Stop State Spending Insanity Part III - Solutions

…. Continues from Bob Lemer’s previous post:  “Stop State Spending Insanity Part II – Out of Control!

Suggested Composition Of The Special Commission. 

I have already presented the reason for having Mr. Paul Burka of the Texas Monthly serve as chairman.  The commission needs to have significant input from the applicable areas of elected state government that deal with the state’s finances. 

In my view, since all elected Texas officials apparently see the legislative budget board, rather than the legislature, as having the responsibility and authority under state statute for enforcing the 1978 constitutional amendment, I suggest that the co-chairmen of the LBB (lieutenant governor and speaker of the house) represent all elected officials from the executive and legislative branches on the special commission.

Additionally, the commission will need the membership of the state comptroller general and the state auditor due to their valuable knowledge of the state’s finances, as well as the work support of the numerous qualified employees of those two independent departments.

In order to make sure that the quality control (constituency service) aspect is covered as well as the productivity aspect, I suggest that the commission include a representative of the internationally recognized American Productivity and Quality Center located in Houston.

Finally, I suggest that the commission include three retired partners of accounting firms either based in Texas or having offices in Texas, selected by the Texas State Society of Certified Public Accountants.  The three should have expertise in governmental financial accounting and reporting and no political ties to any state elected or appointed official.  This should guarantee the asking of the necessary hard questions.

The Commission’s Study Should Include Analyses Of Spending By The State’s Public School And Higher Education Systems, As They Are Integral Parts Of The State’s Spending Problems.  Like the state government itself, the state’s public school and higher education systems have a spending problem rather than a revenue problem.

The focus of the current state budget process is the public school system’s need to receive funding from the state to replace the property tax revenues lost from state legislature mandated cuts in the school districts’ property tax rates.  But apparently no one has ever bothered to properly analyze the situation and understand that the gradual increases in the property tax rates were mostly driven by the fact that the cost per pupil has escalated much faster than inflation.

Just a side note on property tax rates, theoretically, there should never be an increase in a property tax rate.  That is due to the fact that the two principal cost drivers, increases in population (or enrollment) and inflation, also are the two drivers in increased revenues (from increases in improved properties and property values).

Acknowledgement should made of the fact that the state’s contributed portion of the public school system’s revenues dropped from about 44% in the 1999-2000 school year to only 36% in the 2004-2005 school year (before the rate cut).  Therefore, the state’s failure to hold up its share of funding helped bring about the supposed revenue crisis.  Thus the new sources of state revenue instituted to underwrite reimbursement to the public school system for its lost revenues due to the rate cuts are, in part, merely covering the state’s past failure to meet its obligations to the public school system.

The state’s public universities are included in the state’s expenditures.  The public universities’ annual operating expenditures now exceed $15 billion and have continued to grow considerably faster than enrollment and inflation. 

Even though the public universities have recently been granted free rein in setting their tuition, the financial underwriting of their operations by the state’s general fund has only accelerated.  Such general fund underwriting reached $4.8 billion for the last completed fiscal year (2006), with over $2 billion going to the University of Texas System and $1.7 billion going to the Texas A&M University System.  Both of these systems are perpetual beneficiaries of the Permanent University Fund regarding their capital needs.  When is enough ever enough?

Incidentally, the huge increases in tuition at the state’s public universities are punishment enough of the students and their families.  But the commission should also look into the outrageous $100 plus that students must pay for each of their one-time-only-value textbooks, which are often written by the professor conducting the course.   

The finances of the state’s public universities have been hidden from public analysis for much too long.  The current state “revenue crisis” is a very appropriate time to perform such analysis, as well as an analysis of the finances of the state’s public school system.

In order to fully understand the state’s finances, the commission will need to not only analyze the state’s cash basis biennial budget versus cash basis actual revenues and expenditures but also analyze the state’s “real” financial statements, the Comprehensive Annual Financial Report (CAFR), which is prepared according to generally accepted accounting principles, wherein all assets and liabilities are reflected.  For example, it is only through understanding the CAFR that the commission will be able to see whether the state’s priorities are properly balanced between serving its public constituency versus taking care of the employees of the state, its public higher education system and the public school system.  It is also necessary to understand the CAFR in order to evaluate the state’s long-term debt, including employee post-retirement benefits.  

State law requires that the state budget and authorized revenues and expenditures be calculated on the cash basis of accounting.  However, one must read the state’s CAFR in order to fully understand the state’s finances.  Therefore, I recommend that the state comptroller’s office furnish the commission a reconciliation of the state’s total budgeted cash revenues and expenditures to the actual results numbers for the fiscal year ended August 31, 2006.  And then furnish the commission a reconciliation of the actual cash basis results for fiscal 2006 to the “real’ numbers in the Statement of Activities on pages 38 and 39 of the 2006 CAFR.

The commission will find some very interesting facts in reading the 2006 CAFR.  For example, the CAFR reflects the following net assets at August 31, 2006 (in billions of dollars):

  $90.2  Governmental activities-true core mission of the state
  $32.4  State public universities and colleges
$100.2  Teacher retirement system trust account (administered in trust by the state)
  $21.5  State employee retirement system trust account (administered in trust by the state)

Bear in mind that the latter three are funded in part by the state’s general fund.  It is very interesting to note the relative sizes of the net assets, particularly considering that the governmental activities’ $90.2 billion represents the state’s net investment in its true core mission infrastructure.

Summary

Based upon the history of the 1978 tax-cap amendment to the state constitution and the state’s spending insanity since 1978, it is evident that the voters need be allowed to approve another amendment to the state constitution.

The forthcoming amendment should, as a minimum:

  1. Set a very reasonable population-and-inflation cap on the state’s entire revenues (excluding federal revenues but including all other revenues, even those now specifically dedicated by the state constitution) with voter approval required before the cap can be exceeded in any given year.  By capping revenues, control will be exerted over all spending, whether for operations, debt service, capital improvements or otherwise.
  2. Require cap compliance certification by the state comptroller before a biennium budget can be approved by the legislature.
  3. Require cap compliance certification of actual financial results by both the state comptroller and the state auditor before the state’s Comprehensive Annual Financial Report can be issued for any fiscal year.
  4. Provide for enforcement of compliance and severe penalties to be levied on any state official who prevents or severely delays compliance.
  5. Provide for a reasonable (stated computation) rainy day fund and an emergency fund.  Voters must subsequently approve any legislature created emergency fund or it will be rescinded.

In the meantime:

  1. The 2008-2009 biennial budget (including funds for school property tax relief) should be frozen at the current budget level for the 2006-2007 biennium, to show that the state legislature is serious about getting state expenditures under control.
  2. To further demonstrate the legislature’s commitment, every legal Texan should receive a promptly delivered $100 sales tax refund.
  3. A special nonpartisan and nonpolitically connected commission of highly qualified members be immediately convened by the governor to analyze the current state budget and growth in state spending since 1978 and rapidly come up with fundamental and specific recommendations for curing the state’s spending insanity.
  4. I suggest that the commission chairman be Paul Burka of the Texas Monthly publication.  Its members should include: (a) the co-chairmen of the Texas legislative budget board; (b) the state comptroller; (c) the state auditor; (d) a representative from the American Productivity and Quality Center (Houston); and (e) three retired partners of Texas accounting firms who are expert in governmental financial accounting and reporting.
  5. The commission’s study should include analyses of spending by the state’s public school and higher education systems, as they are integral parts of the state’s spending problems.
  6. The commission should conduct a Texas city-by-city tour explaining their findings and their recommended constitutional amendment to permanently place control in the voter’s hands over the overall rate of growth in state spending.

 

Disclaimer from the author: This piece was written just before the legislature "solved" the school finance problem via the business tax.

 

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