Despite cuts, South Carolina's budget woes will persist in 2011
The last time the state's budget was this small, gasoline cost a buck a gallon and South Carolina had a half-million fewer residents.
That was in the fall of 1999, when George W. Bush was running for his first term as president and the Internet stock bubble had yet to pop.
Now, more than a decade later, we've been through two recessions and just about everything costs more -- fuel costs have more than doubled, college tuition has nearly tripled, health care has soared.
Paying this year's expenses on a turn-of-the-century paycheck would be tough for anyone, and the state is no different.
The nearly $2 billion in belt-tightening since the recession began has cut the budget by more than 25 percent, and that means less funding for everything from state universities to AIDs medicine, and forget about extras like replacing the state's ancient school buses.
Next year, the state budget will plunge again, falling to mid-1990s levels, as the federal stimulus money propping up the state runs out.
Considering that half the state's general fund is spent on education and most of the other half goes to health care, social programs, police and prisons, the impact on services people rely on seems inescapable.
The repeated budget cuts raise the question: What is the minimum amount of money the state needs to provide adequate, basic services?
Democrat Vincent Sheheen and Republican Nikki Haley, the major-party candidates for governor, said the state will have to make the most of the money that's available, and neither supports raising additional revenue through taxes.
"We can't keep funding everything at the levels of two or three years ago," Sheheen said. "We can't keep funding everything, period."
Haley suggests that there is wasteful spending yet to be eliminated, and she proposes further tax cuts.
"If we look at reducing small-business income taxes, companies will come and create jobs," she said. "If we level out the property taxes, investors will come."
Haley in August said she would support taxing groceries in order to free up money for business tax cuts.
Sheheen said there is a need for tax reform, particularly regarding the property taxes that fund local governments and schools. He said that the property tax changes in Act 388, which he did not support, destabilized school funding and unfairly shifted the burden to businesses.
Act 388 exempted owner-occupied homes from property taxes for school operations, raised the statewide sales tax to replace the revenue and created a system where recently-sold properties get higher tax bills than properties that don't change ownership.
"If we don't fix the property tax system, that will harm businesses' ability to grow," Sheheen said. The 10.5 percent assessment rate on industrial property is particularly not competitive, he said, and creates an unfair situation where some businesses pay that rate and others don't because of economic development incentives.
But when it comes to cutting taxes that fund state programs, Sheheen said, "I don't think the state has room to reduce revenue."
Tax cuts
South Carolina has had a knack for boom-and-bust budgeting and a bad habit of cutting spending when the economy could use some help, spending more and cutting taxes when the economy is doing well all by itself, and not saving for the bad times.
It's easy to look at state budget documents and see when recessions hit because that's when the state stopped buying school buses and slashed funding for school supplies.
Shortly before the most recent recession hit, state lawmakers agreed to eliminate the lowest income tax bracket, reduce taxes on small-business income, and eliminate the sales tax on groceries. Those three tax cuts now cost the state an estimated $600 million every year.
Lawmakers also agreed, under pressure from coastal owners of high-priced homes, to pass Act 388, rearranging the tax burden for funding schools.
The result of that plan has become much-criticized because of the way it shifted taxation to businesses, but the plan also harms the state budget every year because the additional sales tax hasn't covered the mandatory payments the state makes to school districts to replace the lost property taxes.
The state now has what budget wonks call a "structural deficit." That means the tax base is inexorably shrinking, while demand for the services that account for most state spending -- schools and health care -- is growing because there are more children in school and more people on Medicaid.
Increasingly reliant upon consumer-driven sales tax revenues, state finances fell off a cliff when the recession hit. One option a state tax commission is considering recommending to the General Assembly is to shift sales taxes to items people have to buy, such as water, electricity and medicine.
Sheheen and Haley are hesitant to embrace the Tax Realignment Commission plan, which still is being developed.
"I'm not a big believer in commissions and committees," Sheheen said, "but I do think their work could help us develop our own proposals."
Limiting spending
South Carolina has smaller government, lower taxes and far less spending than it did just a few years ago, but voters keep hearing politicians talk about the need to limit spending.
On the Republican primary ballot in June, voters were asked if they would support legislation limiting state spending growth to match the smaller of the growth in personal income, or the combined growth of population and inflation.
Nearly all the GOP primary voters -- 92 percent -- approved that resolution.
Sheheen said people tend to confuse the growing federal budget with the shrinking state budget. He said that to understand the historic nature of the state's budget crisis, "You only have to look at the number of teachers and highway patrolmen who have been laid off."
The reality is that spending has not kept up with population growth and inflation. Spending amounted to $1,275 for every state resident in the 1999-2000 budget, and $1,109 today, and a dollar buys a lot less today than during the dot-com era.
Fuel, for example, is far more expensive than it was in 2000, and every 8-cent increase in a gallon of diesel adds $1 million to the state's cost for keeping school buses on the road.
An analysis by The Post and Courier found that if state spending had kept pace with inflation and population growth, the budget would be $7.6 billion today instead of $5.1 billion.
"It's not what you spend, it's how you spend," said Haley. "It comes down to, what are our priorities, and how do we come out stronger?"
"This is a chance to get creative and reform our agencies," she said.
The state already has a constitutional spending limit based upon personal income growth, and has not come close to approaching that limit.
Sheheen and Haley said that it's time to get out the scalpels, when budget cuts are needed, and stop making across-the-board spending cuts regardless of merit or efficiency.
Regardless of any plans by Haley and Sheheen, the state will need to make deep budget cuts again in 2011. That's because about $1 billion in federal stimulus funds propping up state finances this year will have been expended.
Knocking an additional $1 billion off the state budget will take it back to where it was in 1995, and as bad as that sounds, it's worse, because the state is running out of things to cut.
"Many state agencies have budgets reduced to 'threshold levels' where additional cuts will trigger federal intervention and mandates or effective closure of those agencies," said Mike Shealy of the South Carolina Senate Finance Committee, in a written presentation to the state Health Care Coalition.
The Department of Corrections and the Department of Juvenile Justice are among "threshold level" departments.
Some state departments -- agriculture, insurance, commerce, consumer affairs, budget and control -- already have seen their budgets slashed by more than half.
The General Assembly has been busy forming committees to consider budget problems.
The Tax Realignment Commission is reviewing the tax structure, the State Agency Restructuring Study Committee is considering government efficiency, and there's talk of creating a Streamlining Commission and Council on Efficient Government.
"The reality is, we can't afford what we've got," Senate President Pro Tem Glenn McConnell, R-Charleston, said this month.
The state's largest expenses are education and health care. Additional education cuts likely would prove unpopular. Federal regulations make it difficult to cut Medicaid. And the remaining 20 percent of the state budget, which includes law enforcement and prisons, can't be trimmed enough to plug the expected holes.
The hangover
The previous recession ended in 2001, lasting eight months, but state spending on public services fell for three years, until the summer of 2004.
The current recession began at the end of 2007 and, according to the National Bureau of Economic Research, officially ended in June 2009. State budget forecasts, however, predict that revenues will decline until at least 2012.
"The facts are what they are. The revenues are going to be what they are going to be," Haley said. "We're going to have to do what every household and business in South Carolina is doing, and that's live within our means."
To put the state's situation in household terms, imagine a family whose income dropped from $70,000 a year in 2008 to $50,000. They have a mortgage to pay, rising health insurance premiums, and school tuition that keeps going up, but they know their income will drop to $40,000 next year.
"I think that, long-term, the only way you are going to see a budget rebound is through increased economic activity in the state," said Sheheen, who said the next governor will need to play a hands-on role in economic development. "We need to get involved."
Haley said the state will need to spend its money on the things likely to produce economic benefits.
"When your revenues are down, the last thing you cut is your advertising, so we need to make sure the Commerce Department is strong," she said. "We need to strengthen our technical colleges."
The nagging question is: Where will the money come from?
It's no surprise that things cost more today than they did in 1999:
1999 / 2010
A gallon of gas $1.00 / $2.65
A home in Charleston County $152,000 / $263,000
Annual College of Charleston tuition $3,520 / $10,314
...but the state is spending less now, per person, than it did then:
1999 / 2010
State spending $5.1 billion / $5.1 billion
SC population 4 million / 4.6 million
SC spending per resident $1,275 / $1,109
Reach David Slade at 937-5552.
