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Federal funding: far from free

Recently, the Tax Foundation released a study showing which states rely most on federal aid and what percentage of their budgets come from these federal dollars.

States receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. In fact, when averaged together state governments relied on federal money for almost one-third of their general revenue in 2014.



This dependence diminishes local priorities in favor of national special interests, incentivizes unnecessary spending at the state and local levels, mandates burdensome regulations, and leaves states vulnerable to future federal spending crises. Simply put, these dollars aren’t free – and the economic, social and financial costs are passed along to taxpayers.

Sutherland Institute wrote an article a year ago about the negative consequences of federal aid in an op-ed in the Daily Herald titled The Myth of Free Federal Money:

“No such thing as a free lunch.”

“If it sounds too good to be true, it probably is.”

“You don’t get something for nothing.”

We know all this. Yet the allure of “buy one, get one free!” “no money down!” and “get 6 months free!” still draws us in.

We see this natural impulse at work when “free” federal money is offered to our elected officials. With billions of tax dollars dangling in front of state and local governments, the sales pitch of better schools, stimulated economies and improved roads usually proves too enticing to turn away.

Unfortunately, this promise is based on a misconception. Federal funding isn’t free at all. In fact, according to new research, it costs Utah taxpayers hundreds of millions of dollars per year.

A new study from Economics International (EI) reports that each additional dollar of federal grant money to the states is associated with an average increase of 82 cents in new state and local taxes.

In Utah, the extra tax burden from every dollar of federal funding is 72 cents. To illustrate, a hypothetical 10 percent increase in federal grants to Utah ($560 million) would be associated with approximately $400 million more in spending from state and local government — an additional tax burden of about $140 per Utahn.

That’s slightly below the national average, but it is cause for genuine concern. It means Utah’s elected officials are being manipulated by the federal government into increasing the financial burden on Utah taxpayers in ways they wouldn’t do otherwise.

We encourage the public and policymakers to reread this op-ed and reject federal funding’s empty promises.

Legislature has it right on budget approach

Photo Credit: Scott Catron

Photo Credit: Scott Catron

The Utah Legislature recently received updated budget projections that give policymakers hundreds of millions in new state taxpayer dollars to allocate. The governor’s office subsequently recommended a $14.3 billion budget, which reportedly encourages legislators to spend almost all of this new revenue. With that as background, we can now expect special interests to begin lining up to pressure lawmakers to give them every taxpayer dollar possible.

Fortunately for Utahns and their families, the Legislature has established a process for budgeting that takes a more cautious approach than “spend it all now.”

Last year, the Legislature passed bills that created a process to determine the proportion of new tax dollars technically considered “ongoing” that can actually be expected to be ongoing in reality. This is necessary because historical revenue information shows that some technically “ongoing” tax revenue actually vanishes during a recession. The Legislature tasked its budget staff to examine historical trends and estimate how much new “ongoing” tax revenue (on paper) is likely to be temporary in fact because it is above historical revenue growth trends. Based on that analysis, the amount of that “above trend” revenue is about one-third of the projected ongoing new tax revenue.

Because this money is likely to disappear during hard economic times, it can be quite risky to spend it on programs that require sustained taxpayer funding (e.g. public school operations, transportation administration or prison operations). When a recession hits and the supposedly “ongoing” tax revenue goes away, unless there has been sufficient financial contingency planning in good economic years, then policymakers will be left with the unappealing options of either cutting important government programs and services or increasing taxes – both of which harm and disrupt the lives of Utahns. Read more

Pension madness


According to a just-released study by State Budget Solutions, Utahns are in hock to the tune of $16,350 apiece to the state employee pension system, for about $34 billion of unfunded liability. Just for context, that’s about five times the per capita taxes in the state.

Utah’s pension system, like that of virtually all states, didn’t have enough reserves and expected revenues to cover the obligations that have been made to workers in their retirement years. Generally speaking, that leaves several alternatives when the bill comes due for making up the difference: shift spending from other priorities; raise taxes; break the pension promises that have been made to workers; or reform the system so that future inflows equal future outflows.  After the economic downturn of 2008, Utah addressed the problem head-on and passed sweeping pension reforms. 

It will take time to grow out of the dip, as the reforms did not apply to current workers, but all new employees starting in July 2011. With those reforms, however, Utah is on solid footing and is regarded as a leader in pension reform around the country.

How do states get so far in debt? Easy peasy. Just kick the can down the road. Pay and benefit increases are generally expensive and take money away from other spending priorities in the short term. Pension increases, on the other hand, are paid way out in the future when someone else is in charge and, therefore, on the hook to fix. They also don’t count against any annoying balanced budget requirements, so making promises we know we can’t keep is a win-win, at least until the bill comes due.

Every year that pension liabilities accumulate, the options to fix them get narrower and more painful. The Band-Aid approach is to shovel a little extra money into the pot every once in a while to keep the decision day far enough out there to ignore, but that doesn’t address the root problem of basically writing post-dated checks.

It’s hardly leadership, and is a lot closer to irresponsible to do that. States like California and Illinois are close to the point where pension liabilities are budget breakers. Cities like Detroit and Stockton, Calif., have already gone into bankruptcy as a result of extravagant public sector pension promises that anyone with a two-dollar calculator and temporal awareness could have known would lead to crises.

So what to do? The biggest problem is that most public sector pensions are of the defined benefit type, meaning that they promise to pay a certain amount for the life of the retiree regardless how much was put in. The private sector, meanwhile, is moving almost entirely to defined contribution plans, in which the employee and employer both contribute to a pension that then pays out according to how much was put in. That encourages smart decisions by both the employee and employer, and also reduces the risks to both since everyone knows that what comes out of the system has to go in first. I’m not a mathematician, but that seems to make sense to me.

Utah largely moved away from the defined-benefit program with the reforms passed in 2010. This state has course-corrected and is on solid finanical footing. Other states have not been as wise and their problems continue to compound. Ignoring this problem will not make it go away. 

So what to do? The biggest problem is that most public sector pensions are of the defined benefit type, meaning that they promise to pay a certain amount for the life of the retiree regardless how much was put in. The private sector, meanwhile, is moving almost entirely to defined contribution plans, in which the employee and employer both contribute to a pension that then pays out according to how much was put in. That encourages smart decisions by both the employee and employer, and also reduces the risks to both since everyone knows that what comes out of the system has to go in first. I’m not a mathematician, but that seems to make sense to me.

How states that take the federal bait end up on the hook – Sutherland Soapbox, 10/14/14

Fisherman_and_his_catch_SeychellesThis post is a transcript of a 4-minute weekly radio commentary aired on several Utah radio stations.

Last week, Sutherland Institute had the opportunity to meet with Tarren Bragdon while he was in Utah’s capital. Tarren is CEO of the Foundation for Government Accountability – also known as the FGA – an independent, nonprofit policy organization based in Naples, Florida. With a focus on healthcare and welfare issues, the FGA works with policy makers in about 20 states helping them fix big-government and broken healthcare and welfare programs. Among their priorities is freeing people from dependence on government and helping them move on to a better life.

Medicaid expansion is a significant topic across the nation. A number of states have decided to expand while others have not. As Utah is in the process of working toward making that decision, Bragdon discussed with Sutherland key elements of this important issue that he and his colleagues are addressing as they meet with legislators and decision-makers across the nation. In the videotaped interview, Tarren talked about Medicaid expansion in general and briefly about the Healthy Utah Plan proposed by Governor Herbert.

In the brief, 14-minute interview, he describes the informative experience of states that have made the decision to expand Medicaid and, with the body of information now emerging, he highlights points of particular relevance he believes Utah policy-makers should keep in mind as they work through the decision process:

Essentially, what you have right now is the federal government dangling this promise of federal money in front of the states, hoping the states will embrace this Medicaid expansion voluntarily because they want this federal money to flow into their states. But what we’re seeing is that just like with almost every welfare expansion, that the prediction of how much it would cost is very different than the reality. And so we’re seeing states already having dramatically higher enrollment in Medicaid expansion than what they projected and dramatically higher costs. It turns out these individuals are much more expensive to cover than single moms. And so states are already seeing this as a budget buster. In states like Arkansas, the state taxpayers are on the hook for tens of millions of dollars just in the first year.

He then explains what this means for the most vulnerable populations – for whom Medicaid was implemented in the first place:

What that has meant in the states, and we’ve already seen this happen, is they will cut back Medicaid programs when times are tough for those most vulnerable populations because those are the populations who they have the lower match for. … Typically, lawmakers focus on making those cuts to the most vulnerable. We saw this in Arizona where, when the Medicaid expansion for childless adults got out of control, the Legislature voted to cut heart and lung transplants.

Read more

Video: The risks of Medicaid expansion and Healthy Utah

What is the significance of the numbers 1, 3 and 10 when it comes to Medicaid expansion? Watch this video to find out:

In this interview, Tarren Bragdon, CEO of the Foundation for Government Accountability (FGA), and Stan Rasmussen, director of public affairs for Sutherland Institute, discuss Medicaid expansion in general and the Healthy Utah Plan proposed by Governor Gary Herbert.

Bragdon, whose nonprofit is based in Naples, Fla., talks about the experiences of states that have made the decision to expand Medicaid – and why Utah should be wary of the “free” federal money offered for expanding Medicaid.

Utah, where careful planning makes the sun shine

sunshinestate2013This report by the State Data Lab, a project of the nonpartisan Truth in Accounting, finds that Utah is one of only nine “sunshine states” – meaning the state governments have enough financial assets to cover their financial liabilities (debt).

Click here for more details about Utah’s financial position.

(Or create your own graphs for any of the states.)

There is a caveat: The report notes at the bottom of the page that, unfortunately, each of the nine states has “hidden retirement debt,” or commitments to current employees’ retirement benefits that aren’t counted as traditional financial liabilities or debt.

Spending $24,696 per minute: The 2013-14 Utah State Budget

Spending Clock

In 41 hours, the Utah state spending has already burned through nearly $61 million of the state budget.

With the dawning of Utah’s new fiscal year, we’ve reset our state spending clock to show you, real time, how quickly the state spends our tax dollars. We understand governments have a legitimate and vital role to play in our pursuit of life, liberty and happiness. And we also understand the inherent and insidious “spending bias” created by the very nature of our political system.

That system is built to collect tax dollars from taxpayers to “solve” apparent “needs” in the service of the common good. The desires that drive this system are human. Legislators perceive a public need and determine resources to try to solve that need. The issue, of course, is that those resources aren’t created by government. They are created by we, the people. Those resources are otherwise sacred.

What elected officials do with these resources comes, rightly so, with increased scrutiny.

The idea of civil society within a democratic republic is that government provides an ordered framework for a free society to thrive and flourish, and lets the people voluntarily do what they do best: deliver the highest quality of life ever known to mankind. This is a very symbiotic relationship. Unfortunately, governments can turn toxic, hurting their citizens through excessive regulations, overly burdensome taxes, market manipulation, cronyism, preferential tax breaks and government competition with private enterprise. Read more

Cast a skeptical eye on Medicaid economic impact predictions

labThis is the third of three blog posts discussing the findings of a recent state-funded report on the impacts of Utah’s pending decision on Medicaid expansion. See the other two posts here and here.

A recent state-funded analysis projected that expanding Medicaid under the provisions of Obamacare will create hundreds of millions of dollars in new economic activity and tens of millions of dollars in new tax revenues over a decade, presumably leading to thousands of new jobs in Utah. The key question about these projections is: Can they really be trusted?

As an economics major in college, I remember one of the introductory lessons in Econ 101 (or Econ 110, as it is numbered at BYU) talked about past attempts to project future economic outcomes. How did they do? Terrible. They couldn’t predict the economy very many months ahead, let alone years.

Why? Because mathematical models do not accurately or reliably describe the behavior of unpredictable human beings. Because statistical models cannot capture responses to unforeseen, economically harmful events which change individual and group economic reasoning and behavior. In short, because human intelligence and understanding of naturally unpredictable human behavior has limits which preclude broad comprehension and prediction, human attempts at boiling that complexity down to a mathematical/statistical formula have failed miserably.

So what does the projection that Medicaid expansion will generate hundreds of millions of dollars in new economic activity over 10 years really mean? Probably not much … except perhaps that an economist somewhere just got a fat, taxpayer-funded paycheck.

Thousands to lose existing insurance if Medicaid expands

StethescopeThis is the second of three blog posts discussing the findings of a recent state-funded report on the impacts of Utah’s pending decision on Medicaid expansion. See the first post here.

Some Medicaid expansion advocates in Utah believe that, financially, the state can get something for nothing by opting to expand the program under the provisions of Obamacare.

Unfortunately, this contradicts common sense and experience. Expanding Medicaid will not only cost taxpayers millions, but will push thousands off their current insurance coverage.

According to a recent state-funded analysis of Utah’s Medicaid expansion (or non-expansion) options, between 18,119 and 55,542 men, women, and children in Utah will lose their private health insurance coverage by 2023 if Utah policymakers choose to expand Medicaid. These estimates are based on a broad swath of peer-reviewed research on a phenomenon called “crowding out” – the reality that expanding government health care reduces private health care coverage.

According to the analysis, there is no “hard evidence” suggesting that those who lose private health insurance from “crowding out” subsequently enroll in public health care programs. To the extent that they do, it means Medicaid expansion will cost Utah taxpayers millions of dollars to pay for the health care of thousands of Utahns that would have paid for their own health care coverage sans expansion. On the other hand, if Utahns “crowded out” of their private coverage do not enroll in Medicaid, it means Medicaid expansion is actually creating thousands of uninsured Utahns who would have had health insurance if Utah had not expanded Medicaid – creating more of the very problem that Medicaid expansion is meant to address!

Whether out of basic fairness to Utah taxpayers who would be asked to pay for expanded government health care, or from a desire not to pursue “solutions” that create more of the social problem they claim to address, Utah policymakers should avoid Medicaid expansion. Not only will it cost taxpayers millions, but it will needlessly destroy the health care coverage of thousands of Utahns.

Expanding Medicaid in Utah will cost taxpayers millions

Dollars funnelThis is the first of three blog posts discussing the findings of a recent state-funded report on the impacts of Utah’s pending decision on Medicaid expansion.

Some advocates for expanding Medicaid in Utah have recently opined that “there is no mathematical reason not to” expand Medicaid under the provisions of Obamacare. A recent state-funded analysis of Utah’s Medicaid expansion (or not) options shows that this claim is not grounded in reality.

According to the analysis, “expanding Medicaid is modeled to have an overall cost to the state,” which is to say, to Utah taxpayers. If policymakers choose to expand its Medicaid program, the least expensive option is estimated to cost state and county government $246.5 million over ten years, and the most expensive option is estimated to cost $540.8 million over the same period. This is compared with a 10-year cost of $212.6 million for choosing to not expand Medicaid beyond the mandatory changes required under Obamacare, for a net Medicaid expansion cost for Utah taxpayers between $33.9 million to $328.2 million.

It is important to note that these cost estimates assume that the federal government actually provides all of the Medicaid funding that they have promised to states over the 10-year period of the study. Considering the fact that, according to the American Institute of CPAs, the “total obligations of the US government – $61 trillion – exceed the net worth of all of its citizens,” and according to the U.S. Government Accountability Office, “…the current structure of the federal budget is unsustainable,” it seems reasonable to question this assumption.

Some may wish to believe in the fantasy that expanding Medicaid will improve health care for hundreds of thousands of Utahns without costing Utah taxpayers anything. But in the real world you do not get something for nothing. To believe otherwise defies both common sense and human experience. There will be a cost to Utah taxpayers for policymakers choosing to expand Utah’s Medicaid program. And it likely to be significant, running into the hundreds of millions of taxpayer dollars.