State’s Budget Woes-Where is the Money Going?

Cost_Study_2010_Budget_Gaps_vs_Costs

Elected Officials View of Your Money!

 This article was originally written in August and we still do not have a State or Federal Budget today, almost the first of October.

          This article is being written from the perspective of an Ex-Mayor which I am.  There are a lot of expenditures at the local and state level that the average taxpayer may not be aware of.  It is important to understand some of the nuances of public sector “budgeting” and its impact on state’s deficits.  We will spend a little time talking specifically about public sector employment costs, illegal immigration budget impacts and the role of the Federal Government is turning our great nation upside down.  You will start to hear more and more of our cities declaring their “bankrupt” status.  Hopefully this discussion will include sufficient causal factors to help you understand the depth of the problems we face as individuals, public sector employees, tax payers and citizens.

Private Sector View:

               In business, it is imperative to analyze every expense in terms of whether it is a long-term hard commitment or an expense that is short-term and can be eliminated if needed due to revenue shortfalls.  Contractual obligations are scrutinized carefully so a company does not over commit itself in the event of a generalized recession or a loss of revenue that is specific to the company.  All expenditures and cash flow requirements are carefully balanced since companies cannot “print” money and have to rely on their internal cash reserves, their ability to borrow capital or issue stocks or bonds to generate cash.  The latter is tricky during economic downturns as the willingness of investors to jump in is dampened by the downturn and the investor’s analysis of whether the company will be in a position to repay the bond debt or if the stock price or dividends will provide a return to the investors. 

Unfunded Mandates on the Private Sector:

               More and more, businesses are being saddled with what are known as “Unfunded Mandates” by government entities.  Unfunded mandates are exactly what the term implies; a requirement for a company to expend capital that does not enhance the creation or delivery of the goods or services provided by the company.  For example, if the EPA requires a coal plant to install scrubbers to reduce their emissions, that cost is not funded (unfunded) by the EPA but is required by law or regulation (mandate).  That example may sound like it is beneficial to the common good” but keep in mind that businesses have to pass the cost of the unfunded mandate to its consumers.  If they do not, they will soon be out of business due to rising costs that cannot be matched with an increase in revenue.   The new health care bill that just passed has many examples of unfunded mandates.  Practically every federal bill that has passed in the past 18 months carries increasing levels of unfunded mandates for companies and their consumers.

Public Sector View:

Cities, counties, and the state governments do not scrutinize their own budget commitments in the same way.  Government entities are controlled by their legislative bodies that use the revenues they have first to insure their own re-election, build their power base, and finally to provide for their view of the “common good”.  This may sound a little cynical but unfortunately you could write volumes outlining the self-serving natures of our legislatures.  This is not isolated to one party or the other but is pervasive throughout government.  (Longevity in office further exacerbates this ill but that will be the subject of another blog)  It used to be that local governments, Cities, Counties, School Boards, were more motivated towards the common good.  This was due to the proximity of their voters.  Today the focus on the common good has deteriorated so as evidenced by the out of control City Council, staff, and employee salaries in the city of Bell, California.  But they are not alone.

               Most government entities take a very short-term view of their expenditures.  When the economy is booming, governments ratchet up their long-term commitments with no eye on what will happen when the normal economic downturns occur.  Today we are witnessing this in almost every state in the Union and certainly in the Federal Government.  The big difference with the Federal Government is that it can print money to cover its debt, hence the term “monetizing the debt”.

Public Sector Pensions, “Defined Benefit Programs”:

               Most of us in the private sector are familiar with 401K plans, or perhaps profit-sharing plans that are commonly referred to as DEFINED CONTRIBUTION Plans.  In these plans, there is NO GUARANTEE how much your retirement BENEFIT will be when you retire.  These plans only offer you assistance in building your retirement portfolio through matching funds, outright grants in profit-sharing plans, etc.  The value of your retirement nest egg is dependent on how YOU invested the money and how those investments grew or shrunk over the years.  Conversely, most government workers participate in  “Defined Benefit Programs”.  These programs are an outright, contractual GUARANTEE of to a specified retirement benefit.  In many cases involving public sector employees, the Benefit is a percentage of their salary in the final specified years of their employment.  Most of these plans have cost of living adjustments built-in.  For example, if you are a police officer making $100,000 per year during your determinant years, and your plan calls for 90% retirement benefit, you will be guaranteed to receive a $90,000 annual retirement benefit, regardless of the economy or the underlying investment the entity has made to “fund” the benefit.  In addition, many public sector employees are guaranteed specified health benefits upon retirement as well. 

These are great programs for employees but are unsustainable in the long-term, which is now!  One of the reasons is that the unions and the complicit legislatures have continuously reduced the funding requirements for the reserves to fund these liabilities.  Consequently, when an employee retires, the payments to that employee have to be paid out of the general fund rather than from a “lock box” reserve fund.  Today, there are cities and counties allocating over 50% of their police and fire annual budgets to paying retirees.  The percentage will continue to rise until all of the current fire and police employees are laid off so the retirees can be paid.  The laying off of current employees to fund retirees is happening today in the City of Oakland, California, and more recently in East St. Louis, Missouri.   This situation exists for cities, counties, school districts, and certainly for states such as California.

In California, the then governor Jerry Brown pushed and passed Senate Bill 160 (1975), the Rodda Act.  This REQUIRED school districts to negotiate with one of several unions at least every 3 YEARS.  Similar legislation was passed under Brown’s guidance for practically all public sector employees.  Since 1975, California has continued to build up backlog of unfunded liabilities and today the operating budget for California is over $25B in the red and the total unfunded liabilities are estimated to exceed $1 trillion dollars. 

Since the public sector does not produce any products but only “services”, labor is its largest budget line item.  Since the 1970s, the nation’s local governments have continued to make commitments to their employees that are unsustainable.  Salaries in the public sector are now higher than their counterparts in the private sector and the benefit packages are orders of magnitude better for the employee.  Unfortunately, public sector employees better start planning for drastic reductions in their retirement and health benefit plans.  The costs today cannot be supported.  The Federal Government bailed out the UAW when it provided taxpayer dollars to GM and Chrysler.  The Feds used much of the “Stimulus” money to date to help local entities pay their current liabilities for pension and health benefit programs.  Since the Feds are in deficit spending themselves, the Feds are merely monetizing even state and local government budget shortfalls.   To say that this is nuts, is just nuts.  It is way beyond nuts.

Unfunded Mandates on the Local Public Sector: (cities, counties & states)

               Every dime a local government receives from the Federal Government comes with strings attached and those strings are usually a requirement for “matching” funds and services at some level.  You may receive a community development block grant but the city has to put up “X” amount in matching funds.  Or, you are “guaranteed” reimbursement by the Feds for Medicaid; or for enforcing Federal Laws for drug trafficking, border security, or a whole host of other “cost/work sharing” efforts.  With each of these programs, the local entities always have to commit to a higher annual budget costs to participate in these programs.  Those cities that take community development block grants to fund their general fund expenditures are only kidding themselves.  These funds dry up or get reallocated to other programs then you are left holding your budget bag all by yourself. 

Illegal Alien Costs:

               The National Conference of State Legislatures, issued their “State Budget Update: July 2009”, that put forth some staggering budget shortfall numbers by state and what each state was spending for all of the services it had to provide to Illegal Aliens due to Federal legislation.  In 2009, California had a budget shortfall (deficit) of $19,638B.  California’s cost to support illegal Aliens for 2009 was $21,756B.  Without the costs for California to support services to Illegal Aliens, California would have had a budget Surplus of $2,117B!  If you add up all of the States’ budget shortfalls in 2009, the total amount would be $69,775B.  The total costs to support Illegal Immigrants for all States in 2009 were $81,813B.  Without the illegal Immigrant issue, the combined all States’ Budget surplus would have been $12,038B in 2009. 

               The cost of illegal immigration is draining not only cash for day-to-day services, but it is forcing premature, increased capital expenditures in the form of additional classrooms to house a 20% increase in children, additional health care facilities to handle the increased emergency room loads, etc. 

THIS IS A FAILURE OF OUR FEDERAL GOVERNMENT, GOING BACK TO AT LEAST 1986, TO PROVIDE FOR A SANE IMMIGRATION POLICY AND TO INSURE BOARDER SECURITY AND TO FORCE LOCAL ENTITIES TO FUND AND ABSORB ALL OF THE RELATED COSTS OF THEIR FAILURE…!

               We are once again being forced to consider granting amnesty to millions of people who are in this country illegally and thus perpetuating the budget shortfalls of our local governments.  We are told that amnesty is the only really charitable thing to do and that we cannot just round these people up and drive/fly them to where ever they came from. 

How about if we start with deporting every Senator, Congressman and President that has held office since 1986!

IF they were not in Washington thinking up ways to waste more of our tax dollars and drive us further into debt, we could probably allow the illegal aliens to stay!  Considering that illegal immigrants cost the local states $82B in 2009, stopping the Federal Government from spending any more money would cover that cost pretty quickly.  The $82B is roughly equal to 22 months of interest just on the “Stimulus Package” these clowns forced us to thinks was a necessity.

               It is time for local governments to step up and make the right choices.  These are going to be choices of BAD and WORSE.  Retired and current public workers are going to have to give up some of what they have rightfully expected to receive.  But, if our nation basically goes into bankruptcy, there will be even less available for you to draw.

               It is time for the Congress and the President to grow up.  You cannot continue to tax, spend, regulate and shove unfunded mandates down everyone’s throats.  Your games are now transparent to the public who is fed up with your antics.  This includes every single member of Congress and the Administration.  Even if you don’t support this out of control fiscal insanity, then we are asking what you have done to stop it.  If you have not chained yourself to the steps of the capital in protest or done something outrageous to draw continual attention to this farce, then you are also part of the problem.  A simple NO vote doesn’t cut it anymore!  We need honest, citizen legislators who will stand up for what is right; spend 2 terms in office; then go home and get a job.  The time for career politicians is over at every level of our government.  The States’ budget woes are just the tip of the iceberg.

RD Pierini

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