“The European Union diplomat said early Monday that Cyprus’ second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses.”
More recent news seems to confirm that earlier rumors that part of the European Union bailout package of Cyprus will involve confiscating money out of certain large bank accounts. Mind you, this is not a tax on any earnings, transactions, or gains, but a straight money transfer from a bank account to the government. Sounds a lot like stealing to me.
Perhaps the scarier part is that between the money transfer and the collapse of the banking system, the former may be the preferred option for Cypriots. There are important lessons here for the United States, and Wisconsin. First, government must plan ahead to build, fund, and support a realistic social safety net. Second, citizens should realize that government is the ultimate guarantor of a stable society.
Of course, government serves by the consent of the governed, and works in partnership with the private and non-profit sectors. But when it comes to the delivery of necessary public goods – security, sewer and water, universal education – we depend on and need a well-functioning government. If we don’t have one, a day of reckoning, like we are seeing in Cyprus, will come. Which brings me to Wisconsin.
Wisconsinites should be proud of the fact that our state pension system is in such good shape. This means we will avoid having to make the impossible choice states like Illinois and California are facing. Wisconsinites should also recognize that what Governor Walker did in his first budget, as well as Act 10, took courage. It wasn’t many people’s preferred approach but it was a way to make our public sector costs more sustainable long-term. At the very least it got us talking about making government more sustainable.
However, the ultimate legacy of Act 10 and Walker’s first budget remains to be seen. It is somewhat troubling that the state is borrowing again. The 2011-2013 budget was so difficult because it corrected decades of budget gimmicks, any return to such gimmicks means difficult budgets will be in our future. Also, it is too early to call Act 10 a success. The controversial law must be judged on whether it improves government performance long-term, not whether it creates a short-term fiscal benefit. There are many positive signs that local governments and schools districts are innovating in ways they could not before. Hopefully these innovations will improve local government performance, because if they don’t, it will be difficult to justify the political upheaval of Act 10.
What is happening in Cyprus is scary, but it is not evidence of the inherent evils of big government. Rather, it demonstrates the importance of realistic public budgeting to build sustainable governments that avoid days of reckoning.
As the whole world knows by now, David Corn of Mother Jonesprocured secret video footage of a private Romney fundraiser that captures the candidate in an unusually perturbing and candid light. “There are 47 percent of the people who will vote for the president [Obama] no matter what,” Romney declared. He went on to declare that these entitled folks feel themselves to be victims, and the coup de grâce, that “my job is not to worry about those people. I’ll never convince them that they should take personal responsibility and care for their lives.” He simply writes off skeptical voters, and with that, forfeits any pretense of uniting a country that so desperately needs it after President Obama’s failure to do so.
I want to suggest a better line of rhetoric for the GOP than the brash mention of those who do not pay income taxes and the extolling of individual responsibility by “pulling yourself up from your bootstraps.” The GOP would do well to take a small lesson in political theory, particularly in social contract theories. In past eras, it was far easier to implore conservatives to heed the advice of their best political and historical minds. Alas, today this is not so. Yet, I believe that reopening the pages of the great conservative Edmund Burke’s Reflections on the Revolution in France (1790) could help salvage much of the GOP’s rhetoric from a disastrous inability to connect with American voters.
Burke’s concept of the social contract is an intergenerational one. It is staunchly against the explicitly “statist” contracts of Rousseau or Locke and Hobbes before him. In these statist models, the people come together laterally and agree to the formation of a state and sovereign with limited, and often times enumerated powers. Burke’s contract ignores largely the state, focusing instead on “partnership” between generations. He says:
“One of the first and most leading principles on which the commonwealth and the laws are consecrated is, lest the temporary possessors and life-renters in it, unmindful of what they have received from their ancestors or of what is due to their posterity, should act as if they were the entire masters, that they should not think it among their rights to cut off the entail or commit waste on the inheritance by destroying at their pleasure the whole original fabric of their society, hazarding to leave to those who come after them a ruin instead of an habitation—and teaching these successors as little to respect their contrivances as they had themselves respected the institutions of their forefathers.”
Quite simply, society is a contract. “The state is a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.” Precisely where the GOP could earn points, especially with young and middle-aged voters often skeptical of their policies, is in explicating the profound transfers of fiscal burden that entitlement programs represent, and the shocking and unprecedented betrayal of Burke’s “societal partnership” between generations of the present and the future. (Professor Niall Ferguson suggested just this in his recent BBC Reith Lectures.) The most important remedy the GOP may offer is a solution to restoring the social contract between generations, a flaw of democracy that worried deeply that most observant and trenchant of commentators on American democracy, Alexis de Tocqueville. Aristocrats think and operate with a sense of their ancestors and their bloodlines, he said, while citizens of democracies live entirely and dangerously in the present.
The United States’ national debt is symptomatic of something that is terribly awry with our current representative government, i.e., decision-making ceased long ago to have any temporal frame of reference whatsoever. No notion of future generations exists, precisely because they are not represented; lacking Burke’s vision of the social contract, it is too easy to defer difficult decisions in the present and pass the bill to a future generation not yet represented. Ferguson hits the nail on the head in one of his lectures: “a pretty blithe disregard for the legacy of the past characterizes, it seems to me, a great many legislators. But perhaps more seriously, a real neglect of the interests of future generations…and that’s really the problem.” Representative government must operate with a greater sense of continuity between generations.
Best yet, such a line of rhetoric could appeal to a broad base of the American public, not just in terms of age but also across political parties. The GOP could earn electoral credentials with conservatives by presenting credible (and specific) plans to preserve and save entitlement programs for future generations; the GOP would need to defend these proposals from demagoguery for electoral gain by arguing that such an approach is a reckless path to bankruptcy. But the Burkean social contract rhetoric could also appeal to many Democrats and Independents who worry about the increasing fissures between the wealthy and not so wealthy. It is no wonder, many of them would say (not unreasonably), that there is no social contract between generations of Americans when wealth inequality has risen to an unprecedented level. The daily routines of some Americans make it almost impossible for them to sympathize with the long-term interests of other Americans once their kith, as Charles Murray shows in Coming Apart. In all, the GOP would do well to revisit the political thought of their great thinkers like Edmund Burke, and there was once a time when such obvious statements could go unstated.
Ok. I admit it’s unlikely that Rep. Ryan will be giving stump speeches based on his pro-government credentials. Nonetheless a fundamentally positive view of government is part of Ryan’s platform. The new newly minted vice-presidential candidate states in his Path to Prosperity budget proposal:
“The unchecked growth of government has degraded its effectiveness and rendered its institutions incapable of meeting the challenges of the 21st century.”
Ryan made a similar point in a speech I attended in Janesville earlier this summer. He argued the increasing debt burden on the United States makes debt service a growing annual expense that lessens the nation’s ability to provide a social safety net, an adequate defense, and other essential government services. Simply, the pie of available government funds is shrinking because of our obligations. The longer debt grows unchecked the worse the structural problem becomes (check out the scary graph on page 6 of Ryan’s plan).
Ryan’s argument parallels one WPRI has made repeatedly at the local level: Growing legacy, debt service, and healthcare costs are not abstract concerns but rather annual lines on government budgets that threaten the adequate funding of needed government programming. I do think legislators on both sides of the aisle get this basic structural problem. The difference is the preferred policy response.
Ryan proposes cuts to federal government spending, lower taxes, and structural changes to our social safety net designed to lower costs, and, in his opinion, improve quality. In other words, reverse the growth of debt by shrinking overall spending and encouraging economic growth.
I am hopeful the choice of Ryan represents a growing acceptance among conservatives that government can and should play an important role in American life. The nature of that role, the ways in which its efficiency can be maximized, and the ways in which it can be sustained long-term deserve attention and debate. The entry of Rep. Ryan into the presidential race is fostering such a debate, and that is a huge step toward building government institutions that are up to the challenges of the 21st century.
The issues leading to these two filings are not rare. The Washington Post reports that state and local governments in the United States currently have over $2.4 trillion in debt. Local governments in Wisconsin, according to 2008 data from the Wisconsin Taxpayer’s Alliance, have over $12 billion in debt obligations:
The MPS unfunded liability is a massive and growing cost driver for the district that is totally unrelated to education. It is non-education cost drivers likes these that make MPS teachers and principals react with disbelief when told the district receives $14,863 per-member. And it is not just MPS. City and county governments face the similar problem of increasing costs unrelated to service delivery.
So could bankruptcy be an option for MPS and other local governments struggling to deal with their unfunded liabilities? There are five basic criteria in Chapter 9 of the federal Title 11 bankruptcy statutes that must be met for a municipality to file for bankruptcy:
1. The entity filing must be a municipality. In Wisconsin this includes cities, villages and towns, counties, and school districts.
2. Municipal bankruptcy must be allowed by the state. The Wisconsin state statutes are silent on municipal bankruptcy.
3. A municipality needs to meet the definition of insolvent. Insolvent is defined in the federal statutes as: “…financial condition such that the municipality is (i) Generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) Unable to pay its debts as they become due.”
4. A municipality must desire to affect a plan to adjust its debt.
5. A municipality must do one of the following:
Obtain agreement with creditors holding the majority of debt;
Negotiate in good faith but fail to reach agreement with its debtors;
Be unable to negotiate with its debtors because it is impractical; or
Reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of chapter 9 of the bankruptcy statutes.
The most obvious barrier to bankruptcy filings in Wisconsin is the lack of a state law allowing municipal bankruptcy. If a law were on the books the big question for a willing municipality is whether having substantial unfunded or underfunded healthcare liabilities meets the definition of insolvency.
To answer the question posed in the title to this entry, no, Wisconsin governments could not as of now go the way of Jefferson County, Alabama. However, the concept has been floated here recently making the experiences of Jefferson County and Harrisburg worth watching.
I’ve been following the current debt ceiling news somewhat schizophrenically – I’ve been obsessively reading everything the major newspapers puts out, then I get frustrated and try to pretend nothing’s out of the ordinary. Two seconds later I’m refreshing the New York Times webpage in hopes that they’ll have announced a surprise deal that everyone managed to keep secret. It hasn’t been a winning strategy on my part, I’ll admit.
Other people have been more productive. Stateline has a breakdown of how Wisconsin agencies may be impacted. It estimates that Medicaid, law enforcement training, and veterans’ benefits will be hardest hit. The Journal Sentinel reports that, according to a survey commissioned by Governor Walker, Wisconsin has enough funds to maintain its federal programs for about three months. After that, if the federal government is still in default, the state will have to re-prioritize fund allocation.
Even if the federal government somehow resolves this by Tuesday, there still may be some longer-term implications for Wisconsin government. The Wisconsin State Journal reports that the GOP has introduced a bill requiring Wisconsin agencies to devise contingency plans if the federal government can’t meet its funding obligations to the state. Their rationale is that even if Congress raises the debt ceiling this year, the problem is not going to go away in years to come. What a depressing (but increasingly probable) idea.
Filed under: Budget,Debt — Christian Schneider @ 3:57 pm
This week, Milwaukee Magazine’s Bruce Murphy cites a recent New York Times analysis to make the point that Wisconsin’s budget deficit isn’t really so bad after all. According to the analysis, Wisconsin’s $1.8 billion deficit in 2012 represents 12.8% of the previous year’s budget, which puts us right in the middle of the 44 states that reported budget deficits.
Fair enough, but that’s not the whole story.
Wisconsin is well behind the nation in the tools it grants itself to deal with budget deficits. As I laid out in this lengthy research paper in 2009, most states require healthy “rainy day” funds to help ameliorate revenue shortfalls. Wisconsin’s is virtually nonexistent:
According to the National Association of State Budget Officers (NASBO), nationwide ending balances reached 10.4% of expenditures in 2000, and 9.4% in 2001. During the 2001 recession, states were able to draw on $25.8 billion of reserves to help balance their budgets. As a result, ending balances were reduced to 3.7% of expenditures. Balances built up over the previous years helped ameliorate many of the budget problems caused by lagging revenue.
Following the recession in 2001, most states set aside significant amounts of money in budget reserves. In 2006, nationwide ending balances in state budgets had reached $62.1 billion, or 10.9% of expenditures. Increased revenue due to a growing economy contributed to these new funds, as states learned the importance of setting aside money for emergencies.
Wisconsin never learned its lesson. Wisconsin remains one of only four states with a minimum statutory balance under 1% of expenditures. Wisconsin had ending balances of 0.4% of annual spending in 2006 and 0.6% in 2007, and budgeted a minimum balance of 0.4% in the fiscal year 2008 budget. This compares to a nationwide average of 8.2% in 2007. By the standards set by other states, Wisconsin’s government has been running on fumes.
Furthermore, Wisconsin has been using debt to finance more and more of its state government operations. When the state issues bonds, the debt service on that borrowing is inviolate – it cannot be reduced unless the bonds are refinanced:
In the past three budgets, the Governor and Legislature have generously used debt to fund ongoing appropriations indirectly. Additionally, new types of bonds have been created that allow government to circumvent the constitutional prohibition on bonding for general operating expenses. In several instances, Wisconsin’s elected leaders opted for short-term gain over long-term fiscal responsibility, and their creation of new types of borrowing carried risks for the future.
In 1969, when the state constitution was amended to allow the state to issue bonds, Wisconsin had $392.8 million in outstanding debt. In December of 2006, Wisconsin had $19.3 billion in outstanding debt, or $3,476 for every state resident. Shortly before the 1969 constitutional amendment passed, Wisconsin ranked 40th in the nation in state debt per capita. By 2003, Wisconsin had risen to 10th in per capita debt outstanding – and state debt has increased substantially since then.
Furthermore, the state has issued debt in excess of taxpayers’ ability to support that debt. In 1979, outstanding GPR supported GO bonding was 16.1% of state GPR revenues. By 2006, that number had more than doubled, to 33.9%. GPR funded GO bonding has grown substantially in relation to tax revenue.
Increased debt further ties the hands of the Governor and Legislature when trying to address budget shortfalls. Debt service simply can’t be cut like other government programs. General obligation bonds are backed by the full faith and credit of the state, and defaulting on those bonds is not an option.
So while Wisconsin may appear to be in the middle of the pack, it has far more restrictions on dealing with budget deficits than other states. The lack of long-term planning over the years has caught up with the state, and makes earnest attempts to balance the budget all the more painful.
As states struggle with enormous deficits and exploding pension costs, some analysts are urging Congress to enact a law enabling states to declare bankruptcy the way municipalities can under Chapter 9 of the federal bankruptcy code. This is a bad idea. A state bankruptcy provision could create more problems than it solves.
Bankruptcy proponents understandably worry that states such as California and Illinois are so deep in the hole they may end up petitioning Congress for federal relief. To forestall this possibility, the argument goes, even the threat of bankruptcy would give governors and legislators a powerful new weapon for forcing concessions from recalcitrant public employee unions.
At least 18 states already outlaw collective bargaining with some categories of government employees; Virginia and North Carolina prohibit it for all public workers. Two newly elected Republican governors, Scott Walker in Wisconsin and John Kasich in Ohio, have threatened to dismantle their state bargaining statutes if unions fail to make concessions.
Filed under: Budget,Debt — Christian Schneider @ 3:48 pm
In November of 2007, I issued a WPRI report warning of Wisconsin’s growing use of debt. (It’s a good read, especially if you’re looking to cure your insomnia.)
This week, Moody’s Investor Service issued their own nationwide report detailing the massive amount of debt states are taking on in order to bolster their lagging tax receipts. Wisconsin is no exception – and has issued debt at a much quicker rate than other states.
As I point out in my report, Wisconsin state government wasn’t even allowed to issue debt until 1969, when voters amended the state’s constitution to allow the legislature to issue bonds. Shortly after ratification of the constitutional amendment, Wisconsin ranked 40th in the nation in debt per capita. According to the Moody’s report this week, Wisconsin is now 12th in the nation in debt per capita, barely behind notorious big-spending states like New York, California, New Jersey, and Illinois.
According to the report, Wisconsin’s $1,720 in debt per capita puts the state $423 per capita above the national average (skewed slightly high due to the absolutely obscene per capita debt of Connecticut, Massachusetts, Hawaii, New Jersey, and New York), and $784 more than the national median of $936 of debt per capita.
Furthermore, the trend in Wisconsin has been to issue more debt than we can afford. As detailed in the Moody’s report, Wisconsin debt has risen from 2.8% of personal income in 1998 to 4.6% in 2010. That’s an increase of 64% in 12 years, and ahead of every other neighboring state (Illinois is next at 4.4%, while Michigan is at 2.1%, Minnesota 2.4%, and Iowa at 0.2%.) The national median is 2.5%
Your average citizen might then ask, “so what? What difference does a higher debt burden make to me?”
A couple things:
First, debt service is the first draw on the state’s general fund. It gets paid off before the state spends a single cent on schools, the environment, corrections, or anything else. Obviously, the more debt the state takes on, the higher these payments will be, leaving less money to fund these other programs – although the state can sometimes refinance to take advantage of better bond rates, it can’t just reduce debt service. (Although sometimes they will restructure the bonds to pay more over a longer period of time in order to save money in the short term – which is terrible budgeting.)
Secondly, bonding for ongoing spending programs makes those programs more expensive. Instead of paying a teacher’s salary for one year, you’re paying for that teacher’s salary for one year, plus interest over the course of twenty to thirty more years.
Additionally, having an excessive debt load can possibly force the bond rating agencies to mark down the state’s rating, which gives its bonds a higher rate. In other words, the more debt the state has, the more it has to pay to pay them back. Too much debt is a red flag to the credit agencies – as are things like structural imbalances and low reserve funds. (Wisconsin fares extremely poorly on all three counts, which is why its credit rating has fallen within the past few years.)
Finally, it is worth pointing out that Moody’s analysis is unclear as to which Wisconsin state bonds it uses in its analysis. Some bonds are funded with tax money, some are funded by user fees, some are backed by the state’s moral obligation, and some are not. When added together, all these bonds in Wisconsin in 2007 added up to $3,476 per capita – and that doesn’t even count local debt, such as municipal and school construction.
So when the new governor takes office in January of 2011, he’ll have the state’s large debt burden to thank for much of the state’s shabby fiscal condition. And the public will eventually feel the pain for all the spending that debt propped up over the past decade.
Excellent article by Vikki Kratz in this week’s Isthmus regarding the increasing tendency of Madison-area governments to use debt to finance ongoing spending. As I’m sure everyone remembers, WPRI issued a report last year that documented the increased use of debt to finance government on the state level.
Dane County Executive Kathleen Falk bills herself as a fiscal conservative who keeps property taxes low while maximizing services. But some members of the County Board say Falk is living beyond her means, borrowing money to pay for basic needs — and sending the county dangerously into debt.
The county typically borrows money in its capital budget to pay for new buildings, roads or parkland. And it traditionally only borrows money for projects that cost more than $50,000. But Wiganowsky and others say Falk often bundles small projects together and sticks them in the capital budget, instead of paying for them outright using property tax dollars.
…Falk’s critics note that Dane County’s capital budget has increased substantially since she took office 11 years ago. Her first capital budget, in 1998, was $9.3 million. In 2008, it was $21 million. Last week, Falk proposed a $42 million capital budget for 2009, which includes $15 million for flood prevention initiatives and purchases of wetlands.
And it’s not just Dane County government taking on more debt: the City of Madison is also in on the act:
The city of Madison is also facing huge debt payments as a consequence of large capital budgets in past years. In 2008, the city’s capital budget was a record $92.7 million. For 2009, Mayor Dave Cieslewicz has proposed a capital budget of more than $76 million.
Right now, the city pays about $21 million a year toward its $213 million total debt. If the city borrows as planned for 2009, says comptroller Dean Brasser, that payment will jump to $26 million. By 2010, it will hit $34 million, and by 2015, the city could be paying as much as $52 million a year toward its debt.
Naturally, there can be reasonable ideological disagreement about how to mitigate the debt problem: liberals would want to see ongoing programs funded with tax revenue, while conservatives would argue that much of the funding is unnecessary. But both should be in agreement that driving these governments deeper into debt causes significant problems in the future – just ask Wall Street.