them separately than in one “all of the above” bill.

Allowing Counties to Impose a Tax

S.149 would allow counties to impose an ordinance implementing a two cent gasoline tax lasting up to five years, subject to popular approval by a referendum. The proceeds of the two cent tax would go towards road improvement projects specified in the ordinance. If voters reject the tax in the referendum, the county may call for another referendum but may only do so once per 24 month period.

Dedicating Motor Vehicle Sales Tax Revenue to the Highway Fund

S.210 would dedicate all funds received from the sales tax of motor vehicles to the State Highway Fund to be used for road maintenance. As we have mentioned in analysis of H.3412, revenues from sales tax applied to motor vehicles is currently dedicated to the General Fund and the Education Improvement Act Fund. What this transfer of funds means is a likely increase in taxes or future debt: the General Assembly has historically shown a reluctance to lower spending and will no doubt be reluctant to cut an education program.

CLEARLY, LAWMAKERS HAD GOOD REASONS TO KEEP H.3945 SECRET

The talk this week has been mainly about the ill-named ethics reform bill being debated in the South Carolina House. It’s ill-named because, despite a strong provision requiring income disclosure, the bill actually weakens ethics laws in several areas.

The most obvious problem with it, however, was the manner in which it sailed through the subcommittee and committee process. The bill was – apparently deliberately – kept from public scrutiny by withholding its content from online viewers.  Apparently some members of the committee didn’t even know what was in the bill (a point that didn’t stop one legislative leader from blasting the bill’s critics for – strangely enough – not knowing what was in it).

Leaving aside the secrecy with which the bill has progressed so far, however, it contains several new provisions that could fairly be called outrageous.

Decriminalization

It decriminalizes major portions of the law code on ethics. Instead of potential prison time and a maximum fine of $5,000 for violations under Chapter 13, it substitutes lower fines (between $200 and $2,500) and no prison time. Essentially, lawmakers would be free to break ethics laws as long as they were willing to pay the (decreased) fines.

Specifically, what would no longer be a crime under H.3945?

Converting campaign funds to personal use. Elected officials could now legally use their campaign accounts as slush funds, opening the door to special interests and bribery. Even elected officials who go unopposed in their reelection campaign would likely raise thousands of dollars since they could now use the money for any purpose.

Using an office for personal gain. Elected officials already have greater access to state contracts and business opportunities by virtue of their close proximity to the laws governing such matters. If the bill were to pass in its present form, it wouldn’t be a crime to explicitly solicit business from your position as an elected official.

Violation of nepotism laws. Currently state law doesn’t allow elected officials to directly appoint family members to positions they directly supervise. That doesn’t mean they don’t do it, but the law forbids it. This bill would legalize the practice.

Citizens required to register as lobbyists

If you’re a citizen or the representative of any grassroots organization, and you want to testify in front of a legislative committee or subcommittee, you will now have to register with the State Ethics Commission as a lobbyist and pay a $200 registration fee. Current law allows such individuals to present material and/or testimony at legislative subcommittee hearings without being considered a lobbyist, but that would no longer be the case if this bill passed in its present form.

A provision in this section would also make independent citizens (for instance, business owners) to register as lobbyists if they wanted to give input at a public hearing on a local ordinance or initiative.

Legislative appointees would dominate new ethics commission

The bill abolishes House and Senate Ethics Committees – something SCPC and other organizations have advocated for years. Any arrangement in which ethics violations are adjudicated by the friends, allies, and peers of the accused – at least partly in secret – violates the principle of the rule of law.

But instead of transferring the committees’ powers to the Ethics Commission, the bill abolishes the Commission, too, and replaces it with another entity: the Commission on Ethics Enforcement and Disclosure. The reason for that seems clear: The Ethics Commission is made up of nine commissioners appointed by the governor, with advice and consent of the legislature. The new entity would be governed by a 12-member commission; four members would be appointed by the governor, four by the Senate, and four by the House. The new Commission would therefore be dominated by the legislature’s interests (outnumbering gubernatorial appointees eight to four) – meaning, in effect, that legislative self-policing would continue, with the difference that legislators themselves wouldn’t have to take the political risk of going easy on their colleagues.

Recusal requirement … deleted?

Current law stipulates that, if a lawmaker votes on a state entity’s annual appropriation, he or she is barred from receiving a state contract with that agency. Yet the current House bill would eliminate this provision. Lawmakers would no longer have to recuse themselves from votes pertaining to state agencies’ appropriations when they or their businesses have ongoing contracts with those agencies.

The bill undoubtedly has some strong provisions. Yet it’s so loaded with language that weakens ethics laws and affords state lawmakers greater ethical latitude, it no longer deserves the title “ethics reform bill.”