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More to the budget than meets the eye

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McCabe McCabe
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  • Map to Prosperity

    Map to Prosperity

    Wednesday, December 24 2014 4:16 PM EST2014-12-24 21:16:46 GMT
    "Map to Prosperity" is a long-term project of The State Journal that will deeply examine government and business in West Virginia — both the perceptions and the reality.
    "Map to Prosperity" is a long-term project of The State Journal that will deeply examine government and business in West Virginia — both the perceptions and the reality.

Sen. Brooks McCabe, D-Kanawha, is managing member and broker of West Virginia Commercial LLC. He has been involved in commercial and investment real estate for more than 30 years, and he also is general partner of McCabe Land Company LP. He has served in the West Virginia Senate since 1998, and is a special project consultant to The State Journal.

The governor's budget for Fiscal Year 2015 is a well-formulated plan that basically keeps state government functioning as normal while providing for modest pay raises, avoiding layoffs or furloughs and funding the ever-increasing Medicaid costs.

Coming on the heels of two years of structural budget cuts amounting to approximately $145 million, the proposed state budget appears to be meeting the needs of the state as best it can. The Legislature will carefully analyze each line item and make changes it deems are in the state's best interest. There will be considerable tension as these financial policy discussions proceed in the next two months. 

However, there is one thing missing, and that is a "crisis mentality." 

Everyone is working toward balancing the budget, not recasting it to create the funds needed to restructure government. Current forecasts show the state budget should return to a growth mode within the next two to three years. If we can properly manage the state's fiscal policy in the short term, everything should be OK. If this is all that is accomplished, we will have missed a major opportunity. 

Balancing the budget is one thing; restructuring state government to prepare it for the next 20 years is altogether something else. If everyone understood what was around the corner, we would have a different mindset. 

Let's look at some particulars:

n The Medicaid budget will grow dramatically due to the state match gradually decreasing because of our improving economy. 

n The current match is approximately 71 to 29. It is targeted to go down .5 percent per year going forward. 

n Along with increased costs associated with the Affordable Care Act, this translates into $40 to $50 million of cost increases each year. 

n This is in the budget forecasts and is a major driver in increasing the base budget. 

But where are the other major cost drivers? Salary enhancements are projected at $52 million in FY 2017 and FY 2019. At that rate, West Virginia will continue to go backward in competitive salaries. The proposed FY 2015 budget has $42 million in salary enhancements, which provide a 2 percent increase to teachers and service personnel and approximately $500 for all other state employees. 

West Virginia will never get salaries to where they need to be with 1 percent increases each year. For salaries to raise to competitive levels, something has to give. The reality of the situation is that the delivery of services needs a complete redesign — less bureaucracy and more time on task. Fewer employees with significantly better salary levels is what ultimately will be required. Where in the budget process is this being discussed? To bring our teachers up to competitive pay levels will cost hundreds of millions of dollars, and $50 million dollars every two years is not even close to what is needed. Employee turnover in Health and Human Services is at dysfunctionally high rates. Our correctional employees are over worked and under paid. The list goes on and on. 

The point being that state government needs to redefine its workplace and find a way to provide competitive salaries for capable employees. The staffing level for full-time equivalents in the FY 2015 budget is 41,442. This is only 119 full-time equivalents fewer than in FY 2014 and 547 more FTE's than in FY 2013. One could conclude that the the current budget is designed to maintain the status quo while plowing through rough waters. 

It is not about the State trying to adjust to dramatically changing times. With the demographics of state workers, it should be possible to manage downsizing through retirements and attrition. Some employees will not be up to the task of a redefined workplace, and they will need to look for employment elsewhere. Those will clearly be the exception, and even in those cases, workforce training and job placement services can be provided. Given the extent of the redesign necessary to bring employee numbers and salaries in line, Gov. Earl Ray Tomblin missed an opportunity to start the redesign process in this budget year. Salary increases and redesigned work places should go hand in hand. 

Next year's projected shortfall is $126 million. The State has already spent the $45 million in the Tax Refund Reserve Fund. This year the Legislature's TRAFFIC account is being significantly decreased and the Rainy Day Fund A is being used for the first time to backfill the general revenue budget. The logic there is that we need to get through this fiscal year and the next and then the ship should be righted. But the problem is that will not be the case, if for no reason other than increasing pressure to make salaries more competitive. Unfortunately there are other reasons looming on the horizon. 

The governor's proposed budget was balanced using $18 million in savings created by the West Virginia Investment Management Board earning 10 percent on investments last year rather than the budgeted 7.5 percent. This reduced the required amount of funding for the Teachers' Retirement System and the reduction in the funding for the Public Safety Retirement Plan A and State Police Plan B. 

Going forward, the budget forecast makes no allowance for the years when the IMB misses the targeted 7.5 percent investment return, which happened following the market collapse of 2008. This potential annual volatility can be a time bomb for the budget.

An additional $2 million was made available to balance the budget due to a decrease in public school enrollment, per the State Aid to Schools formula. Of the $32 million needed to fund the teachers' pay raise, almost $19 million can be accounted for by reductions in funding requirements for TRS and the decrease in funding for public education. The rest could be considered coming from the Rainy Day Fund. Some folks might be a little nervous as they look forward to the coming budget years. 

This is not to be interpreted as faulty budgeting; quite to the contrary, the State's budget office is outstanding. The balancing of accounts is what good budgeting is all about. But with this comes the recognition that the future is hard to predict and by dipping into the Rainy Day Fund, a significant precedent has been set. At the end of the 2013 fiscal year the Rainy Day Funds A and B were approximately 22 percent of the general revenue budget. 

Anticipated withdrawals this year and next should still keep the fund above the 20 percent threshold, which is eyed so favorably by the rating agencies in New York. However, the projected FY 2018 budget shows a general revenue of over $4.8 billion dollars. Twenty percent of that projected amount would require a rainy day fund of approximately $964 million, well above current levels. Where is this money coming from? It is not in any of the projections and neither is the replacement funding for the Tax Refund Reserve Fund. Replacing these two funds alone approaches $100 million. 

The General and Lottery revenue estimates are $4.7 billion for FY 2015 while the state's federal funds are estimated to be $5 billion. As we move forward to coming budget years, what is the prognosis for federal funding? A safe assumption would be that there will be fewer federal dollars in the future than there have been in the past. This in itself will cause some type of redesign of how services are to be delivered and what they might include. 

As was said in the movie "Music Man," "All is not well in River City." In the recent past the management of West Virginia's programs and limited resources has been exceptional. But all is not well as we move forward. This is especially true if one tries to peek around the corner to see what the future might bring. Now is the time for West Virginia to become aggressively proactive and not allow the dictates of the situation to once again displace our good intentions. To effectively deal with the opportunities at hand, we need to be in a crisis mode with a primary tool being the recasting of the budget, not just a balancing of the budget.

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