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Thursday, February 27, 2020

The Budget, Part 2: Three Items to Cut

Good spending reforms can yield substantial gains in the budget. It is not that hard, actually.

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Actually, there are plenty of places in the state budget where the legislature could reduce spending, but for today let us focus on three.

Before we get there, though, let me repeat my point from last week:
The drift of sate spending from the General Fund to Other Funds suggests that we need to have a conversation not primarily about the amounts being spent - although that is of course an important component - but first and foremost about the functions of government. ... our lack of willingness to pay for functions of government is not based on selfishness, but on utter necessity. We know that paying more in taxes is unsustainable and unaffordable. We also know that the private sector is better at education, health care, welfare and almost everything else that government does. Going forward, we need a budget conversation that concentrates on the permanent reduction of government and the permanent protection of taxpayers from future tax grabs and overspending.
This is, without a doubt, the overarching mission for our legislature. Fiscal conservatives in both chambers have been trying to make this happen already in this session; to save Wyoming from a fiscal cliff, those courageous men and women need even more support going forward. 

As several legislators have already demonstrated, it is not that hard to turn the theory of fiscal conservatism into practice. To mention a couple ideas, I have provided my list of seven spending reforms to make Wyoming government fiscally sustainable, and Representative Chuck Gray has written a great TABOR bill that should spearhead any spending reform agenda. 

These are all structural reforms that would alter the role of government in our state's economy. At the same time, they can seem a bit abstract when viewed outside of the actual state budget. Therefore, let us review three items in the budget that illustrate overspending and put them in the context of structurally oriented spending reforms. 


1. School construction.


As I mentioned on Tuesday, Wyoming is losing population, and has been doing so for three years straight now. From 2013 to 2018, two out of three counties in our state lost population. Despite that, we continue to spend lavishly on school construction, and this biennium budget is no exception. Under Section 027, the budget appropriates $80.7m per year for school construction - and funds 29 state employees in the bargain.

This appropriations item has several problems attached to it. First, it is a prime example of the trend I mentioned last week, namely of how our tax dollars are increasingly spent through Other Funds, outside of the General Fund, and more or less put on autopilot. We see repeated efforts, every year, by legislators who want to perpetuate funding for Other Funds project - the school construction fund among them - without ever questioning the democratic soundness of this type of spending. The more money we move away from the General Fund, the less accountability there is in the state budget vs. those who pay for it. 

Secondly - and I will keep repeating this until someone explains why I am wrong - we are losing population. Why do we need to build new schools for $80 million per year when we are losing population? Imagine what $80 million could do for the improvement of our highways and other parts of our infrastructure. Or, better still, in the pockets of our hard-working taxpayers. 

Yes, I know there is a special formula for school construction funding, but that is basically just a technicality. At the end of the day, all tax revenue is just that: tax revenue. If the legislature wants to, it can send any dollar anywhere it wants to. It can just rewrite its rules and regulations for how to appropriate.

Which brings me to my third problem with Section 027 in the budget. Remember how they tried to sell us the corporate income tax on the premise that it would bring in just over $20 million in annual revenue? Well, if we instituted a one-year moratorium on school construction - one year - uno año - ein Jahre - ett år - we would suddenly have enough money in the bank to pay for everything the corporate income tax was supposed to pay for, four times over. 

The legislative tax hikers would not have to bring back the corporate income tax until 2024. I would imagine that Representative Obermuller and his tax hikers would like that. They could go through the next couple of elections without having to defend the indefensible - and all they would have to do is take a one-year break from building new school shrines in a state with a declining population.

Doesn't sound like too bad of a deal to me. Does it sound like too bad of a deal to you?

Imagine what school choice would do to this $80m annual spending on school construction. Imagine when Wyoming kids start homeschooling more, or going to private schools that find their facilities on the open real estate market. Imagine when banks start dealing directly with private schools for funding modest but cost-wise appropriate buildings for private schools. Imagine when landlords around our state can start leasing existing facilities to schools. Imagine when more parents choose homeschooling and form networks that don't even need school buildings.

Imagine if we coupled this school-choice reform with a reform that decentralized school construction funding for the public schools as well. What if a school district bonded its construction projects? What if local residents could buy bonds that yielded, say, two percent per year? What if the school district had to explain the need for a new building, and instead of just asking the state government to grab our money, it had to actually make us an interesting, compelling offer? 


2. Medicaid. 


This biennium budget appropriates an annual $724.7 million for Medicaid. This is split into $347.6 million in in-state money (most of which comes from the General Fund) and $377.1 million in Federal Funds. The split is almost 50/50, as it has been for many years now. 

There is a troubling cost trend in Medicaid that we cannot ignore anymore, especially not in view of the efforts to get Medicaid Expansion passed. As recently as in 2016, total Medicaid spending here in Wyoming amounted to $596 million, split into $301 million from in-state sources and $295 million in federal money. In other words, the appropriations in the budget currently before the legislature amounts to a 21.5 percent increase in Medicaid costs - in four short years. 

Disregarding federal funds, our state is spending more than $1.25 on Medicaid in this budget, for every $1.00 it spent in 2016. 

This is an entirely unsustainable cost trajectory. The federal government will not have it much longer. The worry about the trillion-dollar deficit is rising fast in Congress, especially among Republicans. We can only hope that Congress works with President Trump on his 2021 budget, which charts a mild and prudent path back to a balanced budget; if they don't, there is a fiscal cliff heading our way. If we get there, we will see spending cuts - real, hard and unforgiving ones - of a nature no American has yet experienced. 

Think Greece, where health care, prescription-drug subsidies, housing subsidies, welfare, unemployment checks... everything was cut by 50-90 percent in a few short years. Even if it doesn't get that bad, it gives us a hint of what we are looking at if we choose to do nothing.

Wyoming can easily be proactive here. We can implement vouchers for those who are on Medicaid for general health insurance - a system that would incentivize Medicaid enrollees into getting a cheaper plan with more features on it than they have today - and we can create a charity-compact system in long term care. 

This last reform is built on a model I developed for welfare programs in general, but it is highly suitable for long-term care in a state like Wyoming. 

Done right, these reforms could lower the cost of Medicaid by at least $150 million annually. The savings potential is much higher under the Republican Study Committee plan for health care reform. 


3. The University of Wyoming.


If the budget now before the legislature becomes law, it will spend $223.4 million per year on the University of Wyoming, over the next two years.

In 2018 the university got just over $186 million in taxpayer money. This represents an increase of almost seven percent per year. 

Have you gotten a seven-percent annual increase in pay and benefits over the past three years?

In its budget for FY2020 the university budgeted for $352.5 million in total revenue. Of that, $208.9 million would come from taxpayers - in other words 59 cents of every dollar they spend - and only $72.4 million, or two dimes to the dollar, from tuitions. 

This is an imbalance that has only been exacerbated over time. A few years ago, when I wrote a plan for how to privatize the university, the tax share of their revenue was still a hair below 50 percent. 

There are so many problems with the appropriations for the university that I will refrain from listing all of them, lest I demand your attention for the remainder of the week. Let us restrict ourselves to two:

a) Ideology 

With tuitions funding only one fifth of the university budget, we are on the verge of a single-payer college system here in Wyoming. It is almost as though tuitions have become an afterthought in their finances. 

I grew up in Sweden, which has no private universities or colleges whatsoever. Tertiary education is "free" in the sense that you don't pay tuitions, but you pay for room, board and everything else. Education is also highly controlled by government, run top down by tax-paid bureaucrats whose tool for dictating course offerings, research agendas and every other aspect of higher education, consists of the power to appropriate. 

More to the point: do we really believe that it is the taxpayer's duty to fund higher education? Doing so means economic redistribution, and a perverted one at that. Imagine a family with two working adults who did not go to college. Their kids want to roll up their sleeves and get jobs right out of high school. They have no interest in going to college. This family pays property taxes, sales taxes, excise taxes; their employers pay taxes, funded by the work that their employees do but cannot get paid for since the money goes to pay taxes. Those taxes then go to fund a university where students become lawyers, accountants, engineers and teachers, all of whom will make more money than a family where the parents have no college degree.

Is this ideologically fair? No, of course not. It is far more reasonable that students who want to pursue a higher education pay their way through college themselves, through their parents' savings, student loans (which I had to take, even though college is "free" in Sweden) or by earning grants and scholarships. Going to college is an individual choice, something you earn the right to do. It is not an entitlement.

b) Academic quality

Currently, in the U.S. News and World Report's ranking of national universities, the University of Wyoming is tied for 228th place. That is effectively rock bottom as far as rankings go. 

We as taxpayers should be worried about what we are getting for the money. Our concern is extra valid given that we are being asked to fund almost 60 percent of the university budget. We have the right to ask them to do better than that.

Or we can simply privatize the university. Private universities generally rank much better than their public competitors; the highest-ranked public university, the UCLA, comes in at 20th place on the U.S. News list. It is worth noting that the UCLA gets less than seven percent of its funding from the state; in my paper on privatization I reported that the University of Michigan - another top-tier public university - got approximately five percent of their funding directly from the state government.

Even if we do not go as far as to privatizing our university, we have to put a foot down and ask them to start doing a better job at raising their own money. A simple way to do this is to turn the state appropriations into a matching grant: for every $1 they raise from tuitions, donations and private research grants, they get $1 from taxpayers. But the private money has to come first. Given that their total budget is less than $360 million, this should save taxpayers a handsome amount of money.


Summary


If we implemented school choice and thus got rid of state funding for school construction; if we went for Medicaid vouchers and long-term charity compacts; and if we matching-granted funding for the university, we would be looking at savings to taxpayers of roughly $250 million - in one year. However, over time the savings would be much larger: the growth trajectory of government-funded spending programs is always steeper than it is in the private sector where competition, innovation and marketability keep costs in check. 

In other words, we would not only reduce costs upfront, but we would protect taxpayers against unpleasant surprises going forward. This would create a more stable, more predictable economic environment in our state, which in turn would retain more businesses, attract more investors and entrepreneurs from out of state, and put us on a growth path like the rest of the country.

All we need to do is change the way we go about government funding: from asking the taxpayer to pony up whatever government needs, to a conversation where we ask what taxpayers can actually afford. 

That's not too much to ask, is it?

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