By Laura Rion and Nicole Jolicoeur*
Elected officials at the state and local level play many of the same tricks that elected officials play.
The Money Trick
Much like their federal counterparts, state and local politicians want to take credit for spending and evade blame for the taxes needed to pay for it. These politicians can do so by spending more than they raise in revenues, but that will put the state in debt. To pay the debt, their successors in office will ultimately have to spend less than they raise in revenue. The net effect is that the incumbents who spend more than they raise will have shifted blame for the shortfall to their successors in office and burdened future generations, perhaps even bankrupting the state.[1]
To avoid such harms, all states but one bar spending more on operating expenses than they raise in taxes for this purpose.[2] A similar concern justifies the many prohibitions on deficit spending at the local level.[3]
Courts, however, have problems enforcing the prohibitions on deficit spending.[4] States and localities skirt such requirements in four major ways. First, states and localities engage in phony bookkeeping.[5] Second, they sell prisons and other assets and count the proceeds as revenue, yet ignore the fact that the state will have to pay rent for decades to use what they sold. The economic effect is the same as if the state took out a loan. Third, states and localities defer maintenance of infrastructure. Fourth, states fail to set aside funds adequate to pay the pensions that workers have already earned.[6]
Because state and local politicians have evaded balanced budget requirements, voters need ways to stop state and local politicians from shifting blame to successors in office. Methods that David Schoenbrod recommends for the federal level can be adapted to the state and local level as well.[7] Basically, this would involve a system that informs voters, in tangible terms, how much current policies would cost the average family in terms of tax increases or spending cuts. Appendix A summarizes how to do this for the state level and Appendix B does the same for the local level, at least for cities with a population of more than 500,000 people.
The Debt Guarantee Trick
Much like their federal counterparts, state and local politicians are tempted to guarantee the payment of private debt. Such debt guarantees are popular with the businesses whose debts are guaranteed because they help the business to borrow and reduce the interest that they must pay to borrow. Yet, if the government has to pay up on the guarantee, the cost to the public will come later and so the blame for it will fall on the successors in office of the incumbent officials who took credit for the debt guarantee in the first place.
To avoid this harm to the public, a majority of states and localities have provisions preventing the state from guaranteeing private debts.[8] For example, New York’s Constitution prohibits the state or localities from lending public credit to private individuals, corporations, or other private entities.[9] But, many states have exceptions such as for debt guarantees that serve public or charitable purposes.
Courts, however, have problems enforcing these provisions because of judicial deference to political officials’ judgments on such policy questions as what is a public or charitable purpose.
In order to effectuate change, the methods Schoenbrod recommends for the federal level can be adapted to the state and local level as well. State and local officials should be required to make firms whose debts are guaranteed pay a market based fee for guarantees. Imposing the fee would make incumbents responsible. Appendix A summarizes how to create this accountability at the state level and Appendix B does the same for the local level.
The State Mandate Trick
Much like their federal counterparts, state politicians seek to take credit and shift blame by mandating local governments to produce benefits for voters. The net effect is that state politicians sometimes fail to seriously consider whether the benefits that they mandate that voters receive from local government are worth the cost to voters.
To avoid such harms, some states have enacted various statutes and constitutional provisions, which are supposed to allow localities the power to run their local affairs, such as police and sanitation.[10]
Courts, however, have problems enforcing home rule provisions because it is unclear what is a state versus a local matter.[11]
Because of the difficulty of enforcing home rule provisions voters need ways to hold state officials accountable for the burdens imposed by state mandates. The methods Schoenbrod recommends for the federal level can be adapted to the state level as well. Appendix A summarizes how to do this at the state level.
The Regulation Trick
Much like their federal counterparts, state and local politicians want to take credit for promising regulatory protection, but avoid blame for the burdens needed to produce this protection and the failures to actually deliver it. They do so by creating rights to regulatory protections and ordering agencies to impose the corresponding duties. This can lead to inefficient or ineffective regulations.
A few states have tried to deal with this problem by legislating that state legislators should vote on regulations.[12]
The methods Schoenbrod recommends for the federal level can be adapted to the state and local level as well. State governments should have to vote on and approve any major regulations from state agencies before they go into effect.[13] It is a good idea for legislators to be voting on major regulations, however what constitutes as a major regulation will differ depending on the size of the state or locality at issue. It would be appropriate for individual localities to decide themselves what would constitute a major regulation that should be voted on. Appendix A summarizes how to accomplish this at the state level and Appendix B does the same for the local level.
Appendix A
Summary of the State Honest Deal Act
The State Honest Deal Act contains four titles, each addressed to the Money Trick, the Debt Guarantee Trick, the State Mandate Trick and the Regulation Trick. . There is no analogy to the War Trick is not applicable at the state level.
Title I – Honesty in Spending and Taxing
To make members of the state legislature and the governor responsible for the gap between spending and revenues that current policies would produce in the long term:
1. The State Independent Budget Office (IBO) is established to provide voters with readily understandable information on the size of the financial burdens that current practices would impose upon the people in the long run. The members of the IBO shall be nominated by the governor and confirmed by the state legislature for staggered fourteen year terms and shall not be subject to removal at will by the governor or legislature.
2. At the conclusion of each session of the state legislature and before each general election, the IBO shall send citizens a readily understandable letter that conveys the following sorts of information:
A. If the gap between spending and taxation is closed entirely by increasing income taxes on individuals and corporations, revenues from such taxes would have to be increased permanently by __ %.
B. If the gap between spending and taxation is closed entirely by cutting government expenditures, (including education, roads, welfare, etc) total expenditures would have to be cut permanently by __ %.
C. Assuming that the cost is spread equally across the population, the average cost of the tax increases or spending cuts to a family of four in the current year would be $____ with similar costs in each subsequent year.
D. The size of the required tax increases or spending cuts will grow larger the longer the legislature and the governor delay action.
E. That available at the State IBO’s website is information on the extent to which, under current taxing and spending practices, a person born in any particular year will be enriched by future generations or will enrich past generations.
The State IBO shall, to the extent practicable, have a copy of this letter delivered to each individual of voting age and may, to that end, require that the State Tax Department include this letter with their communications to the public.
3. To fill in the blanks in its letter, the State IBO shall adopt each year a long-term budget model that projects revenues and spending under current practices. The State IBO shall make its budget model available to the public in a form conducive to its use in assessing the fiscal impact of various legislative proposals.
Title II – Honesty in Debt Guarantees
To make members of state legislature and the governor responsible for the risks that debt guarantees inflict upon the public:
1. A Debt Guarantee Honesty Commission (the “Commission”) shall be established. At the end of year one of its operations, the Commission shall adopt a list of all existing debt guarantees, explicit and implicit.
2. The Commission shall then divide the debt guarantees into three groups to be the subject of proposals at the end of years two, three, and four of its operations respectively. At the end of years two, three, and four, the Commission shall propose as to each debt guarantee in the group for that year.
A. whether the debt guarantee should be continued or eliminated;
B. if continued, how to set a market-based fee for such guarantees, with the fees set individually for systemically important (“too big to fail”) institutions and, to the extent practicable, for other debtors; and
C. whether to phase in the discontinuance of a guarantee or a market-based fee and, if so, how.
The legislature shall vote on each year’s proposals en masse on a fast-track, no-amendment, no-filibuster basis.
3. Thereafter, the legislature may subsidize an activity to which it previously gave a free or underpriced guarantee only by appropriating the money for the subsidy as discretionary spending.
4. From the end of year four onwards, the state banking department shall annually recommend to the legislature to guarantee explicitly the debts of any institution whose failure would present a systemic risk. The question for the Commission would be whether the failure of that institution would present a systemic risk rather than whether the institution itself is presently at risk. If the board so determines, the board shall also recommend how to set a fee. The legislature would be required to vote on all such recommendations for the year en masse on a fast-track, no-amendment, no-filibuster basis.
Title III – Honesty in State Mandates on Local Government
To make members of the legislature and the governor responsible for the burdens that mandates inflict upon the public:
1. The standing rules of the state legislature are amended to allow each legislator one challenge in each legislature to a provision in a bill on the floor that would harm states or localities that fail to do the federal bidding. The challenge would take the form of a point of order and state how the bill should be amended to avoid the harm. The challenge would be resolved by a roll call vote with no debate. Each successful challenge would result in the bill being amended and yield the legislator making it another challenge without limit.
Title IV – Honesty in Regulation
To make members of the legislature and the governor responsible for the failures to deliver to the public the regulatory protection that they promise and the burdens that those promises entail:
1. A “major regulation” (defined to include regulations that either increase or decrease the regulatory protection available to the public) shall not take effect until approved through the state Constitution’s legislative process.
2. The legislature shall each hold roll call votes on whether to approve a major regulation on a fast-track, no-amendment, no-filibuster basis. To ensure that the legislature does not kill major regulations by failing to hold roll call votes by the Honest Deal Act’s deadline, such failure should automatically cut off appropriations for members of either house of the legislature (including appropriations for their salaries, travel expenses, staffs, and office expenses) until such time as that house cures the failure.
3. Despite #1, a major regulation may take effect pending decision by the legislature if the governor finds need, but shall cease to have effect if the vote to approve the regulation fails in either the legislature.
Appendix B
Summary of the Local Honest Deal Act
The Local Honest Deal Act contains three titles, each addressed to the Money Trick, the Debt Guarantee Trick, and the Regulation Trick. There is no analog to the War Trick or the Federal Mandate Trick at the local level.
Title – Honesty in Spending and Taxing
To make members of the City Council and the mayor responsible for the gap between spending and revenues that current policies would produce in the long term:
1. The Local Independent Budget Office (IBO) is established to provide voters with readily understandable information on the size of the financial burdens that current practices would impose upon the people in the long run. The members of the Local IBO shall be nominated by the mayor and confirmed by the city council for staggered fourteen year terms and shall not be subject to removal at will by the mayor or city council.
2. At the conclusion of each city council session and before each general election, the Local IBO shall send to citizens a readily understandable letter that conveys the following sorts of information:
A. If the gap between spending and taxation is closed entirely by increasing local taxes on individuals and corporations, revenues from such taxes would have to be increased permanently by __ %.
B. If the gap between spending and taxation is closed entirely by cutting government expenditures, (school, roads, community programs, etc) total expenditures would have to be cut permanently by __ %.
C. Assuming that the cost is spread equally across the population, the average cost of the tax increases or spending cuts to a family of four in the current year would be $____ with similar costs in each subsequent year.
D. The size of the required tax increases or spending cuts will grow larger the longer the City Council and the mayor delay action.
E. That available at the Local IBO’s website is information on the extent to which, under current taxing and spending practices, a person born in any particular year will be enriched by future generations or will enrich past generations.
The Local IBO shall, to the extent practicable, have a copy of this letter delivered to each individual of voting age and may, to that end, require that the locality tax department, and or other government agencies include this letter with their communications to the public.
3. To fill in the blanks in its letter, the Local IBO shall adopt each year a long-term budget model that projects revenues and spending under current practices. The Local IBO shall make its budget model available to the public in a form conducive to its use in assessing the fiscal impact of various legislative proposals.
Title II – Honesty in Debt Guarantees
To make members of city council and the mayor responsible for the risks that debt guarantees inflict upon the public:
1. A Debt Guarantee Honesty Commission (the “Commission”) shall be established. At the end of year one of its operations, the commission shall adopt a list of all existing debt guarantees, explicit and implicit.
2. The Commission shall then divide the debt guarantees into three groups to be the subject of proposals at the end of years two, three, and four of its operations respectively. At the end of years two, three, and four, the Commission shall propose as to each debt guarantee in the group for that year
A. whether the debt guarantee should be continued or eliminated;
B. if continued, how to set a market-based fee for such guarantees, with the fees set individually for systemically important (“too big to fail”) institutions and, to the extent practicable, for other debtors; and
C. whether to phase in the discontinuance of a guarantee or a market-based fee and, if so, how.
The city council shall vote on each year’s proposals en masse on a fast-track, no-amendment, no-filibuster basis.
3. Thereafter, the city council may subsidize an activity to which it previously gave a free or underpriced guarantee only by appropriating the money for the subsidy as discretionary spending.
4. From the end of year four onwards, the state banking department shall annually recommend to the city council to guarantee explicitly the debts of any institution whose failure would present a systemic risk. The question for the Commission would be whether the failure of that institution would present a systemic risk rather than whether the institution itself is presently at risk. If the board so determines, the board shall also recommend how to set a fee. The city council would be required to vote on all such recommendations for the year en masse on a fast-track, no-amendment, no-filibuster basis.
Title III – Honesty in Regulation
To make members of the city council and the mayor responsible for the failures to deliver to the public the regulatory protection that they promise and the burdens that those promises entail:
1. A “major regulation” (defined to include regulations that either increase or decrease the regulatory protection available to the public) shall not take effect until approved through the City Charter legislative process.
2. The city council shall each hold roll call votes on whether to approve a major regulation on a fast-track, no-amendment, no-filibuster basis. To ensure that the council not kill major regulations by failing to hold roll call votes by the Honest Deal Act’s deadline, such failure should automatically cut off appropriations for members of the council (including appropriations for their salaries, travel expenses, staffs, and office expenses) until such time as the council cures the failure.
3. Despite #1, a major regulation may take effect pending decision by the city council, if the mayor finds need, but shall cease to have effect if the vote to approve the regulation fails in the city council.
* Laura Rion and Nicole Jolicoeur are graduates of New York School class of 2017.
[1] From 2009–2012, the combined budgetary shortfalls of all 50 states was over 540 billion dollars. Elizabeth McNichol, Out of Balance: Cuts in Services Have Been States’ Primary Response to Budget Gaps, Harming the Nation’s Economy, Ctr. On Budget & Pol’y Priorities 3 (Apr. 18, 2012), available at http://www.cbpp.org/files/4-18-12sfp.pdf, archived at http://perma.cc/RP36-LRCP.<<
[2] David Gamage, Preventing State Budget Crises: Managing the Fiscal Volatility Problem, 98 Calif. L. Rev. 749, 755 (2010). Currently, Vermont is the only state that does not have any balanced budget requirement. Sen. John Cornyn Says 49 States Have a Balanced Budget Amendment in Their State Constitutions, PolitiFact (Dec. 25, 2010), http://www.politifact.com/texas/statements/2010/dec/25/john-cornyn/sen-john-cornyn-says-49-states-have-balanced-budge/; Phil Oliff et al., States Continue to Feel Recession’s Impact, Ctr. on Budget & Pol’y Priorities 2-3 (June 27, 2012), available at http:// www.cbpp.org/cms/index.cfm?fa=view&id=711, archived at http://perma.cc/SPE9-BJL7.<
[3] Chester James Antieau, Antieau on Local Government Law § 67.06 (2d ed. 2017).<
[4] Gamage, supra note 2, at 763; Oliff et al., supra note 2, at 2–3.
[5] For example, many state officials argue that revenues are not unspecified as to what is included, and allows them to interpret what cash inflows can be included. In some cases, state officials characterize debt as revenue. Further, they move money to a different fiscal year in order to comply with the requirements of a balanced budget. This includes moving payments to the next fiscal year. Inst. For Truth in Accounting, The Truth About Balanced Budgets: A Fifty State Study, State Data Lab 25–28 (Feb. 2009), http:// www.statedatalab.org/library/doclib/50_State_Final_2008.pdf. See generally Corey Eucalitto, Unbalanced: Why State Balanced Budget Requirements Are Not Enough, State Budget Solutions (Apr. 4, 2013), http:// www.statebudgetsolutions.org/doclib/20130403_UnbalancedPDF.pdf. <
[6]David Schoenbrod, DC Confidential: Inside the Five Tricks of Washington 101 (2017). The State Budget Crisis Task Force found that states are shouldering a $4 trillion debt for pensions and health care for state workers. John Celock, Paul Volcker, Richard Ravitch Say State Budget Crisis Threatens ‘Social Order,’ HuffPost (July 17, 2012), available at http://www.huffingtonpost.com/2012/07/17/paul-volcker-richard-ravitch-budget_n_1677739.html. <
[7] Schoenbrod, supra note 6 at 101 (2017).
[8] Eugene McQuillian et al., The Law of Municipal Corporations §§ 39:19, :33. (3d ed.2017); Antieau, supra note 3, at § 66.15.
[9] N.Y. Const. Art. VIII, § 1.<
[10] McQuillian et al., supra note 8, at §§ 1:43–44.
[11] Id. § 1:48.
[12] See, e.g., Florida, Fla. Stat. Ann. § 120.541(3) (2010 West).
[13]< Schoenbrod, supra note 6, at 150–51.