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20.11.08

Excise unhealthy union greed with no auto bailout

With hat in hand, Shreveport Mayor Cedric Glover went to Washington to ask for (what is accurately termed even if he doesn’t like it) a “bailout” for American auto manufacturers. Shreveport was home to one of the largest General Motors production lines in the country until sagging company fortunes cut its production by over half. Glover equated the request with the loan Chrysler received almost three decades ago which it paid back, but this is a bailout because it throws American taxpayer dollars at a situation made untenable by the greed of unions.

As in almost every commercial enterprise, personnel costs are the largest single component for the automakers, and it is union demands which have escalated total compensation to absurd levels that have made American companies noncompetitive compared to their foreign rivals:

  • The average private sector worker earned $25.36 an hour in 2006 – $17.91 an hour in cash wages and $7.45 an hour in benefits such as pensions, paid time off, and health insurance. Autoworkers at Japanese plants located in the United States earn substantially more than this: between $42 and $48 an hour in wages and benefits. The typical United Automobile Workers member at the Big Three earned between $71 and $76 an hour in 2006 – almost $30 an hour in salary and over $45 in benefits.
  • Typical benefits include extraordinarily generous health care plans where a member pays less that $250 a year for family coverage, long paid vacations (15 –year employees at Chrysler got five weeks off in 2006), the JOBS Bank program that continues to pay almost all of a workers pre-layoff salary after their exhausting regular unemployment benefits that only recently was limited to two years, and “30-and-out” which until recently allowed all workers to retire after just 30 years service with generous benefits that means, for example, GM pays for three times the number of retirees than it had employees.
  • As a result, every American buying an auto made in Detroit pays an extra $700 to $1,000 to support health benefits far more generous than most Americans receive, and hundreds more per vehicle to support these other freebies, whereas the same car made by a foreign manufacturer in the country would cost over a thousand dollars less.

    It is this perverse transfer of wealth from consumer to unionized workers that is the main cause for an ailing domestic auto industry, and a bailout only would compound the problem by allowing subsidization of this inefficiency. Fortunately, this bonanza at consumers’ and shareholders’ expenses partially was reined in by some reforms in the past couple of years, but too late to stave off these financial troubles.

    In fact, in the current crisis provides a perfect opportunity to correct these wrongs. By declaring bankruptcy, the Big Three (likely with some different management) would have far greater latitude to do so. (Don’t forget that in declaring bankruptcy, it’s not like they’ll stop producing immediately: they’ll continue to make cars, even if slightly fewer – after all, Japanese manufacturing in the U.S. with its far lower compensation continues without major difficulties.) A bailout would do nothing more than transfer wealth from taxpayers to a privileged set of workers and prop up an diseased industry that will make its day of reckoning even more painful unless compensation is pegged at a realistic, sustainable level.

    But that’s the entire point, isn’t it? With a new regime determined to “spread the wealth” coming to Washington that’s more interested in redistributing wealth to its allies such as unions and Democrat-run Michigan than in its creation for all, no doubt this bailout will occur in the early months of 2009, and the usual scapegoats will be blamed – society’s most productive people, for example. Naturally, the only thing that would be spread by this action would not be wealth, but economic malaise. Regardless, politicians like Glover need to quit chasing for votes and do the right and sensible thing instead by refusing to go along in recreation of the problems that got us to this juncture in the first place.
  • 19.11.08

    Review of dedicated funding desirable for possible unlocking

    One idea Gov. Bobby Jindal has suggested as a way of dealing with budgetary inflexibility is to unlock state dedicated revenues. The idea should be developed into a broader review matching funding to purpose.

    First, it must be understood that, even though the state took in around $30 billion last year, it had discretion to spend only about 30 percent of it. The other 70 percent is locked in a variety of formats. Some, approaching half of the locked amount, comes from federal grants to be spent on some legally-defined function. Others arise from some legal obligations of the state, such as repaying debt. Yet others are self-generated by agencies themselves, either through their statutory activities or through ancillary operations which also stay in the agency. Only the last of these essentially could be altered, as the state really can’t violate federal and financial obligations without severe penalty, and that would create financial chaos as agencies creating “surpluses” would be raided and thereby discouraged from performing these activities (not that this hasn’t been done before; in the past, revenues that exceeded expenses in the charity hospital system would be removed from the LSU system that runs it).

    What Jindal refers to is the 36 different statutory dedications made by the Legislature for a variety of purposes. For example, it’s not commonly know that within the 4 percent state sales tax paid, 0.03 percent is redirected to the Tourist Promotion District that generates nearly $20 million a year to aid tourism across the state. These divert more than 15 percent or a little under $2 billion from the state’s general fund which leaves almost $9 billion for “discretionary” spending from the general fund. In times of deficit, normally it is from this pot only that cuts may be made in programs (as opposed to cuts in general government operations which can occur anywhere through tactics such as travel curtailment, position freezes, etc.).

    Program cuts, or those to the actual services being funded or provided, come from a projected budget deficit and if less than 0.7 percent of the appropriated amount from a fund (such as the general fund) with no agency suffering more than a 3 percent cut, the governor can do it by himself. If more, he can go up to 5 percent reductions in funds with approval of the Joint Legislative Committee on the Budget (1 percent for the Minimum Foundation Program). Anything more requires a legislative special session. These are constitutional requirements.

    So when Jindal refers to flexibility by removing dedications from some degree to totally, four things must be kept in mind. First, these are statutory matters that could be undone easily by the Legislature. Second, in essence the expenditures from these funds after appropriation can be “cut” but only in a budget emergency, which in essence means that dependence on “discretionary” money that an agency might have could be reduced as its budget gets chopped, but not as part of a budget planning process. Third, constitutional changes could give the governor greater latitude in making unilateral cuts which could have the effect of increasing the proportion of “discretionary” money available to the functions that use well over half of it (because their operations don’t come close to self-financing) – higher education and health care. Fourth, removing dedications would increase flexibility, but given their relatively small proportion of the entire general fund (about a fifth of the non-dedicated monies’ size), not by a whole lot.

    Therefore, it would not take great effort to induce more flexibility into the budget process itself, just statutory changes. More effort would have to be expended regarding dealing with deficits, because these would require constitutional amendments. As to the former, legislative will is all that is necessary.

    Some legislators frown on the idea, arguing removing dedications could endanger programs funded by them. But is that necessarily a bad thing? A few of these dedications go back decades, and even though sunset provisions in law mandate review of agency functions on a periodic basis, no real effort has been made in recent years to study whether dedicated revenue sources truly align with the degree and necessity of functions performed using that money. Simply, money could be going to something of low priority and/or does more than is really needed, and it could be better used elsewhere.

    “Dedication” implies there is some importance to the activity. After all, instead of depending upon annual appropriation subject to the whims of popular and legislative preference and financial conditions, by dedicating them the agency receiving these funds for operating of one or more programs gets far more protection. But is this necessarily true, that all of these functions are so important to have this security, to the extent that they are funded?
    At the very least, the Legislature should embark on a comprehensive review of the scope and usefulness of the dedicated revenues and the activities they fund, in concert with the governor. This can determine whether optimal direction of these revenues is occurring, and maybe changes then should be sought. It’s unwise to make a blanket assumption that existing programmatic functions by virtue of the mere presence of a funding source for them deserve to be untouched when compared in a comprehensive fashion to the kinds of things government should be doing.

    18.11.08

    Jindal must resist siren song to spend, not save

    Recently it has been argued here that with a surplus for the last state fiscal year but a looming deficit for the next that Louisiana bankroll the surplus now and dole some of it out in the future. The need to do so is greater than ever and it will be a challenge to use the savings, collected in the Budget Stabilization Fund, in the most responsible way.

    When House appropriators meet today, one option they say they will investigate to tackle an estimated 2009-10 operating deficit of $1-1.3 billion is to tap the fund. Legally, the initial portion of “excess” mineral revenues and a quarter of any declared nonrecurring budget surplus goes to the fund and the remainder is voluntarily entered into it. Up to a third of the balance at the beginning of this fiscal could be used next fiscal year so long as none is used this fiscal year.

    This year’s ending balance looks to be about $854 million which technically is not the baseline on which the one-third amount eligible to be released is calculated as the Constitution states it is to be calculated from the beginning balance of the state’s current fiscal year, so it appears roughly $275 million would be available to shore up next year’s budget. That figure could have been over $450 had Gov. Bobby Jindal saved more than spent earlier this year (any appropriation into the fund cannot make the fund’s balance exceed four percent of the previous year’s revenues, and federal recovery dollars had boosted state revenues to $34 billion the fiscal year before Jindal assumed office).

    So, a fund withdrawal still would leave a substantial deficit. Further, it essentially locks out using the fund again until another year has passed, so this is a temporary and incomplete solution at best. While economic growth from increased business confidence from ethics laws changes and tax cuts enacted earlier this year will occur, it won’t be overnight. All of this means that lawmakers are going to have to make hard choices.

    Let’s say that the amount does get deducted, leaving about $575 million in the fund, and revenues come in at last year’s figures (even with further reductions in federal recovery aid), maintaining the $1.2 billion cap on the fund and leaving $625 that could be pumped into it for fiscal year 2009-10. Jindal therefore could ask to dump $550 million into the fund during any special session held to deal with the surplus, or if one does not occur during the regular session.

    At the same time, Jindal must cut state spending deeply, and there are some legislators that are going to want a form of “compensation” through the use of the nonrecurring surplus, getting capital projects built to make up for losses to their favored recurring programs, especially when they point out committed funds could not be used for another year. Jindal must resist adding this sweetener and make sure the hard and correct choice is made, saving now and spending cuts (combined with fundamental reform) to ensure a solid state fiscal footing for the future.

    17.11.08

    Less, not more govt will overcome LA migration problem

    Recently released census numbers only underscore the outmigration problem Louisiana has faced for many years, and add fuel to the fire for those who have argued for policy change to stem this tide. Unfortunately, the solutions offered typically range from the minimal to ineffective and ignore what really must be done.

    It seems that Louisiana continues to be near zero population growth, courtesy of more emigration than immigration with births exceeding deaths taking up the slack. More worrisome is that a significant proportion of the migrants away are the prime productive – and therefore biggest taxpaying contributoring – citizenry, where well over half, or about twice the Louisiana average, had attended college and about a quarter made over $50,000 annually.

    But some recommendations to deal with this rest upon the erroneous idea that government somehow has to prime the pump. For example, we get from the Council for A Better Louisiana the notion that government has to fund “research alliances,” even though that has been tried – and produced next to nothing – in most instances. Or also offered is appears-good but useless legislation such as attempting to bribe people to stay in the state by the state funding in part a down payment on a house – not understanding that a short-term incentive does not address the long-term disincentives present in the state.

    In part, these ideas do little because they fundamentally misunderstand the nature of human economic activity and place too much faith in government to replicate the voluntary, beneficial exchanges promoted by free markets. The philosophy on which these public policy solutions need be built is neither novel nor complicated and best may be summarized by Edmund Burke’s quote, “To make us love our country, our country ought to be lovely.” In other words, if conditions that cause people to flee are mitigated, fewer of them will leave, and if they especially target the prime productive citizens, so much the better.

    At least Gov. Bobby Jindal seems to understand what to do here, for the most part. He correctly noted that ethics reform he took the lead on will bring greater confidence in government to the citizenry that their tax dollars would not be wasted or misdirected. To a lesser extent workforce changes also will help although this is more of an attempt to realign resources than create incentives to generate new ones. But Jindal did not mention the most prominent successful such effort at beautification, this year’s tax cuts disproportionately directed at the most productive citizens, probably because he only belatedly jumped on board in support.

    The latter, combined with restructuring of state spending that either will allow the state to do more with what it has or to make itself smaller and do the same, is what really will make a difference. The more government is gotten out of people’s way and the fewer resources it takes from them, the more attractive the state becomes for those who wish to pursue their passions for excellence. A state that taxes too much, regulates too much, misdirects resources to trivial pursuits relative to needs, allows politics to interfere too much with administration, and sees as its primary mission spreading the wealth is the state that will drive away those it precisely tries to attract.

    Regrettably, the Louisiana of the recent past fit this description. Some, and in fact a growing number, like Jindal are trying to change it. But until we rid ourselves of the peculiar notion that it is more government and government itself, not the people, who create wealth, that kind of policy will deter those most capable of contributing to society through their marketplace activities from residing in the state, and the migration problem will continue apace.

    16.11.08

    LA indigent health care reform takes good first steps

    Finally, the Gov. Bobby Jindal administration has issued its plan for reform of indigent health care in the state, which we then learned the changes hold great promise and look to annoy some special interests.

    Essentially, the plan argues that money is being spent inefficiently that concurrently produces lower health care outcomes regarding the poor and indigent. This stems partly from procedural issues – making a variety of services “free” (since the procedures are performed and the state billed or it directly provides with no cost to the recipient) encourages wasteful usage – and from legal/bureaucratic constraints (since the state relies so heavily on state-run care through its charity hospitals it must depend proportionally far more heavily on a federal program designed not for preventive and ordinary care so patients are steered to more costly care).

    The practical impact looms considerably. The administration of the present regime has costs rising far faster than the system can sustain in the long run, threatening to double its proportion of existing state general revenues in the 2004-2011 period from about 10 to 20 percent. Any attempt to rein in this spending under existing rules could threaten to make the system totally state run, if to make up the growing deficit reimbursement rates to the private providers, already low enough to discourage many from participating, get reduced further.

    The plan proposes largely to remove the state from direct care and claims administration. Instead of concentrating on providing or paying providers with little control over consumption, the state wants to negotiate with networks that put together elements of health care any pay, in essence, the insurance premiums for each qualifying eligible recipient. It then would be up to the network to manage the care in a way that minimizes costs while adhering to mandated standards of quality; the better job it does, the more profit it can make (some of which will be required to be passed down to the actual providers).

    In all, it creates a fundamental shift in the way indigent health care is provided in the state, one following in concept other states whose programs are judged to be successful. As a result, some interests vested in aspects of the current system are not too keen on this transformative change.

    One is some lawmakers themselves. When the 2007 enabling legislation was passed, some probably intended that the legislation mainly assist the existing charity system run by the Louisiana State University System which would allow them to brag to constituents how they provided free health care to them. The “medical home” concept they figured would be created within the charity system, each component serving as a “home.” Jindal’s plan scrambles that arrangement by defining a “home” as members of a network put together not by providers, but by health care managers. By doing this, not only did the advantage the charity system’s parts and other hospital groups have disappear (by already having many functions put together), especially the charity hospitals’ bureaucratic natures may prove to be a disadvantage in what has become a far more market-driven process than many probably envisioned.

    This is why some cautious words about the reforms are being issued by the LSU System (whose head of these operations is none other than the former Secretary of Health and Hospitals Dr. Fred Cerise who shaped the 2007 legislation) because it knows private sector outfits will eat into its revenues derived from providing indigent care. But more alarming to it is this new system potentially will transfer much money out of it. Already one aspect of the plan, to change the nature of W.O. Moss Regional Hospital in Lake Charles, does remove money that would have gone to LSU, and that could grow considerably. Like any government bureaucracy, LSU always prefers more than fewer resources so expect some resistance from it.

    And then there are some opponents who just do not like the idea of less government and more free enterprise in indigent health care provision, even though it represents best practices, for ideological reasons, and others such as some physicians because it will make them have to pay more attention to their own business dealings. But the fact is, as long as the state is vigilant in quality control, the best way of increasing system efficiency is to bring more market elements into it.

    The Jindal reforms at present speak to increased coverage at reduced costs. Whether the former can be had with the latter remains an open question, and specific details still need working out that potentially could blunt its philosophy (such as those imposed by a new Democrat administration in Washington that is hostile to the liberty provided by free markets). Regardless, this is a welcome, refresh, and absolutely vital step addressing one of the more arcane yet most significant area of Louisiana’s budget and its quality of life.