Sunday, January 16, 2011

A Courageous State Budget

Governor Daugaard will propose his State Budget this week to the Legislature.

During his State of the State Address last week he said that his budget will be “austere.”

There have been suggestions and reports in the last weeks that the Governor will propose 10 percent cuts to K-12 Schools and to Medicaid payments. Reports have also indicated that their will also be cuts in Government departments of 10 percent. In the spirit of sacrifice the Governor has taken a 15% cut in his own salary and his Cabinet officials have also taken symbolic and significant cuts in their pay.

If substantiated by fact these steps are bold and politically risky for the Governor. While risky if he is able to have his budget substantially enacted he has in the long run the opportunity to be a winner.

Such a budget takes on two pretty heavy political hitters, the local school districts, the docs, hospitals, and medical community. While these groups are able to weather such revenue cuts to varying degrees (more later) they will not just stand still. They will push back.

Under the previous Rounds administration, State Government has been deficit spending for 7 of the last 8 years. Structural deficit (a new political creation of Governor Rounds and in this case balancing the budget with reserves) is deficit spending. Deficit spending (by the Rosenthal definition) is spending more money than you take in.

This year is time to right the fiscal ship of state. The most important fact to understand is the money is not there.

Raising taxes is a political non starter; this Governor, this Legislature (Republicans and Democrats) and the people are in no mood.

Revenues projections are a mixed bag. The sales tax may have some modest growth, consumer spending has picked up a bit and ag commodity prices are high. Video lottery receipts are expected to be lower because of the Iowa Casino, the bank franchise tax may again be in the tank, thanks to the so called federal bank reforms, the contractor’s excise tax given the economy shouldn’t be at previously higher levels, and who has any idea what to expect from Deadwood revenues as their story changes if not weekly at least monthly to whatever calamity they only are expecting.

Candidate Daugaard has said he will not spend money he does not have and he will not raise taxes. The Governor is also said that State revenues will come back as the economy recovers. I never try to say never, but does anyone see robust economic growth in the near or medium term. I read recently that unemployment may not go below 6 percent until 2020! Expect modest economic growth at best.

Just a couple of factoids to throw into the mix: The DUSEL Laboratory does not appear going to receive the expected revenue that will pay to keep pumping water out of the Homestake Mine Laboratory. Will the State continue putting money down that hole? The Governor has expressed several times he would like to increase the REDI fund for economic development loans to perhaps the $90 million level. Where will that money come from (the budget) and when?

This is the year to get back on a paygo (pay as you go) basis (I am stealing that one from the Congressional Dems, though they don’t do it.) We will not see the numbers until the budget is unveiled this week and we won’t have firmer estimates (an oxymoron?) until later in the Session (perhaps late February) but for my part, this is the year to right the books and get pure.

No spending more than we take in.

What follows I understand is provocative. If the 10 percent cuts are not enough and because the Med and School Communities are being asked to take significant and austere hits; State employees at all levels including all Regent institutions should take a 5 percent pay cut.

For Background – K-12 last year received no increase and Stare employees for 2 years have not received any pay increase (while their medical insurance cost did rise.) Some school districts probably can weather a 10 percent cut by using reserves, though others may have to option out and ask school district voters for a real property tax increase. Schools in the growing districts tend to have fewer reserves and of course receive their state aid a year after the growth in the number of students has occurred.

Cutting State and University workers is a hard ask, though the Governor would be taking a shared sacrifice approach that might make the 10 percenters to the medics and schools more palatable. He just would not be cutting others but more than symbolically cutting his own fiefdom as well.

Sidebar – I expect the Board of Regents will scream even louder than the K-12 or Medicals are. They will tell us about the brain drain and losing staff to surrounding States and Colleges. While maybe true in former times, in today’s economy and environment that just ain’t so. Having a job is its own reward.

Repeating here but the more important point is that the State would be positioned to face the future whatever that is, on solid fiscal ground.

I come from an earlier generation, but I clearly remember when the government (Local, State, and particularly Federal) was not so BIG. Coming out of the 1930s government work always earned less than the private sector. Government workers received lower pay because they had desirable benefits including (most importantly then as well as now Job Security. They also had vacation, pensions, and later health care.

Just a word on the politics – If the State is whole in funding its expenditures after the first year as the economy stabilizes we will be in a position to then grow responsibly. If our budget is balanced as formerly stated the vast majority of South Dakotans will reward the Governor politically.

Whether the Daugaard plan with or without the Rosenthal suggest 5 percent pay cut option succeeds, short term or long term Schools and Medicals will be seeking their own legislative candidates in 2012 (read here recruiting Republicans as well as Democrats to oppose incumbents.)

The Governor was elected on his life lessons of hard work and frugality. Governor Daugaard this is your time and your place. Continue showing Courage.

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