Solving boom-bust budget puzzle

The wholesale reductions in public services that South Carolina is suffering through would have seemed unfathomable before this recession, but years of additional budget cuts are now likely.

Unless significant additional revenue materializes, through policy changes or a surprising economic recovery, the state will be unable to maintain even the much-reduced level of services that followed roughly $1 billion in budget cuts.

That forecast from the Office of State Budget, showing large budget gaps through at least 2011, sets the stage for a contentious debate over spending and taxes.

The outcome could determine for years the level and quality of the basic public services that consume most of the state's general fund: Education, health care and public safety.

"Whatever your politics, the government is getting smaller," said John Rainey, chairman of the state's Board of Economic Advisors.

The "T" word

The Republican lawmakers who control the House, Senate and governor's mansion have set their sights on spending caps, rejecting the idea that large tax cuts in 2006 and 2007, worth more than a half-billion dollars this year, contributed to a projected shortfall that's roughly the same size.

"During past economic downturns, our refusal to raise your taxes resulted in an even stronger economic rebound," House Speaker Bobby Harrell, R-Charleston, said in October as the S.C. Legislature approved $488 million of the 2008 budget cuts. "Again, this restraint should greatly assist in strengthening our state's economy."

Some in the Legislature's Democratic minority say tax cuts went too far, but that this isn't the time to consider undoing them or raising other taxes. Both parties have expressed interest in reviewing existing sales tax exemptions.

"We've tax-cut our budget to the point where we don't have the funds for the government," said Senate Minority Leader John Land, of Manning.

The future, he said, "depends on what people want out of their state government, and their educational system."

"If they are satisfied with what we'll be producing with these limited dollars, then fine, but I don't think they will be," said Land.

The finger-pointing

Gov. Mark Sanford has repeatedly accused the Legislature of overspending, arguing that if budgets had not been increased, then cutbacks would not be needed.

Sanford said the current budget situation "should serve as a wake-up call to the many who have spent money as if it's been growing on trees."

In releasing his spending plan for 2009 — the Legislature has never adopted one of his budgets — Sanford said state spending grew by 40 percent in four years. That's correct, if supplemental appropriations are counted.

Harrell responded by accusing the governor of "grossly exaggerating the facts" because spending has grown modestly since 1994, when Republicans gained control of the House. He also said the governor's proposed budget last year was larger than the one passed by the Legislature, which is true.

The governor's press secretary, Joel Sawyer, said Harrell is comparing "apples and Chryslers" because there were proposed legislative budgets larger than the governor's.

If the rival claims seem confusing, that's because each side is cherry-picking numbers that make their point.

As the governor's office said, state spending did rise sharply from the budget year that starting in 2004 to the budget approved in 2007.

However, prior to 2004 state general-fund spending was essentially flat for six years and marked by budget cuts, so it's also true that the long-term rate of growth is very low.

And that illustrates a large part of the looming problem policy-makers must address: How to end the cycle of boom-and-bust budgeting, where revenues and spending rise and fall erratically, making it hard to provide adequate and consistent services.

Recession spending

Over the past 15 years, the state has twice been plunged into a years-long cycle of budget cuts due to recessions.

In 2008 the state's general fund spending, adjusted for inflation, was just starting to approach the level of spending in 1999, which was when the last economic expansion was starting to peak.

Adjusted for population growth and inflation, which is a benchmark suggested in spending caps proposed by Sanford and by Sen. Glenn McConnell, R-Charleston, current state spending is more than $1.3 billion below the spending levels of 1999.

According to Harrell, state spending has been "well below proposed growth levels of population plus inflation" even longer, since 1994.

The statement was meant as a boast about fiscal conservatism, but economists say revenue and spending must at least keep pace with inflation and population growth, in order to simply maintain existing levels of public services.

Peaks and valleys

In 2000, as in 2008, recession arrived, sales and income tax revenues dropped, and years of budget cuts ensued.

The Budget and Control Board mandates across-the-board spending cuts when revenues fall short, unless lawmakers step in to make targeted cuts. Across-the-board cuts can make the impact worse because some state spending is tied to federal spending.

With Medicaid, for example, the state loses more than two dollars in federal funding for every state dollar that's cut.

"I wish I could say the recession will force us to prioritize spending, but I don't believe that will happen," said Rep. Gilda Cobb-Hunter, D-Orangeburg.

Partially due to cuts in state funding, many local governments, school districts and universities are now struggling, raising the prospect of increases in local taxes and in college tuition.

Land said state colleges are practically private institutions now. Colleges saw their state funding cut by more than 20 percent this year.

Spending limits

Proposals from McConnell and Sanford aim to restrict increases in spending to the rate of inflation plus the change in the state's population.

Details are still being worked out, but generally, extra revenue could be set aside for downturns, given back through tax cuts, or put toward the mammoth liability in state retiree health and pension plans.

"We've got about $20 billion in long-term liabilities, and that's a ticking time bomb," Sawyer said.

McConnell would like to see the spending limit made part of the state constitution.

The state already has a constitutional spending limit based upon personal income growth, which has not been exceeded.

In practice, the spending limit has been the amount of revenue the Board of Economic Advisors estimates the state will have each year.

"It's hard, when you know you have available money, and the needs are so great in South Carolina, to set money aside," Land said.

Otis Rawl, president of the S.C. Chamber of Commerce, said the budget problems came largely because "we spent more money that we could expect to collect on an ongoing basis."

Others, including advocates for lower-income residents of the state, point at the tax cuts.

"While everybody jumps on the bandwagon of cutting taxes, these taxes pay for much-needed services," said Sue Berkowitz, executive director of the South Carolina Appleseed Legal Justice Center.

Rainey said tax cuts and spending led to the budget crisis, but he said that, "clearly, the weight of the responsibility is on the side of spending."

Coming from different ends of the discussion, Rawl and Berkowitz say the state needs to examine where its revenue comes from.

There are several pieces of legislation that call for studies, or new commissions, to study taxation in the state.

Wherever the revenue comes from, the Office of State Budget projections say the state will need more, or it will have to cut services this year, next year and the year after that.

More tax cuts?

With the exception of the cigarette tax, Legislative leaders have all but ruled out tax increases, and there's been talk of more tax cuts.

In the House and Senate, lawmakers want to look at property tax relief for businesses and also rethink a provision of the 2006 property tax reforms that requires properties to be reassessed when they are sold.

Addressing either unpopular aspect of property taxation would be costly.

The Legislature is poised to revisit raising cigarette taxes to pay for health care.

Sanford also has proposed raising the cigarette tax, but would use the money toward creating an optional flat tax, which would benefit the top half of income earners.

Meanwhile, there are tough times ahead as the state looks for additional budget cuts.

"We'll make it through this," Rainey said. "The end of the world only comes once, and we're not there yet."

Yvonne Wenger contributed to this report.Reach David Slade at937-5552 or dslade@postandcourier.com.