State Budget Cuts Not Always About The Money

by | Jan 31, 2011 | In The News, The Economy, Weekly Column

For most state governments, including South Dakota, the chickens are coming home to roost.

For decades state and local governments have spent far more than they’ve received. They’ve funded the shortfall by borrowing and pushing the repayment out into the future, hoping against hope that somehow the money to repay the debt would come from increasing tax revenues.

Unfortunately, the increases didn’t materialize. In some cases, tax revenues actually fell as taxpayers’ incomes shrank or highly taxed individuals and companies moved to states with lower tax bases. Cities and states that overspent and over-promised are now seeing lenders begin to refuse requests for new borrowing. Now, they must make the painful decision to cut spending. This by necessity must include the programs most responsible for the overspending, which are the entitlement programs like education, Medicaid, Medicare, and public pensions.

Fortunately, in South Dakota, most of the overspending is funded by robbing savings we have set aside for various projects and emergencies. Governor Dennis Daugaard has proposed a budget that cuts state spending 10% across the board, including education, Medicaid, and Medicare.

National polls say most taxpayers are all for cutting spending, except when it comes to cutting the entitlement programs. Predictably, most people also oppose cuts to programs that benefit them directly.

Since education and health care entitlement programs make up two-thirds of the overspending, South Dakota would need to cut every other government program by about a third to balance the budget. That would reduce law enforcement, road repair, and other government services to a point that would certainly bring new cries of outrage.

While most government departments are attempting to comply with the Governor’s 10% cuts, officials in the State Investment Office say their budget shouldn’t be cut at all. They are in charge of managing and investing the retirement fund that 70,000 South Dakotans depend on now or will in the future for their retirement income.

Why does this office feel they should be treated differently than other state agencies? They have a sound reason. Their funding doesn’t come from tax revenue, but rather from the investment earnings of the fund. Reducing their salaries by 10% would add $1.07 to each retiree’s monthly benefit. It won’t save the state one dime in revenue that can be offset against any other expense.

The SDIC is one of the most bare-boned investment operations in the country. The State of South Dakota spends only .08% for investment advice and management. Contrast that with the more normal range of .50% to 2.00%, and it’s clear that the SDIC is adding huge value to retirees. When you consider the fact that the SDRS out-performs 99% of other public plans, the incredibly low expense ratio of .08% is even more startling.

The SDIC keeps costs low by outsourcing very little, keeping its investment jobs in South Dakota where the staff members earn less than the median industry salaries they could earn elsewhere. Cutting their salaries even further would hurt South Dakota’s attempt to keep our outperformance (which adds hundreds of millions of dollars to the retirement fund) by attracting the best investment professionals. Saving a few dollars in salary costs now would not be worth the dollars it could cost current and future South Dakota retirees.

While the Governor understands the SDIC’s budget doesn’t come from taxpayer dollars, and he lauds their outperformance, it doesn’t change his position that the salaries should be cut because of public perception and a need to be fair. That thinking is a perfect example of a money script. It’s further evidence that most irrational money decisions are “not about the money.”

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