Executive Branch Reforms for 2011

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The concentration of power in South Carolina’s legislature is such that the executive branch is generally unable to institute major reforms without the cooperation of the Legislature, whether stemming from good will or public pressure. Still, the executive branch could implement several initiatives – especially as related to good budgeting practices, health care and job creation – that would, not only complement a reform agenda in the Legislature, but make South Carolina more free and prosperous in concrete ways.

Implement Strategic-Based Budgeting Practices at Cabinet-Level Agencies

Balancing  the budget is at the top of the Legislature’s agenda this year – in  particular, because state law (with some exceptions) requires passage of  a balanced budget.

(Granted, the General Fund budget is down, but overall state spending hit a record high last year. Moreover, General Fund agency cuts were supplemented with raids from Other Funds revenue.)

Instead  of settling for a balanced budget, the governor has an opportunity to  show how good budgeting practices – such as strategic budgeting and  effective spending and revenue caps – can reduce spending and increase  accountability in cabinet-level agencies. To accomplish this goal, the  governor should:

Cap agency spending. Although agencies have already submitted their budget plans, they should go back to the drawing board and revise their budgets using a spending cap correlated with actual economic growth.  The idea here is that each agency should not just submit a balanced  budget (and some have not even done that), but a model budget that  limits overall spending according to a consistent, objective measure.

Implement strategic-based budgeting.  While zero-based budgeting has its merits, it is a time-consuming  process. A better alternative to zero-based budgeting is strategic  budgeting. The process has two parts. The first phase requires each  agency to:

      1)      Prepare a 50 percent base budget that funds Tier 1, essential core services and programs.
    2)       Justify from the ground up all Tier 2, less essential services that  make up the remaining 50 percent of the proposed agency budget.

In  effect, each agency would draft a modified zero-based budget that  forces it to prioritize its activities by classifying each program as  either Tier 1 or Tier 2. In the second phase, agency heads would meet to  negotiate over spending and to set priorities together. The benefit of  this collaborative effort is that savings achieved by one agency can be  used to fund essential expenditures by another agency. In short, this  process allows agencies to make strategic budget cuts in a manner that  serves the interests of the state as a whole, instead of just one  program or another.

Cap agency fines/fees. Along with capping spending, agencies should also cap revenue – all the more so because agencies are routinely spending more than the budget authorizes them to spend. One way of capping  revenue would be to issue an executive order placing a moratorium on all  agency fine and fee increases. The governor should also consider placing a moratorium on all new and current agency capital/building projects.

Request item-reduction veto power. Another key reform that would reduce state spending and allow for strategic budget cuts is item-reduction veto power. The state constitution permits the governor to veto specific items and sections in the state budget. According to a recent state Supreme Court opinion,  this veto power applies only to nullifying entire items, as opposed to  parts of an item. That said, governors in 12 states possess a line-item  reduction veto. Such a veto would allow the governor to reduce funding  for specific budget items without eliminating the item altogether.  According to a 30-year historical analysis by economist Mark Crain,  the item-reduction veto is among the most effective means of limiting  spending, resulting in a 14 percent average decline in state spending. A  constitutional amendment would be necessary to implement this reform.

Reform Health Care for South Carolina

We’ve written extensively on what South Carolina lawmakers can do to create a free market for health care in our state. As far as health  care goes, we recommend a two-pronged approach that pursues free market  reform, even as the state pushes back against the federal health care  takeover. Game-changing reforms include:

Setting up interstate compacts. Georgia has been attempting to establish an interstate compact creating a multistate health insurance market for the past several years. Such compacts must be approved by Congress (but not necessarily by the president).  South Carolina should join its neighbor to the south in creating an  interstate compact that would allow for the creation of a deregulated,  free market for health insurance. One option may be to expand the already existent Interstate Insurance Product  Regulation Commission to include health insurance. Read more about  interstate compacts here.

Requesting Medicaid waivers.  While the Obama administration is unlikely to grant any Medicaid  waivers that entail free market reform, the state should apply anyway,  all the more so because the waiver process is very lengthy even under  the best of circumstances. In particular, South Carolina should apply  for a waiver that would allow the state to obtain its federal Medicaid  funding in the form of a block grant. Rhode Island is the only state  that currently possesses such a waiver, with the result that the Ocean  State has reduced Medicaid spending by $110 million since 2009 (without reducing eligibility).

Exercising oversight over federal health care grants. Gubernatorial review and  approval of all discretionary federal grants stemming from the Patient  Protection and Affordable Care Act (PPACA) would help insure these  grants don’t place additional financial stresses on South Carolina. This  reform would prohibit all executive branch agencies from applying for  further grants without specific authorization.

Implementing a moratorium on the PPACA rulemaking process. Many of the more controversial policies in PPACA will be worked out via the federal government’s rulemaking process. Yet, regulatory agencies in some states do not possess the authority to enforce some of these rules. This rulemaking process also threatens  to overwhelm state regulatory systems. For this reason, the governor  should issue an executive order placing a moratorium on PPACA rulemaking  as it applies to South Carolina. Governors in North Carolina, Arizona  and Washington have already issued such orders.

Encouraging waivers.  The governor should direct the S.C. Department of Insurance and the  Department of Health & Environmental Control to conduct a joint  review aimed at determining what currently available waivers would allow  the state as a whole to opt-out of various provisions of the Patient  Protection and Affordable Care Act. Likewise, the governor can instruct  the Department of Commerce to assist South Carolina businesses in  obtaining temporary waivers from PPACA coverage requirements. As of  mid-December 2010, the White House had already issued 733 waivers affecting millions of individuals.

Create Jobs by Cutting Spending

Government can’t create jobs. As famed economist Walter Williams puts it, “[Government] can only shift employment or unemployment but  cannot create net new jobs.” More to the point, the government’s proper  role is to create the conditions – low spending, low taxes, reduced  regulatory burdens, an equitable court system – that enable  entrepreneurship to thrive.

We suggest South Carolina’s  governor take a cue from Texas. Job creation in the Lone Star state has  exceeded all other states combined over the past 10 years. Observers  credit this growth to the state’s low rate of per capita spending – 47th in the nation for FY2011. Similarly, South Carolina should pursue  policies that limit government spending and reduce taxes. Instead, the  state has taken the opposite route of keeping taxes proportionately high  while extending targeted tax breaks to select companies. The governor  can do her part to end this failed economic experiment by:

Requiring gubernatorial review of Department of Commerce incentives packages.  While the governor can do little to stop economic incentives deals  initiated by the Legislature, the Department of Commerce also plays an  active role in using state tax dollars to lure companies to South  Carolina. Accordingly, the governor could require that all economic  incentives packages extended by the Department of Commerce receive  independent gubernatorial review and authorization. This review process  could include a 30-day waiting period during which the public is invited  to learn the details of the incentives and offer comment.

Requiring agency review of economic development incentives. Legislation (S 206) has been introduced in the Senate that would require the Department of Revenue and Department of Commerce  to exercise active oversight over state economic incentive deals. Such  oversight would include preparing an annual report that details the  costs and benefits of economic development incentives. The Department of  Commerce would also be charged with overseeing an independent review of  every economic incentives package, with the aim of reporting specific  job loss and creation numbers that include the ratio of public spending  for each job created. Instead of waiting for the Legislature to act, the  governor could direct the agencies under her control to proactively  monitor and analyze economic incentives packages and provide yearly  reports on whether these incentives are actually creating jobs – and at  what cost to taxpayers. (For more on economic incentives transparency,  see this report.)

Of  course, requiring greater transparency regarding economic incentives  deals will demonstrate one thing – targeted tax incentives and special  interest deals don’t create long-term prosperity. Thus, in spite of  appropriating more than $2.5 billion in economic incentives from FY99-2000 to FY07-2008, lawmakers can point  to little real economic growth. In fact, over the past 10 years,  private sector growth (as measured by real Gross State Product per  capita) was only 1.35 percent for South Carolina – as compared to 23.76  percent for Texas.

Again, the answer is clear – cut  spending and lower taxes. Toward this end, one of the best ways to  create jobs in South Carolina is to enact an effective and comprehensive  spending cap. In theory, this is a reform the governor has already  expressed support for, but the details remain to be worked out. In  particular, we recommend a spending cap that:

  • Is comprehensive – including General Fund, Other Funds and Federal Fund spending
  • Tied to an objective measure of real economic growth – and not subject to political manipulation
  • Refunds surplus revenue to taxpayers – and, thus, also includes a revenue cap

To learn more, read our new report: “An Effective Spending Cap for South Carolina.”

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

Copyright  © 2011 South Carolina Policy Council

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