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Ohio Budget Expert, Richard Sheridan: “Ohio’s Budget Problems Are A Long Way From Being Solved And One-Time Fixes Have Dried Up”

Posted on October 7, 2008 by Mike Bock

Richard Sheridan, Ohio budget expert, former head of the state’s legislative budget office and a consultant for the Center for Community Solutions in Cleveland, entitles his September article in State Budgeting Matters, “Rebalancing the State’s Budget: Misconceptions, Puzzlements, and Risks.” The article shows that, because of the deepening recession, the governor and state assembly face many challenges in producing and maintaining a balanced budget.

Sheridan prefaces his article with a quote from the State Auditor, Mary Taylor: “Gov. Strickland’s plan is not making real progress toward putting Ohio’s fiscal house in order and unfortunately, by continuing to delay structural reform to the state budget, we have lost valuable time which would have been better spent on advancing serious budget balancing solutions.”

Sheridan says, “What economists see on the horizon is a worsening of the current undeclared recession and, with it, even further contractions of state taxes.”

I’ve not yet read Sheridan’s August article, “Options to Stave Deepening State Budget Hole.” I will make make a post on that article soon. Governor Stickland, along with the State Assembly, is facing some tough decisions. It seems to me that the information in these two article should be at the center of the discussion and debate in our current State Assembly political campaigns. The PDF of “Options to Stave Deepening State Budget Hole” can be downloaded here.

And here is another report all State Assembly candidates should read and respond to, written by Jon Hoceck in April of this year, “A Step Toward Fiscal Balance: Options for Ohio’s Income Tax: An Issue Brief from
Policy Matters Ohio”

The PDF of “Rebalancing the State’s Budget” can be downloaded here. What follows are (with emphasis added) excerpts from the article:

It appears that for FY 2008, despite earlier testimony from OBM, agency budgets were not actually cut during FY 2008. With respect to FY 2009, agencies were given target amounts to reduce their budgets and have until the end of September to negotiate the specific line items to be cut. An early list of cuts totaled $158,497,032, but OBM also announced that the “solution” to the latest iteration of the FY 2009 budget problem would require $198 million in cuts.
On the last day in FY 2008, instead of paying $434 million due for FY 2008 Medicaid bills, OBM paid those bills out of this year’s (FY 2009) appropriations. Without additional appropriations authority in that amount for FY 2009, that means the state will not be able to pay that amount of FY 2009 Medicaid spending obligations before the end of the biennium. … The state can be expected to be$434 million—at least—in the red when it begins the next biennium as a result of this action.
One-time Solutions. It appears that the state managed to end FY 2008 in the black, without the need to cut state budgets and, apparently, also without having to “raid” any of the rotaries. The ability to do so was undoubtedly aided by transferring $434 million in Medicaid spending into FY 2009, which fails to solve the problem and simply pushes it into a new fiscal year. Still, for FY 2009, as was the case in the proposed budget solution for FY 2008, the bulk of the plan consists of using non-recurring, one-time revenues to shore up spending. The effect of this is to make it more difficult to provide continuation spending in the next biennium, where revenues will decline because of scheduled tax relief reductions regardless of what happens to the economy.
Selective Cutting. Reports that the FY 2009 budget cuts are 4.75 percent “across-the-board,” could not be further from the truth. Some agencies are completely exempted from the cuts. Some line items are exempted from the cuts. As a result, health and human services agencies will disproportionately feel the brunt of the announced $158.5 million in cuts (the final figures, when made public, especially if they total the announced $198 million, will be different) accounting for two-thirds of the cuts.
Some Risks. The decision to shore up the current state budget by raiding other state funds and transferring their balances to the GRF, permits state agencies to continue spending at levels that will be sustainable in the next biennium, only if economic conditions improve significantly. Based on what is happening to financial markets, the likelihood that employment will spike, wages rise, and consumer spending and buy ng expand significantly in the next two years is a dream not shared by any notable economist. What economists see on the horizon is a worsening of the current undeclared recession and, with it, even further contractions of state taxes. The decision to address the state’s current budget problem with only modest cuts in authorized appropriation levels, has the effect of postponing the difficult choice of significant budget cuts, increases in tax rates, or expansions of tax bases into next February when the FY 2010-2011 state budget will be presented to the legislature for action.
One such problem is with the new Keno gambling game. The state is counting on receiving $73 million in profits from the game. So far the proceeds have been such that the state will be lucky to receive half that amount before the fiscal year ends.
Another problem involves the Commercial Activity Tax. The Franklin County Court of Appeals ruled that by including the gross income from the sales of food in the base of the new tax the tax violates the Ohio Constitution. Should this ruling be upheld by the state Supreme Court, the state tax department estimates it could cost the state an estimated $188 million in lost revenue when the tax is fully phased- in.3 Although the proceeds of the tax now go to local governments, the state is obliged to make up these proceeds using GRF funds.
With unemployment rising, the potential for increased Medicaid enrollments also increases. Even without worsening economic conditions, there are large numbers of persons now eligible for Medicaid whose enrollment could push spending higher than currently estimated.
And, recently, OBM examined adult corrections population data suggesting the expectation of significant growth with today’s prison population of 49,691 growing to about 70,058 in the next 10 years, unless something is done. Such growth would require new prison construction and, in 2007, it cost the state $24,517 per year, per offender. These costs are increasing each year, especially as the prison population ages and require more expensive health care. According to the OBM analysis, between 2002 and 2007, GRF medical expenditures per inmate increased by 53.4 percent, to $3,653. Cutting positions in 2008, will “inhibit the ability of the system to absorb additional projected population increases,” according to OBM.4 Unless substantial policy changes are made in the near future, the costs of adult corrections, where 90 percent is borne by the state GRF, are destined to escalate, adding to future budget problems.
In a checks-and-balances form of democracy, the legislative branch performs the important role of overseeing the executive branch to insure public accountability. This is especially important when it comes to state finances, and financial oversight requires continuous monitoring by expert staff. As competent as the fiscal staff of the LSC rotaries, (Legislative Service Commission) may be, they must also be responsible for advising legislative leadership when they observe problems, or have questions about fiscal actions taken by the administration so that they can exercise their oversight function and hold the administration accountable for its actions. The old LBO (Legislative Budget Office) performed this function; the converted LBO does not.
With respect to press reporting on the state’s fiscal crisis, every report that I have read has been a regurgitation of the press releases and comments issued by the administration. As noted at the beginning of this article, the September revenue revision was widely reported by the press as representing “$540 million in budget cuts.” Even the administration’s statements show that is clearly not the case with cuts being proposed at $198 million. There is no evidence that reporters desire, or even perhaps have the capability, of doing the kind of fiscal analysis needed to question some of the decisions made concerning the state’s fiscal problems or provide the kind of reporting that would “safeguard the public interest.”
So, when it comes to scrutinizing the state’s financial problems, and insuring that the state’s resources are being soundly managed, the legislature and the public clearly need an organization like the LBO once was. In its absence there needs to be more transparency in fiscal actions taken to balance the budget, especially when those actions deviate from announced plans, and greater clarity, and accuracy, in the administration’s reporting on the state of Ohio’s budget.
The only way that the legislature, ultimately responsible for adopting the state’s budget and setting appropriations levels, not to mention authorizing appropriate actions to keep the budget in balance, has been able to provide necessary oversight over the executive branch, is through its partisan fiscal staff. As competent as that staff is, it consists only of one staff analyst serving the House majority, and another serving the Senate majority. Not only is what that staff is able to do limited by size, it is limited because whatever it does, can be viewed as partisan and become the subject of partisan bickering.
So far, the state has acted promptly to address the problem of reduced revenues, including the most recent actions taken just weeks before the November elections. Many observers were certain that such action would be postponed until after the elections, especially since there appears to be a possibility that political control of the House of Representatives could change. Acting promptly means that there will be more time to implement proposed responses to the lowered revenue estimates, and, it also means that agencies facing cuts will be able to spread them over more months. A 4.75 percent cut for FY 2009 implemented on October 1, translates to a 6.71 percent cut, whereas the same cut implemented on December 1, would effectively be a 9.5 percent cut.
In reality, most proposed agency cuts are lower than 4.75 percent because of the effect of exemptions of specific line items. By choosing to avoid making severe budget cuts, and to protect decisions affecting higher education such as the expansion of scholarship programs and freezing tuitions, by shoring up sagging revenues with non-recurring non-tax revenues, Ohio joins the ranks of many other states in similar straits. Most, though not all, have also avoided the dreaded “tax increase” option. It is obviously politically difficult to raise taxes during bad economic times and equally difficult to admit that the state cannot afford to pay for new and expanded spending considered fiscally viable just 14 months ago.
But Ohio, along with other states in similar circumstances, will soon have to recognize that the budget problems are a long way from being solved, and the one-time fixes have pretty much dried up. That leaves the state in the position of having to draw down the Rainy Day Fund (already effectively reduced from $1 billion to $750 million because of actions taken in the recently enacted Job Bill and the proposed use of $63 million for Medicaid) if things get worse this biennium, and seriously consider the spending cut and/or taxincrease options to balance the next biennial budget.

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Charlie Gibson, ABC World News, Visits Dayton

Posted on October 7, 2008 by Mike Bock

Carlie Gibson broadcasting ABC World News live from the banks of the Great Miami River in Dayton

Charlie Gibson, anchor of ABC World News, visited Dayton yesterday. He reported on the economic situation in Dayton at the closing GM plants. He visited the Wright Brothers Bicycle Shop. He reported that Dayton, at one time, was the center of innovation and in his broadcast showed pictures of Dayton inventors such as John Patterson. Gibson broadcasted the 6:30 PM National News from the banks of the Great Miami River on Edwin C. Moses Blvd, across from the Job Center.

ABC News brought a huge bus and a number of backup trucks and vehicles and made a direct satellite link. Shown here is the ABC crew, getting ready for the 6:30 PM World News Report. Charlie had a beautiful view of Dayton in the late afternoon light.

Don Hammonds, the local news anchor of the ABC affiliate Channel 22, broadcasted his report from the same location.

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Naomi Klein Says Economic Crises Repudiates Milton Friedman Doctrines, Right-wing Trotskyists

Posted on October 7, 2008 by Mike Bock

Naomi Klein, author of “The Shock Doctrine: The Rise of Disaster Capitalism” recently made a speech at The University of Chicago and at Democracy Now, you can read the whole transcript. Klein’s speech was in opposition to naming of the economics institute there, “The Milton Friedman Institute.”

In the speech, Klein linked “Friedmanism” to our current economic crisis. She said, “Milton Friedman is pretty much accepted as the godfather of deregulation. And this ideology was the rationale for turning the financial sector into the casino that we see today.”

Klein says that reality has repudiated Friedman’s ideas. She says the current economic crisis presents a watershed moment for Friedman loyalists, one that should shatter their illusion, one that calls on them to abandon their pure ideology. Excerpts from her speech:

What we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed … I think this has been a class war waged by the rich against the poor, and I think that they won.
The corporate world has been good to Milton Friedman, because his ideas were good for them.
To quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.”
This process of measuring an elegant perfect, beautiful, inspiring ideology against a messy reality is a painful process, and it’s a process that anyone who has tried to free themselves from the confines of fundamentalist thinking, from ideological constraints, has faced. My grandparents, for instance, were pretty hardcore Marxists. In the ’30s and ’40s, they believed fervently in the dream of egalitarianism that the Soviet Union represented. They had their illusions shattered by the reality of gulags, of extreme repression, hypocrisy, Stalin’s pact with Hitler.
I bring this up, because the left has been held accountable for the crimes committed in the name of its extreme ideologies, and I believe that it’s actually been a very healthy process for the left, one that isn’t over, that is continuing. But I think that the process of having to examine the unacceptable compromises that were made in the name of hard ideology, that they are paying off in the way the left today is being reborn and re-imagined..
So, I think all ideologies should be held accountable for the crimes committed in their names. I think it makes us better. Now, of course, there are still those on the far left who will insist that all of those crimes were just an aberration—Mao, Stalin, Pol Pot; reality is annoying—and they retreat into their sacred texts.
But lately, particularly just in the past few months, I have noticed something similar happening on the far libertarian right, at places like the Cato Institute and the Reason Foundation. It’s a kind of a panic, and it comes from the fact that the Bush administration adapted—adopted so much of their rhetoric, the fusing of free markets and free people, the championing of so many of their pet policies. But, of course, Bush is the worst thing that has ever happened to believers in this ideology, because while parroting the talking points of Friedmanism, he has overseen an explosion of crony capitalism, that they treat governing as a conveyor belt or an ATM machine, where private corporations make withdrawals of the government in the form of no-bid contracts and then pay back government in the form of campaign contributions. And we’re seeing this more and more. The Bush administration is a nightmare for these guys—the explosion of the debt and now, of course, these massive bailouts.
So, what we see from the ideologues of the far right—by far right, I mean the far economic right—frantically distancing themselves and retreating to their sacred texts: The Road to Serfdom, Capitalism and Freedom, Free to Choose. So that’s why I’ve taken to calling them right-wing Trotskyists, because they have this—and mostly because it annoys them, but also because they have the same sort of frozen-in-time quality. You know, it’s not, you know, 1917, but it’s definitely 1982. Now, the left-wing Trots don’t have very much money, as you know. They make their money selling newspapers outside of events like this. The right-wing Trots have a lot of money. They build think tanks in Washington, D.C., and they want to build a $200 million Milton Friedman Institute at the University of Chicago.
But, you know, I was interested that yesterday the Heritage Foundation, which has always been a staunch Friedmanite think tank, that they came out in favor of the bailout. They came out in favor of the bailout; they said it was vital. And what’s interesting about that is, of course, the bailout is creating a crisis in the economic—in the public sphere. It’s taking a private crisis, a crisis on Wall Street, which of course isn’t restricted to Wall Street, and it will affect everyone, but it is moving it, moving those bad debts, onto the public books.
And now the Bush administration has already left the next administration, whoever it is, with an economic crisis on their hands, but with this proposed transfer, they’re dramatically increasing that crisis.
We can count, I would argue, on the Heritage Foundation refinding their faith, refinding their faith when it becomes necessary and useful to once again argue that the way to revive the American economy is to cut taxes, cut regulation, to stimulate the economy—and, by the way, we can’t afford Social Security; we’re going to have to privatize it, because we’ve got this terrible debt and deficit on our hands. So, the ideology is far from dead, and what we are, I think, seeing with this proposed monument to Friedmanism is really a way of entrenching it and making sure that it is always available to come back, to come roaring back.
So, I said I would talk a little bit about Friedmanism and the links to the current crisis. And, you know, it’s pretty direct. Milton Friedman is pretty much accepted as the godfather of deregulation. And this was—this ideology was the rationale for turning the financial sector into the casino that we see today.
And I think that the Chicago School of Economics is properly understood as a counterrevolution against the New Deal, against regulations like Glass-Steagall, that was put in place in 1934 after having seen people lose their life savings to the market crash, and it was a firewall, a very simple, sensible law that said if you want to be an investment bank, if you want to gamble, gamble with your investors’ money, but the government isn’t going to help you because it’s your own risk. You can fail. And if you want to be a commercial bank, then we will help you. We will offer insurance to make sure that those savings are safe, but you have to restrict the risks that you take. You cannot gamble. You cannot be an investment bank. And a firewall was put up between investment banks and consumer banks.
Phil Gramm is the person, you know, on the legislative side who did the most to create the legislative context for what we’re seeing right now in the financial sector. … You know, I point—I bring him up because Phil Gramm was a Milton Friedman fanatic. I think you know this. In 1999, the same year that he led the charge to strike down Glass-Steagall, he also—Phil Gramm—pressed Congress to get the Medal of Honor for Friedman.
But, you know, it was—so it was really Reagan who campaigned, you know, with his copy of Capitalism and Freedom on the campaign trail, who was the first person to really put Friedmanism into practice.
Ronald Reagan—but I do think that, you know, that it isn’t a coincidence that, you know, a movie star president champions these ideas, or a body-builder governor, you know, who says, “Dr. Friedman changed my life”—I don’t know if you’ve seen Arnold Schwarzenegger’s introductions to Freedom to Choose, but they’re good. You should. YouTube them. But the appeal of these ideas, I think, to politicians who are actually in over their head on economics—and, by the way, this goes for military dictators, too, like Pinochet—who get control over a country and are totally clueless about how to run an economy, is that it lets them off the hook completely. It says government is the problem, not the solution. Leave it to the market. Laissez-faire. Don’t do anything. Just undo. Get out of the way. Leave it to us.
The other major contribution—another major contribution of Friedmanism to the policy framework is not just deregulation, but privatization, of everything. And, you know, in Capitalism and Freedom, he lays out his wish list, everything from the post office to national parks. So I think it’s interesting to think about how this crisis will effect future plans for privatization.
The crisis, you know—and this is where Friedmanism becomes a kind of a self-fulfilling prophecy, because you neglect the public sphere and—because you have tax cuts and because you’ve derided the public sphere, and we certainly saw this in New Orleans during Hurricane Katrina, which was not a natural disaster; it was a disaster borne of a collision between heavy weather and a weak infrastructure. But then, that was used to rationalize really just erasing the public sphere altogether, closing Charity Hospital, the only hospital that treats the uninsured in New Orleans, closing down the public housing projects. Richard Baker, Republican congressman, said, “We couldn’t clean out the housing projects, but God did.”
Now, that neglect of public sphere that we saw in New Orleans is, of course, a national crisis. The American Society of Civil Engineers estimates that there is a deficit, an infrastructure deficit of between $1.5 trillion and $2 trillion, just to bring the roads and bridges up to safety standards. And the solution, up until very recently, that was being held up, was public-private partnerships, was privatization of essential infrastructure. You know this in Chicago, because the airport is one of the ones on the block.
The biggest test case for infrastructure privatization is the Pennsylvania Turnpike, which was on the verge of being handed over to a consortium of private companies on a seventy-five-year lease, and that deal fell through today. And I think part of the reason why it fell through is because one of the companies leading the consortium was Citigroup. And the idea of putting more essential services, more things that are far too important to fail, in the hands of the same people that have made such a mess of the financial sector suddenly seems like insanity.
The Bush administration, far from being an aberration, is really the culmination of the idea that government is the problem, not the solution. I think they really believe that and totally abdicate it, their responsibility to manage, to govern. The popping of the housing bubble was a surprise to no one. But the only preparation was a two-and-a-half-page plan presented by Henry Paulson that said, “Give me $700 billion, and don’t ask any questions.” That is not preparing, right? This was laissez-faire in action, a really scary kind of laissez-faire.
Class is suddenly back in America, with a vengeance, and it is the result of this class war that was waged from this school.
Milton Friedman understood the utility of crisis. And this is a quote—you know, I use it a lot, but I’ll use it now again, because I think it’s important—which he has at the beginning of the 1982 edition of Capitalism and Freedom: “Only a crisis, actual or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”
So, we know that the crisis is coming, and the question is, how are we going to respond? I think there needs to be better ideas lying around. I think the Milton Friedman Institute is about keeping the same old ideas that have been recycled so many times, that actually make these public crises worse, making sure that they are the ones that are ready and available whenever the next crisis hits. I think that is what—at its core, that’s what so many of the right-wing think tanks are for, and that’s what the Institute is for. And I think that is a waste of the fine minds at this university. I think it is a waste of your minds, your creativity, because all of these crises—climate change, the casino that is contemporary capitalism—all of these crises do demand answers, do demand actions. They are messages, telling us that the system is broken. And instead of actual solutions, we’re throwing ideology, very profitable ideology, at these problems. So we need better ideas lying around.
We need better ideas responding to what a Barack Obama presidency would absolutely face. As soon as he comes to office, “Yes, you can” turns into “No, you can’t; we’re broke.” No green jobs, no alternative energy, no healthcare for everyone. You know, his plan for—to give healthcare to every child in America costs $80 billion. Bailing out AIG cost $85 billion. They’re spending that money. They’re spending those promises. So, the people who are going to say, “No, you can’t,” who are going to use this crisis to shut down hope, to shut down possibility, are ready.
And I think it would be so wonderful to have the brilliant young economists of the University of Chicago—I don’t know if any of them bothered to come out tonight—but to have your minds at work meeting this crisis. We need you. We need open minds. We need flexible minds, as creative as possible. The Milton Friedman Institute, in its name and essence, is about trying to recapture a moment of ideological certainty that has long passed. It has long passed because reality has intervened. It was fun when it was all abstract. It was fun when it was all in the realm of promise and possibility. But we are well past that. Please, don’t retreat into your sacred texts. Join us in the real world.