SADOW: The Fiscal Hawks Are Too Focused On Symptoms Rather Than Causes

While it’s quite fair to point out the hazard behind the concept of using one-off revenues to fund an operating commitment, at the same time it’s incumbent on those doing the criticizing to come up with responsible alternatives to deal with any ensuing revenue adjustment – especially when they haven’t quite characterized the source of their complaint fairly.

That’s the trap state Reps. Thomas Carmody, Cameron Henry, and John Schroder have fallen into extending from their critique about one aspect of Gov. Bobby Jindal’s proposed budget. It concerns two presumed bonuses the state will collect with their proceeds going to fund higher education.

The state will take advantage of artificially-low interest rates to refinance indebtedness to pay off advancement of the tobacco settlement in 2001. Instead of taking some annuitized payments, the state arranged to take 60 percent of the money up front, or $1.202 billion, three-quarters socked it away in a fund, the Millennium Trust Fund, and promised to make periodic payments to lenders for getting it earlier. Refinancing of the bonds to help pay for that will save $85 million, available within the upcoming fiscal year.

Also, part of the payments coming from the tobacco companies had been withheld as they had accused many states of not doing enough to protect market share. That means they could pay a reduced rate to states like Louisiana, as the settlement payments vary according to sales of the participating companies. Thus, states must enforce vigilantly to make sure non-participants don’t get around tobacco sales payments, as that is grounds for reducing the payments.

But the dispute was settled late last year, and Louisiana will take its share from escrow this upcoming fiscal year of $90 million. From this it plans to divert $60 million to higher education, freeing up funds that can be used elsewhere, and the same amount from the refinancing to do the same. This money would have gone to paying off Taylor Opportunity Program for Scholars expenses.

This tactic has drawn the ire of Carmody, Henry, and Schroder, who equate the move with using funds that will appear only once for continuing operations instead of placing all of them in the MTF. However, not only is that not actually what is happening, but also it has them falling into a familiar habit of proposing policy that addresses the symptoms of rather than the disease that in reality is what creates funding difficulties.

Their characterization of the money released from escrow as a one-time benefit is inaccurate. This was money owed to the state but withheld pending litigation, part of a stream that will continue until 2023. It is not a windfall, but a revenue stream of varying predictability no less stable than any of the state’s tax and fee collections. The only difference is some of it was held back that could have been spent in previous years which was paid to the state but was not spent due to the litigation. So while its uses for operating expenses may face political debate and disagreement (even as it appears to be more than adequate to service the debt in question), its definition as a recurring revenue source is unquestioned.

By contrast, the refinancing truly stands as a windfall: without that action, that money doesn’t appear, nor will it ever appear again connected to this specific act. So the trio is accurate on that account, and thereby brings up the question of whether its expenditure on operating aspects constitutes wise policy. Although it’s not the first time the state has used refinancing proceeds on this money to fund a state government program, as the same was done in 2005 to provide money for small businesses affected by the hurricane disasters. (Interestingly, Treas. John Kennedy, a critic of the tactic in 2013, seemed to have no qualms about it in 2005.)

That question applies as well to the escrow reimbursement, where the alternative answer provided by the trio appears to be to place it in the MTF, as they claim otherwise TOPS will run into deficit. This would be because one-third of the MTF provides some funding to TOPS from interest derived from the expanding principle that increases every year due to payments from the tobacco companies, plus all monies above a $1.38 billion balance also directly flow to TOPS. As the MTF balance has gone to the $1.5 billion mark recently, this means the extra money deposited would pass directly through to TOPS payments now or in the future.

Investments always can go down, but that means at present $120 million remains available to be allocated to TOPS, even without a $60 million infusion. Note also to some degree the mutation of payments into the funds into monies spent on operating expenses (i.e. TOPS) already has happened with the stricture that everything above the cap becomes fair game for that. In other words, the idea that any money, regardless of whether it is recurring, that gets deposited into the fund automatically gets treated as available for operating expenses, so long as the fund in total remains above $1.38 billion, has been legitimized already.

This means if Carmody, Henry, and Schroder argue that, instead of spending the $60 million from refinancing directly on TOPS that in essence cuts out the middleman of having to dump it first into the MTF before appropriation, that it get dumped into the MTF and then an appropriation gets made, they are not supporting some kind of safeguarding of TOPS from “deficit,” they’re just adding an additional step to the process. Only by saying it should go to the MTF and stay there (where it can crank out more interest to pay for TOPS) does that differ in any material way from what the Jindal budget proposes.

And if this is the approach they champion, then they neglect proper consideration of two factors. First, is it wise policy that the state sits on anything more than $1.38 billion in order to crank out investment interest for use in specified operational expenses? In fact, all three lawmakers seem to think not: they voted for the bill that put the change on the ballot. So if they in fact agreed that payments of any kind, even windfalls, that come into the MTF as long as it is sufficiently funded, as it is now, should be treated as available to be spent on operating expenses (given that the public approved of this possibility), they need to explain why not now.

Second, one reason why these funds could be crucial to future TOPS funding is that TOPS itself is an overly generous and potentially unwise use of taxpayer resources. It’s more of an entitlement program for high school graduates who can get into universities under the most minimal standards than any scholarship program. As such, it wastes dollars on marginal and/or unmotivated students, where increasing its standards would provide much more efficient – and far reduced – expenditures.

Therefore, rather than just adopt the attitude, as they have seemed to, that the TOPS Fund portion of the MTF ought to be built up maximally to have its earnings pay for TOPS and leave it at that, TOPS itself must be reformed to reduce the waste that comes from it and lower that spending burden. The problem is not that TOPS funding demands in the future means a more prudent use of the $120 million is to bank it than spend it this year (the symptom), but that TOPS funding demands stem from programmatic problems with it, and those need to be dealt with before locking away any additional resources designed to enable its continuing inefficiency (the disease).

To summarize, Carmody, Henry, and Schroder claim $120 million of windfall bonus money is to be spent on continuing operations, and decry this development as contrary to the health of TOPS. That’s only true to a limited extent. Half of that money is recurring, only delayed in its receipt. That and the other half, which is essentially a kind of investment earning related to TOPS, they propose to be sent to a fund where that deposit may be allowed to be spent on TOPS continuing operations, a feature they blessed in concept, to continue to feed an inefficient program in need of reform.

Ultimately, there is a bit of budget gimmickry involved with half of the money. But at the same time, withdrawing even just that half does nothing to make TOPS a better program to enable it to attain self-sufficiency. So while there is a small degree of merit to their complaint, what they seem to suggest is no better or wiser than the intended budgetary use. Critiques that aren’t entirely accurate nor suggest wise alternatives just aren’t very helpful in the policy-making process.



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