Sudden Stop

Failure to stop a rolling snowball

Just starting downhill, a growing, rolling snowball's easily stopped.  Wait too long, and it's a cartoon cliche, an uncontrollable slapstick disaster.  After today's news, you might well imagine that the State's been slicing and cutting to keep pace with the falling revenues. 

State revenues took yet another plunge last month, ending the financial year $180 million below even the dourest projections and forcing leaders to choose between draining the state’s reserve account and making further cuts in a budget approved just last week.

But no.  Here's the 2010 budget compared to 2009:

HISTORICAL SPENDING CATEGORIES ($000)

SPENDING CATEGORY	FY2006 Expended	FY2007 Expended	FY2008 Expended	FY2009 Expended	FY2010 GAA
Wages & Salaries	3,838,756	4,092,090	4,306,665	4,246,441	3,989,175
Employee Benefits	1,114,725	1,182,179	1,011,388	1,148,498	1,205,011
Operating Expenses	1,396,846	1,217,032	1,968,672	1,171,741	1,068,951
Public Assistance	10,779,003	11,663,047	12,590,650	13,118,165	13,000,239
Grants & Subsidies	5,350,815	6,055,275	6,185,698	5,808,427	5,719,110
Debt Service	1,832,219	2,008,220	1,989,968	2,045,025	2,063,525
TOTAL	24,312,364	26,217,844	28,053,041	27,538,297	27,046,010

From 2009 to 2010, a 1.7% reduction in spending. 

1.7% ! Got that?  In the face of a 23% drop in revenues the State budgets a 1.7% spending decrease.

All the while, they're boasting of reform.  Isn't reform a meaningless slogan without seriously addressing the failure to cut costs, or, painful as it is to this fiscal conservative, communicate the need for higher tax?

Great that the Legislature reformed the silly rules: credit for library trustee, 23 and out, extras for not running for re-election, ethics, no gifts to politicians, rearrange a handful of agencies, etc... .  I can sleep well knowing that some random Representative from Bumfarksville, Mass won't get the extra $200 a month added to his pension because he served as a Trustee on the local library for 5 years. 

Isn't it just great that your Rep can't accept gifts.  You're life's been made full.  Or that the Transporation Authority that hemorrages red ink is doing it as a State Board and not as an Authority.  It's nuance that make the Commonwealth great.

For every day that passes without meaningful reduction in spending, reserves grow smaller and the deficit snowball larger.

Solution, said the leaders, add a sales tax.  That's an extra $900 million in cash, a smidge short of the $3.0 billion shortfall.

Neither the Governor nor the Legislature are addressing where to find the $2.6 billion. By ignoring that short fall, and focusing on  the meaningless (i.e. immaterial money savings) they're guilty of  pure negligence.

Where to cut?  Three places for government: 1) transfer payments (i.e. welfare, medicaid,) 2) employment and benefits 3) local aid, which then translates to employment and benefits,  but at the town level.

Transfer payments are temporarily off limits for the most part because of Federal money coming in although the rumblings are louder that the universal healthcare boondoggle is a target.  Already dental is gone from MassHealth coverage, and certain legal aliens are excluded from Commonwealth Care coverage.  Local aid has been reduced.

What's left is state employment.

Headcount in State government has been locked at 85,000 to 86,000 for many months now. Despite layoff anecdotes, the state appears to have a stealth no-layoff policy in place.

Every 10% cut in heads means approximately $500 million in savings; no cost in unemployment because of Federal $.

The real call ought to be 'savings before revenue'.  Reform is meaningless if it means no dollars saved. 

Globe, what would you pay now?

Given these projections, a fair value over zero looked optimistic.  But add to those projected losses, the unfunded $59 million pension liability of the Globe plus Worcester Telegram, and the NYT might actually end up paying someone to take it off their hands.

This says it all:

The New York Times Co. has postponed tomorrow’s deadline for prospective buyers of The Boston Globe to submit preliminary bids for the newspaper, people briefed on the sales process said.

No new date has been set for the bids. Goldman Sachs Co., the investment banking firm hired by the Times Co. to manage the newspaper sale, have told interested parties they will be given more time to prepare an initial offer for the Globe and its sister paper, the Worcester Telegram & Gazette, the people said.

Looks like buyers aren't terribly  motivated.

 

Hysteria of large numbers

Here's the lede from Mass Budget and Policy Center (Blue, the color theme by no coincidence):

Seeking to close a $5 billion budget gap, the legislative Conference Committee crafted a budget that will require sacrifices across the board.

Oh my God, billions in the hole. Why?

Overall, state taxes as a share of the economy were $3.3 billion lower in FY2008 than they were in FY1998. The two primary causes of this decline were income tax cuts and erosion of the state sale tax.

Income tax:

• The income tax rate was reduced from 5.95 percent to 5.3 percent, costing $1.3 billion.
• The tax rate on dividend and interest income was reduced from 12 percent to 5.3 percent, costing $720 million.
• The personal exemption was increased from $2,200 per person to $4,400 per person, giving each taxpayer a cut of $117, and costing $440 million.
• In 2002 the state repealed the capital gains tax cuts enacted in 1994 which increased revenue by $1.1 billion.

Overall changes in the state income tax resulted in net loss of $1.4 billion in income tax revenues.

Nevermind that tax revenue has grown almost 50% over the past 10 years; nevermind that  2009 budget was the second highest in the history of the State. 

 

 

Tough times

Lamenting the 'tough economic circumstances', the Governor signed the budget.  For goodness sake, it's less than a 3% reduction from the prior year, and you'd think the politicians lost a collective kidney.

The budget signed by the Governor today, coupled with the supplemental legislation he is filing, is 3 percent lower than budget he signed just one year ago.

It is, as noted earlier, the 2nd largest budget in the history of the state, and almost 6.5% greater than the 2007 budget.

 

For $25, you're innocent until proved guilty

Armed with the knowledge that more than 250,000 tickets for civil motor vehicle infractions were challenged in the state last fiscal year, legislators have voted to charge drivers $25 for such hearings. The budget Gov. Deval L. Patrick signed into law this week includes the change, which took effect yesterday, according to Trial Court spokeswoman Joan Kenney.  Worcester Telegram

Imagine how much cash the State could rake in if it charges more for crimes more serious!  Murder, $50K gets you a trial.

Mass Budget "crisis"

Just for needed perspective, look at the past 5 years spending before considering this year's budgeted spending of $27.4 billion:

2005    $22,150

2006    $24,312

2007    $26,217

2008    $28,053

2009    $27,902

Summarized, i) this is the 2nd largest budget in state history and ii) it's a 2.5% decrease from last year.    Crisis? 

Add this,the budget reduces local aid by 29%, a reduction of $377 million from fiscal 2009.  That' to say that local aid cuts notwithstanding, the State's budgeted spending actually increased from 2009 to budgeted 2010.

A decade of employment lost

National employment data over the decade, America's lost decade for jobs. 

In other words, in the last ten years we've borrowed our way into record deficits and what we have to show for it is an anemic private sector that uses the government as a crutch.

Same thing in Massachusetts.

According to Bureau of Labor Statistics here, at the end of April, 2000, the Massachusetts workforce was 3,313,400 workers.  April, 10 years later, the workforce stood at 3,184,000, a 4% decline over the decade.

Meanwhile, Government employment rose over the same period from  435,200 to same period 2009 of 438,000, a 1% increase.

State declines in personal income tax

Via Calculated Risk, the change in personal income taxes multiplied by the percent personal income tax of total state taxes in 2008. (i.e. since personal income tax as a portion of particular State's budget varies from state to state, it's not appropriate to simply measure the percentage drop but rather look to the  loss of revenue relative to the personal income tax importance to the State budget.)

The big losers affected by the dramatic drop in personal income:  Oregon, New York, Massachusetts, California.  (click for state by state comparison)

It's difficult to imagine that F/Y 2010 personal income tax collections will fare better for Massachusetts, given 1) that the dramatic drop was significantly caused by the drop in the capital gains tax and 2) given the size of the capital losses in '08 and the availability for carryover to '09 that the same tax '09 will be much larger.

Just give them the cash

According to the CBO,

According to that assessment, enacting the proposal would result in a net increase in federal budget deficits of about $1.0 trillion over the 2010–2019 period. Once the proposal was fully implemented, about 39 million individuals would obtain coverage through the new insurance exchanges.  At the same time, the number of people who had coverage through anemployer would decline by about 15 million (or roughly 10 percent), and coverage from other sources would fall by about 8 million, so the net decrease in the number of people uninsured would be about 16 million.

That would be one trillion dollars to insure 16 million people for 10 years.  That's $62,500 per person and $6,250 per year and $521 per month. I can get Access Blue Basic right now for $351 per month.  Instead, why not just tell the uninsured folks to get insurance and in exchange the US will give each uninsured person $500 a month. 

Win-Win-Win! 

-US "saves" $21 per month over the current proposal;

-Uninsured people become insured; 

-Smart shoppers get a free hand-out from the Government because you can bet the farm people will shop around for insurance in order to keep as much of the $500 as possible. 

True that currently insured folks may become a bit miffed that they don't get the hand-out too.  Too bad. 

 

Tax free junk bonds

California taxable 30-year Build America Bonds paying 7.55 percent traded at about 93 cents on the dollar today to yield 8.18 percent, down from 94.7 cents and 8.02 percent yesterday, according to Municipal Securities Rulemaking Board trade data.

Not quite the yield of high yield corporate junk bonds.  Yet.  And that 8.18 % is Federal and California tax free.