The Aaron Harber Show

Aaron's Real Opinions (Yikes!)

Budget Quandary Part I: Changing TABOR
03-05-03

Unlike any time in recent memory, the front page news of Colorado’s newspapers and the leading stories on television and radio are dealing with what most Coloradans have traditionally perceived as a dry and boring topic – the State Budget. Now at $14 billion a year, with $6 billion of that being General Fund monies (i.e., funds the State Government actually controls and makes all spending decisions about) and the balance coming from transfers made through the State, primarily from the Federal Government (e.g., for Medicare funding, federal highway funding, et cetera), the State Budget’s growth based on tax and fee revenues has been slowed to a crawl and, in some areas, shifted into reverse due to our stagnant Economy.

As programs compete for increasingly scarcer funds, Colorado’s government is faced with the task of deciding which endeavors get funded and which see the dollars allocated to them reduced or, in some cases, eliminated altogether. Wholesale programs now are in jeopardy. Many politicians on both sides of the aisle concede the "fat has been trimmed" long ago from the State Budget and we are seeing "muscle and bone" being cut. And it appears more surgery will be necessary in the coming months or even years, especially if the Colorado Economy fails to turnaround.

Over the past two budget years, the General Assembly has been facing the challenge of how to manage ever-increasingly tighter funds for the State of Colorado Budget. Increased tax revenues not only have failed to meet projections but actually have fallen. The State’s tax cuts in 2000 were based on the erroneous assumption that the high-flying Colorado Economy would continue to soar indefinitely. The cuts were a terrible mistake not only because the assumption of eternal growth was wrong but because the State no longer can elect spend as much as it needs to if it wants to "catch up" after a bad year, revenue-wise. The Governor and General Assembly took almost $500 million a year in resources away from the State Government -- accounting for half of the potential deficits now faced each year by the State. Any objective review of this change has to conclude it was a mistake, however well-intentioned by politicians seeking to "give people back their own money."

"Giving people back their own money" sounds good and most voters like the concept but it rings hollow. If we want good roads to drive on, if we want children to be educated, if we want the elderly poor to have adequate medical care, if we want public libraries, if we want a well-functioning criminal justice system, and similar activities of government, we have to pay for them. Taking money away from the Departments which provide these services and then demanding more services from them doesn’t work – or add up -- from a budgetary perspective.

The problem Colorado has is that, unlike most states, it is unable to respond to budget crises with tax increases -- even modest ones. This problem is uniquely attributable to the Taxpayer Bill Of Rights, a constitutional amendment passed by voters over a decade ago in 1992. (As a matter of full disclosure, in 1992, I publicly supported and voted for the TABOR and still believe its basic principles make sense.) While the TABOR limited annual increases in government spending to a maximum of 6%, it also had another effect which was not as seriously considered when voters went to the ballot box over a decade ago. That feature was a restriction which said, once taxes are cut, they can only be restored by a vote of the people.

In the past, if the General Assembly passed a tax increase or a tax decrease and it created a problem, it had the ability to correct that problem in the next legislative session. This no longer is the case. If the General Assembly and the Governor join forces to cut taxes, as they did in 2000, and their decision needs to be adjusted, under TABOR, they do not have the authority to make any correction. Instead, the TABOR requires they go to the entire electorate of the State and ask for that correction. Hence, tax reductions can be accomplished by State Government but tax increases – even if they are corrections of previous decreases – can only be approved by a vote of the people.

The situation is akin to a boat captain who can steer to the right any time he or she wants but is not allowed to steer to the left without going through a lengthy, time-consuming approval process from company management. When a crisis occurs, the need for an immediate course correction cannot be met. That is what has happened with the ship of state in Colorado. Of course, pro-TABOR forces could argue that, if a tax increase is necessary, the Governor and the General Assembly should put it on the ballot this Fall. The odds are neither has the courage to do that and, instead, will elect to cut the Budget further.

One possible amendment of the TABOR would be to give the State Government a window (such as a five-year period) to make corrections in any tax decreases which were legislated. That would preserve the basic premise of the TABOR – i.e., to restrict net tax increases by requiring a public vote -- but would provide for corrections of mistakes made by our elected officials.

What this restriction also does is make it impossible for Colorado to take advantage of good years in which the Economy is booming and tax revenues are pouring into the State’s coffers. The State does not have a "Rainy Day Fund," which could give it some flexibility in lean years. If the State were allowed to create such a Fund and have the equivalent of up to 25% of the entire State Budget in a true reserve fund (i.e., one which could not be easily "raided"), that Fund could grow via interest, dividends, and appreciation of its inves™ents. Over time, it could become large enough to cushion the State against most Budget ills – all without a single tax increase.

Unfortunately, the TABOR fails to recognize the cyclical "Boom and Bust" tradition of Colorado’s Economy. By allowing the General Assembly to reduce taxes but then making it very difficult to raise them back up to even previous levels, the TABOR has the effect of ratcheting down tax revenues.

This ratcheting process also occurs due to the 6% annual spending increase cap. That is, if spending is cut 12% in a bad year and the next year is good, the State Government cannot increase the Budget back to its previous level. It only is allowed to increase the next year’s Budget by 6%.

When real numbers are examined, in this example, the allowable increase is less than half of what would be necessary to get back to the old Budget level. For example, if you had $100 in spending in Year 1 and had to reduce it by 12% for the next year due to a decrease in income or revenue then, in Year 2, you would have $88 to spend. To get back to $100 in Year 3 would require $12 or almost a 14% increase over the $88.

If you were limited to a 6% increase, however, you only could go up by $5 to $93 in Year 3, and another $6 in Year 4 to $99. In Year 5, you could up another $6 to $105 but the odds are you would not even have covered inflation during that span. So, the one mistake made in Year 1 could take four or more years to correct, due to the limitations of the TABOR. This is why the TABOR has a double-whammy effect on the State Budget.

Was the TABOR a mistake? The answer is, "No." What created the current problem was poor planning by the State Government, short-sighted political gains sought by elected officials seeking to please the electorate in the short term, and a poor Economy few anticipated. These issues will be addressed in the next installment of this tripartite series.

Budget Quandary Part II: The End of Game-Playing
03-05-03

After a recent rare joint session of all 100 elected members of the State Senate and State House, both Republicans and Democrats left shaking their heads and wondering how their own Joint Budget Committee ("JBC") – consisting of three Senators and three Representatives, with the majority party in each chamber selecting two of the three members so the Committee now consists of four Republicans and two Democrats) was going to complete $849 million in cuts for the current Fiscal Year (July 1, 2002, through June 30, 2003) and then possibly face as great a set of additional cuts (yes, possibly another $869 million) for the coming Fiscal Year (July 1, 2003, through June 30, 2004).

If the Colorado Economy continues to stumble, even those near billion-dollar numbers may not be enough to keep the Budget in balance for both this Fiscal Year and the next. Reports come in daily tracking revenues and expenditures, and those are looking more glum every day. In Colorado, unlike the Federal Budget, the State Constitution requires the State Budget be balanced every year. Although some could argue a number of budgetary games are being played – especially right now – it is fair to say the State Budget has greater transparency (i.e., you can see what really is going on) and has fewer accounting tricks being used compared to the Federal Budget and that budgeting process (which approaches the status of a total sham).

This year, as it did last year, the JBC and the General Assembly as a whole, were able to use a number of accounting games to help smooth over much of the potential deficit problem. Transferring funds out of certain accounts – including those reserved for specific purposes unrelated to the transfers – was done to an extreme and has risen to the level of being questionable, if not altogether inappropriate. In a "Pay me now or pay me later" scheme, the General Assembly shifted the Fiscal Year-ending payday for State employees by one day. This accounting trick saves almost $100 million in the current Fiscal Year but then loads that extra $100 million onto the next Fiscal Year. Eventually, the Day Of Reckoning will arrive. It may already be here as the opportunity to juggle accounts lessens every time one of these accounting tricks is used.

An interesting impact of the severity of the Budget Crisis has been the potential for greater bipartisanship in the Legislature. As members of both parties come to understand the seriousness of the situation, they are rolling up their sleeves and trying to work together to tackle perhaps the biggest challenge most of them ever have faced as public officials. And they have to link arms just to protect themselves from the swarms of lobbyists, each with a different set of priorities about which programs should be preserved and which ones should be cut.

In most arenas, the primary components to the Budget Crisis are presented as including (1) the Taxpayer Bill Of Rights ("TABOR"), which hamstrings the State Government and restricts its flexibility to respond to crises, (2) Constitutional Amendment 23, passed by voters in 2000, which requires annual increases in funding for K-12 education no matter how much money actually is available, (3) the property tax break for senior citizens, which is costing the State about $200 million a year in lost revenues, (4) the Gallagher Amendment, which was put in place years ago (authored by Dennis Gallagher) and which imposes a tax rate 100% higher on commercial real estate compared to residential real estate, (5) the federally-mandated costs imposed on Colorado, and (6) the demands of providing basic services to Coloradans and their above-inflation increase in cost (such as for prisons, whose budget outstrips inflation by a wide margin).

As described previously, the TABOR needs to be slightly modified but wholesale changes aren’t needed. Amendment 23 probably needs to be adjusted to take into account "bad years" – i.e., when new revenues just aren’t there. In exchange for that adjus™ent, Amendment 23's time-frame could be lengthened so its original goals would remain in place. Even a separate "Rainy Day Fund" for Amendment 23 might make sense.

The senior citizen property tax break needs to be modified. It should be means-tested (i.e., you should get the tax break only if your family lives below the Federal Poverty Line). If it were to apply only to needy seniors -- i.e., those below a certain income and net worth level -- it would accomplish its true purpose. Why should Coloradans subsidize seniors who are millionaires? The problem with this program is politicians were gutless when it was proposed and feared appearing "anti-senior." It was a perfect example of a special interest proposal which had little merit. And if a multi-millionaire property owner gets to avoid taxes and then sells his or her property at a huge profit, shouldn’t those deferred taxes at least be paid at that time?

The Gallagher Amendment is of questionable value today and also skews the economic system. If I own a house worth $200,000 or if I own a neighborhood store worth $200,000, why shouldn’t I pay real estate taxes on each property based on the value of the property? Given that residential properties dwarf commercial properties in number and overall value in the State, why should commercial enterprises bear such a disproportionate burden? Plus, if we want to encourage economic growth, the last thing we should do is tell commercial property owners they need to pay twice as much in taxes. And just think how much easier the system would be if taxes and tax rates were based on a property’s actual value (and game-playing could be eliminated on the assessment front, too).

As far as Federal Government mandates are concerned, we need more leadership from our nine elected federal officials. They represent less than 2% of the U.S. Congress (i.e., 435 members of the House and 100 members of the Senate) but they have to have colleagues who feel the same way. This is a critical issue because Colorado’s Budget – and the budgets of most states – are dominated by federal mandates, imposed by both Republican and Democratic Congresses and Administrations who fail to provide adequate funding for the requirements they impose on us.

And, finally, perhaps it is time for us to reassess what we, as voters and citizens, have a right to expect from our own State Government. Maybe we, too, have been demanding more than can reasonably be done. Perhaps it is time for us to become less dependent on Government and stop looking to the Government to solve all our problems. Maybe it’s time we took on greater responsibility ourselves. That will be the topic of the last part of this series.

Budget Quandary Part III: Rethinking Government
03-05-03

With revenues falling, costs increasing, federal mandates squeezing, and special interests shouting, Colorado’s State Government finds itself in a position of not having enough funds to do as much as it did the previous year. The State Government has played almost every accounting game at its disposal and there no longer are any shells which can be moved around. Perhaps it now is time to step back and reconsider what the role of Government should be? Perhaps there are tasks Government has taken on which it now should shed? Perhaps there are better, more efficient, less expensive ways to accomplish the same goals?

Without question, many government activities are vital to the health and safety of Colorado citizens. These functions need to be preserved. But, as Government has evolved at all levels, its theme has been "Should we do it" or "Can we do it?" more often than not. That is, Government has seen its role as identifying what it believes are important functions and seeking ways to better serve the people by performing those functions. This inevitably leads to an ongoing expansion of Government.

Almost everything Government does is positive – or, at least its intent is positive. Every Government function is meant to be beneficial and most are. But Coloradans now need to ask two questions in an effort to better define and refine the role of Government. No longer can Government afford to simply "do good" – to simply identify and address a problem because it has the capacity to do so. First it must ask and answer today’s most critical questions.

(1) "Do We Need To Do This At All?" This is probably the most important question which needs to be asked. Let’s look at government programs and see if the State Government really needs to do everything it is doing. Can we separate government programs into two categories – those we absolutely have to have (such as police and fire protection) versus those we want but can survive without (e.g., the Lieutenant Governor’s office, new State administrative building construction, direct subsidization of certain programs such as higher education)?

A concerted effort on this front could save 20% from the General Fund portion of the State Budget. Given the Budget crisis, the General Assembly is likely going to have to adopt this perspective whether it wants to or not. It can be helped, however, by distinguishing between all the good things we want Government to do and what we really absolutely need it to do. As citizens, we have become too spoiled and look to Government to do far too many things for us. It’s time we were weaned away from our dependence on Government. Now is the time to begin that process.

(2) "Is There Another Way To Achieve The Same Goals?" After the first question has been asked and if it is answered affirmatively for a program, the next question is to determine if there is a better way to accomplish the now-deemed necessary objectives. This is where most solutions can be readily found. It calls for a whole new approach to Government but one which can provide immediate answers. One concept is to let those who benefit from a government program pay for it and, if they can afford it, pay a little more so those who are less fortunate can share some of the same benefits.

For example, the State should promote the construction of more toll-roads and impose a small extra charge on operators and drivers. This, in turn, could provide additional revenues for all roads – which require billions of dollars of upgrading today but are severely short of funds -- and give less fortunate drivers some benefit from the restricted road system (in addition to the benefit they receive when some traffic goes elsewhere). The State should increase the gasoline tax and dedicate those new funds exclusively to transportation system improvements – hence most benefitting the people who are paying those taxes. If the State added 25 cents to all tolls and if it added 50 cents to each gallon of gasoline, Colorado’s transportation problems would be solved permanently and the use of State General Funds (which are minimal) could be eliminated. We would be able to build all the roads, repair all the highways, and build mass transit systems with those funds (and available federal assistance, of course). And, after all, those of us who are driving would pay these costs and get these direct benefits.

Similarly, the State should jettison its direct support of Higher Education, freeze spending, and immediately allow all the State’s colleges and universities to set their own tuition rates and seek other ways of generating funds. Let them be totally independent of the State. The State’s proposed voucher system for Higher Education students makes sense and will allow every deserving student the opportunity to attend college. And the institutions of Higher Education who offer superior programs should raise their tuition rates substantially so they can pay for their own budgets – including being able to fund sizable increases in scholarship resources. In this manner, as private institutions already do, the wealthier students who are tuition-rate insensitive (i.e., whether tuition is $15,000 a year or $30,000 a year does not matter to them) can help pay for a greater proportion of the institution’s costs. Keep in mind, even full-rate paying students today are not paying 100% of the cost of their educations. At some schools, tuition covers less than a quarter of the actual cost of a student’s education. That gap needs to be narrowed. Given the economic value of a college education, this is a reasonable demand. Why should taxpayers subsidize a student from a family worth millions of dollars? Let these people pay their own way. They can afford it and they don’t mind paying. It’s silly public policy for the State to continue to subsidize millionaires, especially during a budget crisis.

Another approach is for the State to begin substituting severe penalties and fines in place of costly regulation. If a speeding ticket or a littering violation costs $250 rather than $50, the need for enforcement will drop. And we need to recognize the true cost of enforcement and have penalties reflect those costs. Today, penalties and fines typically cover only a fraction of the true costs of enforcement. We need to move towards covering all those costs. If you get charged with reckless driving and are found guilty, take a law enforcement officer’s time, and take the time of the judicial system, the true costs of that process – probably on the order of $250 to $500 – should be reflected in the size of your penalty. Perhaps a "Penalty Plus Real Cost" system needs to be implemented. Charge a convicted offender a $50 fine plus $250 for the costs incurred by the system. Revenues likely would go up but violations would go down.

In a similarly Machiavellian approach, if you cheat on your taxes and the penalty is $25,000 per material violation or 300% of the tax difference -- whichever is greater -- few people will cheat anymore. That would reduce the need for audits and would increase needed tax revenues without raising tax rates. (And, yes, let’s have a one-month amnesty period when people could file back taxes without any penalty. When people can file past due taxes without penalty, it typically generates a solid, albeit one-time, increase in tax revenues.) And if penalties for violations of most crimes – including white collar crime – are greatly increased and focused on monetary assessments, the State could see its revenues increased while its regulatory staff would not have to grow at all.

Similarly, the Judicial System should be freed from its current constraints. Filing fees are ridiculously low. They should be increased substantially and new fees should be imposed on every single filing a party makes in a case (e.g., $25 per filing plus $2 per page of material submitted). If this were done, there would be less paperwork filed by attorneys and the Courts would be completely self-sufficient and would not require any subsidy whatsoever. Heck, they could become profit-centers for the State (or, better yet, any excess funds could be used
for Victim Restitution).
At the same time, the General Assembly could reduce the demands being made on Government agencies. For example, in the case of the Courts – which have grown so much that judges handling hundreds of cases at the same time simply cannot do the quality job they want to do -- one possibility is to require that all disputes valued under $100,000 be sent to Alternative Dispute Resolution (i.e., first to mediation, where a settlement is sought, and then, if that fails, to binding arbitration). This would speed justice, keep more parties in an amicable mode, reduce everyone’s costs, turn attorneys into problem-solvers (rather than fight instigators), and leave the Courts with just the larger, tougher cases. Additionally, all family law cases (such as divorce) also could be sent to ADR rather than to the Courts – which are totally ill-equipped at dealing with these crises, which are more emotional than legal in nature. This reform would reduce the demands on the State’s legal system by 50% – meaning there would be no need to increase the judiciary’s budget for years to come.

One of our greatest costs is the State prison system. The Department Of Corrections costs us half a billion dollars a year. We should switch our penalty system over to one of restitution of victims and the State. Make offenders work more to pay back their debt to Society. Pay that debt back with money, rather than prison time, whenever possible. Make offenders pay for the annual cost of their incarceration whenever possible (and really pursue this). Incarcerate only those who pose a physical threat to others. For the vast majority of prisoners, the State should work to make them productive, tax-paying members of Society. Put them on the plus side -- not the minus side -- of the ledger. Make them do extensive public service, make them contribute to the system into which their crimes brought them. Having them sit around in a prison – costing us $30,000 a year – is a waste for everyone. Instead, put these people to work.

And, speaking of prisons, the concept of privatization can be a good one. We should look at opportunities for privatization while recognizing that certain functions of Government cannot be privatized. Furthermore, one cannot assume the Private Sector will always do as good a job compared to the Public Sector so issues of accountability and oversight remain important. But this doesn’t mean we should not try and see where it makes sense for the Private Sector to take over some Public Sector functions. We just need to be thoughtful and careful.

When it comes to the costs of Growth, the State should enable municipalities to be able to require new residents to do more to help pay for the new schools that need to be built as well as the costs of new roads and utilities. The State should not restrict Growth but should create incentives for Growth to pay its own way. Impact fees need to be raised considerably but builders and developers also need to be given the opportunity to creatively solve problems to mitigate the costs of Growth.

The State also should look at who should pay for certain costs. New cigarette taxes could be dedicated to paying for the health care costs incurred by Government which are attributable to smoking. Stop forcing taxpayers in general to subsidize the health of smokers and add $1 to each pack of cigarettes. At the same time, if people want to smoke, that should be their right. We need to stop harassing smokers all the time. But the costs of that vice – whether it be in the form of direct subsidies by the State to health care facilities tending to the needs of now-ill smokers or in the form of indirect subsidies by all of us who pay higher health insurance premiums to meet the needs of diseased smokers – should be paid by the smokers themselves.

This "Pay your own way" concept is important and should be applied across the board. If there is a program which benefits a particular group, let that group pay for it. If the Government can play a role in facilitating a good program, that is fine but just make certain those who benefit the most from it are the ones paying for it. If farmers want a Department of Agriculture or if one is needed for regulatory reasons, those of us who farm should pay for it. If natural resource providers need to be regulated, that Department should be funded by those special interest groups via taxes and fees on their products, services, and operations. If businesses in tourism want a "Tourism Tax" to fund promotion, the Government can collect it but let those who benefit directly from it pay for the promotional program.

Besides achieving fairness, the other advantage to beneficiaries paying their own way is that they will serve to ensure programs are being run effectively and efficiently because it is their money being spent. Most businesspeople are more than willing to do this. They are ready and willing to accept responsibility for these programs and are dedicated to making them successful. In essence, the theme should be to make Colorado’s State Government self-sufficient and funded on a program-by-program basis by those who benefit the most from it.

Last but not least, we also need a more concerted effort to get more money from the Federal Government. More attention needs to be paid to how well we are doing on that front and how good a job our nine federal officials are doing to secure those funds for us. And we need to do everything possible to ensure that federal mandates come along with the real dollar resources needed to implement them.

If we adopt the preceding approaches, we can work out way out of the current budget crisis and have a better-functioning Government for everyone. With these philosophies and tactics, Colorado’s Budget and its Economy can get "back on track." It will take new approaches and creative thinking – as well as the assumption of new responsibilities by all of us – to succeed in the coming years. It’s a challenge all Coloradans can accept.