Spending Growth, Priorities in the 2018 House Budget

UPDATE: When the Senate’s version of the budget returned to the House, the latter readopted the original House budget with additional amendments. The total budget spending approved by the House is now $24.5 billion – a $4 billion decrease from the original House budget. This decrease comes from a reduction in the Other Funds revenue projection. The amended House version and the Senate version are currently being debated in conference committee. 

 

The South Carolina House debated and passed the largest budget in state history last week. However, the term “debate” is perhaps overly generous, as the House passed the majority of the budget without any debate at all and a perfunctory roll-call vote for each section – most of which passed nearly unanimously.

While unfortunate, this is not overly surprising. The budget process followed by legislative leadership is complex, and designed to minimize involvement not only from citizens, but from the 99 House members not on the Ways and Means Committee (By contrast, the budget process required by state law is open and transparent, geared to facilitate citizen involvement).

Only a relative handful of amendments were adopted on the House floor, and none of them changed agency appropriations. By and large, members simply rubberstamped the spending decisions of House leadership. Below is a breakdown of the major takeaways from this year’s House budget.

 

1.  Overall Budget Growth

The budget approved by the House is a grand total of $28.5 billion – a $1.2 billion increase (by 4.36%) over last year’s budget.

This is even more concerning given that South Carolina citizens’ per capita income growth in 2017 was only 2.5%. That number reflects the first three quarters of 2017 as reported by the US Bureau of Economic Advisors. The fourth quarter numbers have not yet been released, but it is clear that income growth in South Carolina will fall far below state government’s spending increase of 4.36%.

 

2.  Growth in General, Federal, and “Other Funds” Spending

The South Carolina budget consists of three categories of spending: General (tax revenue), Federal (revenue derived from the federal government) and Other Funds (fines and fees). However, lawmakers only debate the first category of general fund spending. The full breakdown of the three funds cannot even be viewed in the budget (which shows only the general funds and the total of the three categories).

For the full breakdown of agency appropriations in all three spending categories, SCPC policy analysts had to refer to the summary control document released by the Revenue and Fiscal Affairs Office (RFA) – not to the budget itself. Below is a breakdown of the spending increases in each category.

General Funds

  • $7,947,088,831 – 2017 Conference budget
  • $8,223,447,860 – 2018 House budget
  • 3.48% increase

Federal Funds

  • $8,592,136,727 – 2017 Conference budget
  • $8,766,252,935 – 2018 House budget
  • 2.03% increase

Other Funds

  • $10,834,446,943 – 2017 Conference budget
  • $11,577,944,965 – 2018 House budget
  • 6.86% increase (2.24% of which is gas tax hike – one third roughly)

Remarkably, South Carolina gets more money from the federal government than from its own taxes. This is particularly concerning given the fact that federal money always comes with strings attached. While it isn’t always clear what all those strings are (as agencies do not follow the state law requiring those strings to be disclosed during the budget process), it is impossible to be a truly independent state when one-third of the state budget comes from the federal government. South Carolina’s reliance on federal dollars has influenced – and in some cases dictated – state policy on education, transportation, second amendment rights, entitlements, and many other areas.

Moreover, not all the funding received from the federal government is reported in the budget. In 2013, federal dollars funding the food stamp program (Supplemental Nutritional Assistance Program – SNAP) (estimated at $1.5 billion for fiscal year 2013-14) was moved “offline” into an unbudgeted account and has been unaccounted for in state budget documents since then.

For this reason, it’s unknown how much money the federal government will disburse to South Carolinians through the SNAP program in fiscal year 2018-19, but last year’s total equaled $1 billion.

“Other Funds” is the largest category of spending in the budget and is comprised of fines and fees. These are already appropriated in state law as dedicated revenue streams, so they are not treated as discretionary spending for budget purposes. For instance, the gas tax hike that passed last year is not in the general fund category, in spite of the fact that it is, properly speaking, a tax. However, lawmakers renamed it a “fee” to circumvent the constitutional prohibition on tax revenue being used for revenue bonds. Consequently, the gas tax increase is reflected in the “Other Funds” category.

 

3. Growth in Programs and Agency Spending

Surplus general fund revenue this year equaled around $232 million due to taxes generating more revenue than last year. As usual, lawmakers spent every dime of it. Below are some of the agencies that saw increases in this year’s budget.

Department of Transportation (DOT) – increase of $280 million

The DOT’s overall funding increase this year comes from Other Funds, much of which is due to the gas tax hike as previously noted. The DOT’s general fund appropriations dropped significantly, since it is no longer the pass-through agency for an annual $50 million appropriation to STIB as formerly required by the now-repealed Act 98. Both the 2016 bond bill and 2017 gas tax hike had significant STIB funding measures, so the direct STIB appropriation is no longer needed and was repealed in the gas tax hike bill.

Department of Education (DOE) – increase of $159 million

According to a presentation by the House Ways and Means Committee, 23% of the new recurring funds went to K-12 education. This accounts for the $114 million increase in general fund appropriations to the DOE, but it should also be noted that the DOE received a 5% increase – $40 million – in Education Improvement Act (a dedicated statewide sales tax for education) revenue as well.

University of South Carolina (USC) – increase of $124 million

The Columbia USC campus alone received a 9% increase in overall appropriations. Combined with the increases to its seven satellite campuses throughout the state, the total increased revenue is $124 million. Lawmakers dedicated 30% of this year’s non-recurring surplus funds to higher education, and nearly all of South Carolina’s public colleges and universities saw funding increases.

Public Employee Benefit Authority (PEBA) – increase of $118 million

26% of new recurring revenue was dedicated to PEBA for pension funding increases and employee healthcare. Last year’s pension “reform” bill increased the employer (taxpayers’) contribution to the state pension plan by one percent each year, but did not specify where those funds would come from. This year’s budget funds mandated that increase through new recurring tax revenue (which basically means that the state received more income and sales tax revenue than was anticipated). Will the funds be there next year to cover the mandated pension increase? Put simply, those funds cannot be guaranteed in the future. As the required employer contribution rate increases by 1% annually, the state will feel growing pressure to pay for the pension system. If the funds to cover the system aren’t available, agencies could be forced to tighten their budgets and even cut programs and staff, and in a worst-case scenario, lawmakers could be forced to raise taxes to cover the costs.

Department of Health and Human Services (DHHS) – increase of $115 million

A large portion of the increased revenue to DHHS went to Medicaid funding. South Carolina officials have expanded the Medicaid program in the state in a variety of ways since 2012, and those costs continue to rise. Other programs funded with additional state revenue are a healthcare initiative for rural areas, telemedicine infrastructure and autism therapy and service providers.

4. Budget Priorities: Core Functions vs. Economic Development

The annual budget process always brings lawmakers’ true priorities into sharp focus when it comes to spending taxpayer dollars. For instance, during the second day of the budget debate, two amendments were presented that would have diverted funds from economic development initiatives towards core government functions.

The first would have completely defunded The Commerce Department – an entity whose primary mission is economic development – and diverted the money to roads. That amendment was voted down 98-2. The second amendment would have redirected Commerce’s funding increase to the Local Government Fund (LGF). Since the LGF’s purpose is to cover the costs of state government’s local mandates, underfunding it can force local governments to either reduce services or raise local fees or taxes (not to mention that the funding level is required by law, which is routinely ignored by lawmakers). This amendment failed 97-2.

As a general rule, economic development policies are better left to the free market. Far too often they result in wasted taxpayer dollars, due to the lack of mechanisms for measuring the success or failure of incentives, and they allow government to pick winners and losers in the marketplace. Economic development is certainly not a core function of government, but lawmakers voted twice to fund it over definite core functions of government that should receive priority spending.

 

Conclusion

None of these themes – increased spending, wrong priorities, mismanaged dollars, unfunded mandates, etc. – will come as a surprise to those familiar with typical South Carolina state budgets. These trends are a pattern that repeat themselves year after year. The question is not whether spending will increase, but by how much and for what – and rarely do the answers to those questions reflect fiscal discipline and a proper view of government’s role and core functions.

The budget is now in the Senate and will be considered in the coming weeks first by the Senate Finance Committee, then by the body as a whole. Typically, the budget will end up in conference committee to reconcile differences between the House and Senate’s spending priorities before it lands on the Governor’s desk. Unfortunately, those differences are often relatively minor, and rarely center on whether or not to increase spending in the first place.

We will continue to monitor the budget as it makes its way through the legislative process and will keep our readership posted on how lawmakers decide to spend taxpayer dollars.

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