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UPDATED: Governor’ Raimondo’s $13.6 Million Refinance

Give this to our super smaht, financially savvy new governor: She knows how to pack a budget with things that require detailed review and analysis if the public is going to have any real sense of whether it’s a good or bad package, on the whole.

Jennifer Bogdan does the good work of digging into the big refinance part of Governor Raimondo’s proposal in today’s Providence Journal:

Roughly $64.5 million in Raimondo’s 2016 fiscal year budget would come from a refinancing effort. Another $20 million would flow in fiscal year 2017. The bonds in question have an average interest rate of 4.9 percent, but if refinanced the interest rate is expected to be lower than 2.34 percent. She calls the refinancing conservative and says it would be irresponsible not to consider a money-saving measure for the state.

By “money-saving,” what the governor means is that she’s using the restructuring to borrow around $84 million in the first two years.  In the third year, the state will actually have to pay about $10 million more in debt service, and the years will change between costing more and costing less over the refinancing period.  As shown in a table included with Bogdan’s article, when the state reaches the end, in 2032, it will have actually paid $13.6 million more in debt service.

That’s where the governor deploys an accounting trick to make the analysis a bit murkier.  In the words of Budget Officer Thomas Mullaney, “The key here is that we would not enter into this transaction if the state would not ultimately come out ahead.”

He’s referring to the fact that if you look at the present value of the changes in payments up and down over the sixteen years — in other words, adjust them for inflation to what they would be in today’s dollars — the real value of the changes is actually $225,238 less in debt service.

Like so many of the “bold and innovative” moves in the governor’s budget, that’s misleading.  For one thing, the assumed inflation rate is critical.  A rough spreadsheet suggests it’s 2.97%.  In that case, it would erase these so-called savings if inflation turns out to be 2.91%.  Below that, we’ll be well into negative territory.*

For another thing, the state isn’t going to treat the refinance like a restricted fund.  The state will spend the savings in the years that there are savings and will have to come up with the money in years that there are costs.  The money is going to have to come from somewhere to pay the extra debt service, and that somewhere will very probably have been worth more to the economy than simply inflation.  (Hey, maybe the governor should invest the savings along with the state pension fund, which the state assumes makes 7.5% profit every year.)

Simply refinancing from 4.9% to 2.34% interest for the same number of years would have saved a great deal of money that could have been left in the hands of Rhode Islanders.  Whatever the governor’s room full of smaht people do for economic development, they have to do better not only than the cost of the refinance, but also the economic activity of people acting without the government’s meddling.

UPDATE (03/27/15 8:37 p.m.): According to the governor’s office, the estimated rate of inflation is 2.44%, which my math leads me to believe would produce a $2 million cost to the refinancing, in current dollars.  I’ve asked for more insight into the governor’s math, but if anybody has an idea, I’d be interested to hear it.  There also must be something incorrect in the information out of the governor’s office.  They’re saying the refinancing is of $160 million of debt, but the Projo’s numbers have the state paying nearly that amount every year.

* Posting this of a Friday afternoon, I got my signs reversed.  I’ve fixed the relevant text.

RI, Becoming the Medicaid State

Last August, I noted that HealthSource RI had largely become a means of shuffling people into Medicaid, highlighting this grim fact:

The number of new Medicaid enrollments in Rhode Island from March to August was more than five times greater than the number of seasonally adjusted new jobs based in Rhode Island.  If you want a barometer of the direction in which the state is headed, that’s a pretty good one.

Well, herewith, one of the more depressing things I’ve ever read in the Providence Journal:

The total personal income of Rhode Islanders rose 4.3 percent from 2013 to 2014, ranking the Ocean State as the 16th fastest growing state in the country and second in New England, according to figures published Wednesday by the Bureau of Economic Analysis.

But a large portion of that gain was the result of the expansion of Medicaid benefits under Obamacare. 

Total net earnings   — wages, salaries, benefits and business owners profit — rose 3.5 percent in Rhode Island, below the national average of 4.0 percent. Similarly, investment income — including dividends, interest and rent collections — rose 3.2 percent in Rhode Island, also below the national average of 3.4 percent.

Rhode Island can’t wait for Governor Gina Raimondo’s court of handpicked economic apothecaries to stumble upon a formula for turning lead into gold — or welfare handouts into jobs.  We need the state to get off of the economy’s back and stop pushing freebies onto our neighbors, even if the elite progressives have to go into withdrawal with the removal of their steady source of self-affirming power.

Skeffington: Hero or Villain?

Reading this Sunday front page article from the Providence Journal, about consummate Rhode Island insider James Skeffington, one gets the sense of a community-minded figure pulling together beloved public projects:

Friendship, sports, business, government and charity mix together for Skeffington. It’s a recipe that’s served him well through 40-plus years as a corporate lawyer and political adviser.

You won’t find Skeffington’s name on public buildings or laws in Rhode Island, but you’ll see his hand in many high-profile projects.

It could be realigning a Navy base in North Kingstown into a business park, building a convention center and a mall in Providence, attracting a global financial firm to Smithfield, keeping a lottery giant from fleeing to Massachusetts, developing a state airport parking garage or a private retirement home. He’s had a hand in all of these projects.

To bring it back to a Rhode Island cliché, Skeffington doesn’t just know a guy; he’s a guy you wanna know.  Of course, it’s not all friendship and charity.  Scion of a funeral home–operating family, he’s made himself very wealthy fulfilling his role in the Ocean State’s back rooms.  Indeed, the following paragraph could be the pivot point from the pro-government worldview to the government-skeptic worldview:

He joined the Edwards & Angell law firm in Providence after college and made himself an expert bond counsel, later importing to Rhode Island an economic-development tool devised in New York — moral-obligation bonds. Such bonds allow quasi-public agencies to issue debt without voter approval, a provision often criticized by government watchdogs.

The poster child for moral-obligation bonds in Rhode Island is 38 Studios.

It’s an easy principle to forget, as we get caught up in debating one public policy proposal after another, but every time Rhode Island undertakes economic development projects, a small group of people whose names Rhode Islanders don’t know do very well for their personal economies.  Bonds, tax credits, development, and public-private partnerships all require lawyers, brokers, dealers, negotiators, advisers, lobbyists, and on and on.

All they have to do to keep their game going is to keep friends in office and voters falling for one scheme after another.

Some of the Larger, Seriously Ill-Advised Items In the Governor’s (What Kind of) “Jobs Budget”

During the days following its release, reporters, analysts and observers worked to unpack the budget that Governor Raimondo sent to the General Assembly — and found some unpleasant items therein. Here is a bullet list of some of the bigger ones.

Proposed Statewide Property Tax

… aka, the Taylor Swift tax.

Justin got clarification from Governor Raimondo’s office that the INTENT is not to include apartment buildings as properties to be taxed. This conforms to Governor Raimondo’s attempt to sell this tax as having only a narrow list of targeted properties. (So, gosh, don’t worry about it. And, anyways, we only want to tax those icky rich people.)

Intent, however, is completely secondary. If this tax passes into law, the door will be opened wide for future – and current! – governors and General Assemblies to tax apartment buildings (of all classes and sizes); commercial buildings; second homes of less than one million dollars; PRIMARY homes of more than one million dollars; primary homes of $750,000 – $1,000,000; et empty state cetera. The critical issue is not that the initial list of targeted properties is short. It’s that the list comes to exist at all. To subject just one property classification to a new, statewide tax would set the precedent to subject virtually all real estate in Rhode Island to a statewide property tax via an easy tweak of the targeted property list.

In a perfect bit of timing, RIPEC released an analysis right before the governor released her budget of just how much Rhode Islanders are already taxed. By one measure, Rhode Island already has the fourth highest property taxes in the country. The governor is seriously proposing to raise that ranking? In fact, the one thing above all that our elected officials should not do is exacerbate this burden.

Further, there’s the matter of Rhode Island’s already undesirable reputation as a high tax state. On Twitter, Gary Sasse correctly asks,

When Tax al.rank tax climate will new statewide property tax impact rankings w resulting reputation risks?

Further to “reputation risks”, WPRO’s Gene Valicenti pointed out Friday morning that the governor’s mere proposal has made the national news via the AP’s feed. This is exactly the kind of publicity that Rhode Island needs to avoid, not curry.

Governor Raimondo’s Proposed Statewide Property Tax Redefines Ownership of Real Estate as a Privilege

This one was a great catch by Justin.

Friday Fun: “RI’s Economic Development Shuffle”

So, it’s the beginning of another budget season, and with a new governor to boot — Gina Raimondo, of pension reform fame.  That must mean that it’s political season to make positive noises about economic development.

Of course, when it comes to Gina (or “gina,” as her campaign signage put it), we’re looking at an additional dimension of credulity.  Some among “the business community” assume she’s not just the typical tax-and-spend (on-somebody-other-than-the-business-community) progressive Democrat.  We’ll see.

But the flurry of media hits about whether the new governor can come up with a scheme to outshine all the schemes before suggests another offering from Justin Katz and His Out-of-Tune Piano.

RI’s Economic Development Shuffle

Well, Gina, she called me, just the other day
She’s our new Wall Street gov’nor, so I heard what she had to say
She said, “I need you to set Rhode Island right.”
So we made a few plans,
And shook a whole bunch of hands,
And the hors d’oevres were dynomite.

We’re good, y’see,
My friends and me,
We’ll develop the economy.

We all know Rhode Island should grow at a faster pace,
But we paid our dues, man, and we don’t want to have to race.
The good news is, there’s a central planning bus.
So we’ll call all our old schemes new,
And tilt the board more for just us few,
And pray the state will outlive us.

Don’t need everybody.
My friends and me,
We’ll develop the economy.

Each gear has to fit:
Government, business, welfare advocate.
It’s a fine machine; don’t mess with it.

Not just talking pride.
We’re all safe inside.
If we go opening doors, where will we hide?

They say that a mind’s a terrible thing to waste
I’m not one to argue, long as they’re molded to my taste.
My business model, see, it’s got specific needs.
Don’t care if they’re white or brown,
Long as they keep my expenses down,
And the K-12 grows them up like weeds.

When wages freeze,
My friends and me,
We’ll develop the economy.

We’re the leaders who lead,
My friends and me,
We’re developing the economy.

Possible Budgeting Illusions from Raimondo

Shortly after Governor Gina Raimondo gave her presentation on Rhode Island’s economy and its budget implications, somebody asked me what I expected in her budget.  Here’s a succinct summary of the presentation from the Cranston Herald editorial board:

Neither cuts nor tax increases, the presentation asserts, will solve the problem. The sales tax would need to be raised from its current 7 percent to 8.8 percent in fiscal 2017 to close the projected budget gap. Meanwhile, the $255.6 million shortfall foreseen for that year significantly exceeds the total budgets of 21 combined state agencies.

The governor’s presentation proposes instead a shifting of resources to focus on job growth, creating a “virtuous cycle” in which those investments in education, infrastructure and property tax relief expand employment opportunities and thus grow the state’s revenue base.

My expectation is that Raimondo will follow the playbook from pension reform, with these steps:

  1. Declare a dire problem, consisting of a short-term emergency and long-term doom.
  2. Propose some technocratic solution that will supposedly fix the long-term problem once and for all.
  3. Make sure that there are enough gimmicks in the solution to defuse the short-term emergency and expect attention to have drifted by the time it falls apart.

The short-term emergency, in this case, is a balanced budget for the  next fiscal year, starting this July, and the long-term doom is the unyielding projected deficits resulting, in large part, from Rhode Island’s continuing economic decline.  The expectation, then, is that Raimondo’s budget will include some sort of new revenue stream, perhaps justified by its use toward some economic development scheme, mixed with budget reductions of the “waste and fraud” variety.  Whether the elusive waste-and-fraud savings could be realized is actually immaterial, inasmuch as the budget would be balanced on paper, and adjustments could be made when the budget is reviewed in November and fixed sometime during the fiscal year, when the eyes of those few who pay attention are mainly focused on the next year’s budget.

That’s what I told the person who asked me.  It was notable, therefore, to see this in yesterday’s Providence Journal:

House Speaker Nicholas Mattiello on Tuesday disclosed that Gov. Gina Raimondo had asked him if she could include “$40 million to $50 million’’ in Medicaid cuts, as a “placeholder” in her first budget proposal, without spelling out how and where she intended to reduce spending in the $2.7 billion government subsidized health-care program.

Mattiello said the governor told him, “in very general terms that there would be some kind of a placeholder and a request for a task force to figure out the cuts.’’

You’re Borrowing from the Banks One Way or Another

Depending on your perspective, it’s either “getting your head around the finance industry” or “adopting a particular perspective on the finance industry,” but whichever it is, once you’ve accomplished it, standard news coverage seems to miss most of the critical observations.  Take this article by Liz Capo McCormick and Daniel Kruger:

Growth is on a tear, hiring is the strongest in decades, and households are the most upbeat since 2011. Yet banks such as Bank of America Corp. keep plowing their burgeoning deposits into U.S. government and related debt — pushing the industry’s holdings past $2 trillion — instead of lending it all out.

What is a government bond, really?  It’s the government borrowing cash now and promising to pay more for it later.  In other words, the banks are lending the money out, just to the government instead of to consumers.

So, who is the government?  Well, if we’re talking about the power that it wields, then we’re mainly talking about an aristocracy of politicians, special interests, and wealthy individuals, but if we’re talking about responsibility for the money that it spends, then the government is all of us.  It’d be more precise, in other words, to say that the banks are lending to us by way of the government, rather than directly.

Why would they do that? Lending to the government is almost risk free, so the banks don’t get a tremendous return on their investment.  Lending to consumers has some risk to it, because people can wind up unable to pay, so banks account for that by requiring larger returns on their investment.

Despite the efforts of the White House and the news media to insist otherwise, there’s still a lot of uncertainty in the economy, and with the Federal Reserve keeping interest rates so low, banks have incentive to accept the lower returns of government bonds.  With such emphasis on keeping inflation down, there’s less incentive to take some risks with money in the lower-risk parts of portfolios to try to keep the real value up.  And with so much in guaranteed returns on government bonds, banks and other investors can gamble those future earnings on stocks for the higher-risk parts of their portfolios.  (After all, much of the cash is simply money “printed” by the Federal Reserve.)

There are a number of vicious circles interlocking, here.  For one, if banks increase their consumer lending, consumers will increase their spending, and general demand will increase in the economy, which will translate into inflation, meaning those government bonds will be worth even less in real dollars.  Meanwhile, the more government debt there is, the less likely rate increases will be, because it would blow up the federal budget if it had to pay more on what it has borrowed in our name.

But hey, maybe the geniuses in government and the finance industry who brought us the mortgage-backed securities crash have really got this whole economy thing figured out and really do want what’s good for everybody, not just their own ever-divergent incomes.

Talking About Rhode Island’s 1%

The interesting part of PolitiFact RI’s review of an income-inequality statement by labor heavyweight George Nee isn’t that the reporters gave him a Mostly False (or couldn’t bring themselves to give him a full-on False), but the line that it draws for the 1% in Rhode Island (emphasis added):

Nee also directed us to a Jan. 26, 2015, report and data compiled by the Economic Policy Institute, another Washington, D.C.-based liberal economic think tank. It compared each state’s highest earners — the top 1 percent — with everyone else.

The institute reports in Table 2 that in 2012, the average income of Rhode Island’s top 1 percent was $966,071 . That’s less than the $1.3 million U.S. average. …

(That report, by the way, concludes that your income needs to be at least $314,647 in Rhode Island to be in the top 1 percent.)

One wonders what sort of people make up this group of roughly 10,000 Rhode Islanders.  Investment types, successful business owners, lawyers, doctors, and so on, probably.  According to the RI Center for Freedom & Prosperity’s RIOpenGov payroll application, it also includes the University of Rhode Island’s basketball coach and university president.  One surprising member of the 1%, apparently, is Neil Steinberg, the President of the Rhode Island Foundation.

Most folks think of the RI Foundation as a mainly charitable organization, but it’s also been investing in socialistic enterprises, like RhodeMap RI, and other political manipulations of the state’s economy.  It’s odd to find that effort headed by somebody with (in the Economic Policy Institute’s words) “outsized” income.

It isn’t clear from the liberal think tank’s report whether it’s measuring household income or individual income.  If it’s the former, of course, Rhode Island’s government and its satellites would account for many, many more members of the 1%.  I mean, even some retired state workers have pensions that would suffice as half of a 1% income level.

Evaluating Tax Incentive Programs: Matching Practice or Kill Order?

When one reads that Rhode Island is engaged in something that might be seen as a “public policy best practice,” cynicism is usually the appropriate response. Such is the case with a Pew Charitable Trusts brief that cites Rhode Island as one of a handful of states implementing good-government reviews of economic development tax incentives.

Ten states and Washington, D.C., according to Pew, have taken steps to ensure “that tax incentives are evaluated regularly and rigorously.”

The legislation in question is a 2013 bill originating in the Rhode Island Senate, number S0734, which evaluates tax incentives and other government activities. The first section of the bill tasks the still-new Office of Management and Budget with “a comprehensive review and inventory of all reports filed by the executive office and agencies of the state with the general assembly.”

So rigorously have Rhode Island’s policymakers been reviewing all of the reports that state government pays itself to create for them that they now require a report on all of the reports that they receive.

Continue reading on

Spending and Addiction to Debt

A chart that the Wall Street Journal tweeted a few weeks ago is worth revisiting.  It shows inflation-adjusted cumulative growth in household consumer spending from 1989 through 2012, contrasting the top 5% of households with the lower 95%:

Remind you of anything?  Both lines strike me as echoes from a chart I made a while ago showing different trends in the economy.  The top 5% line looks a lot like the total stock market value, and the lower 95% looks a lot like credit & debt, doesn’t it? (Click here for some of my theories related to this graph.)

I won’t go into how the Clinton administration worked to dislodge the stock market from the safe risk-mitigation of national debt, and how the Obama administration has worked to ensure that the folks in the top 5% made back all of their housing-bubble losses by letting them absorb all of the borrowed money.  The larger, more-nonpartisan point is the critical one, here.

We’ve let our economy become dependent on the national debt. After the Great Depression and World War II, debt became the main driver of growth.  During the Reagan years, the United States made a fair attempt at boosting productivity enough to chart a new course, but we never dislodged from debt.  This can’t go on, not the least because of the plain facts shown in the Wall Street Journal chart.

The wealthy are taking much of that imaginary money and cashing it in as tangible items and temporal lifestyle enjoyment.  As periodic stock market crashes prove, imaginary money isn’t very stable, and the Obama “recovery” has strongly suggested that all big losses will quickly be socialized, now, so that we all must take reductions to keep the rich in their glory.

Am I sounding somewhat progressive, here?  Not at all.  Progressive centralization and tyranny have gradually exacerbated this problem.  The solutions are to privilege individual initiative and work, again.  That means real cuts in taxes and elimination of vast swaths of regulation.

Progressives just can’t get their head around the reality that government is not how everybody gets an equal voice in policy.  It’s how powerful forces consolidate their power.  Everybody gets an equal voice when we come to the table as individuals able to interact in ways that privilege our value as human beings, not our ability to jump through the insiders’ obstacle course of hoops.

Selective Worries of Environmentalists

So, I was poking around on ecoRI and came across this article by Tim Faulkner:

Left out of the talking points that support expanding pipelines in New England are the efforts by energy companies to deliver that natural gas to Canada for export overseas.

Documents show that developers are already moving forward with this concept. Last October, Pieridae Energy filed a federal application to send domestic natural gas from Massachusetts to Nova Scotia, where it would be converted to liquefied natural gas (LNG) and exported. According to Peiridae, a company in Germany has already agreed to buy the exported LNG.

I’m no expert on this topic, but it seems to me that Faulkner uses a whole bunch of plural nouns when he appears to be talking about one company that may have a single prospect with another company.  It’s clear, moreover, that the concern of the activists quoted later in the article is not that the export business will pull increased supplies of natural gas out from under the New England consumer, but that it will encourage continued development of the natural gas industry in America, which would soften demand for very expensive renewable energy.

According to the application at the link, Pieridae is requesting a two-decade window during which it can explore these options, which would start either on the date of the first sale or seven years after its request is approved.  As the article makes clear, environmental activists have already applied to prolong the application process.  In other words, this is pretty long-term planning.

But what’s the concern?  The company won’t sell gas overseas unless it is more profitable to do so.  In other words, unless people in these other countries are willing to pay so much that the profit margin is better if Pieridae chooses to ship the gas additional hundreds of miles, then liquefy it, then ship it, and then unliquefy it, rather than simply direct it to energy plants and consumers closer-by on the pipeline.  And then there are other possibilities, like the flow being reversed to ship the natural gas from Canada or elsewhere to domestic consumers.  What’s scary in this mix… other than the very existence of a fossil fuel industry?

Then we turn to another article, by the ecoRI News staff:

A common algae commercially grown to make fish food holds promise as a source for both biodiesel and jet fuel, according to a new study published in the journal Energy & Fuels.

Why, in contrast to the pipeline story, is this not scary?  Similar to ethanol’s effects on food prices, wouldn’t increasing the demand for this algae increase its price, thus driving up the cost of farm-grown fish, thus pricing out lower-income consumers and making the depletion of wild fish stock that much more attractive?

There’s a wave of specifics to consider before worrying about such a thing, but it doesn’t strike me as much less plausible than the dark insinuations made in the pipeline case.

Should Rhode Islanders Join In with Insider Optimism

I wish I could be as optimistic as this Ted Nesi article makes it sound like I should be.  Apparently, political leaders and “business leaders” (defined, it appears, as being in attendance at the Greater Providence Chamber of Commerce annual legislative luncheon) think this could be the year that the annual promise to focus on the economy actually turns into something, what with a new, more-business-friendly Speaker of the House and Mrs. Big Investment in the governor’s office.

Maybe my cynicism meter just hasn’t gone back down since the commission to study elimination of the sales tax meeting at which a Greater Providence Chamber of Commerce representative said it would be “a crime to threaten” a government revenue stream.  To be sure, the high reading on the cynicism meter was reinforced when RI Hospitality stepped forward to defend a government expenditure of which it gets a healthy chunk and a Greater Cranston Chamber of Commerce leader proclaimed himself in favor of a move toward socialized healthcare in Rhode Island.

Something about “business leaders” who speak out against the free market produces a red flag, for me.

Put simply, it would be reasonable to suggest that workaday Rhode Islanders should be highly pessimistic about a political environment that makes the people in that room feel optimistic.  House Minority Leader Brian Newberry (R, North Smithfield, Burrillville) provides the beginnings of the proper attitude when he suggests merely a “note of caution” that we might see “rent seeking” (i.e., insiders manipulating the system to benefit themselves).

As I’ve spent a good part of this week arguing (start reading from here), Rhode Island’s already built to consolidate the economy and preserve the lifestyles of insiders for as long as possible, no matter how many opportunities that solution allows to pass by.

And so, we’ve got the Speaker of the House wanting to give a tax break to people who are on their way out of the workforce (or already out) while the Senate President takes a more directly labor-union-friendly approach of emphasizing apprenticeship programs and shoveling more money to government-run schools, and the governor wants to make it even more explicit that state policy is to make economic decisions from the top down, even if it means giving away land to preferred organizations.

Please tell me there was somebody in that room who felt like screaming, “Oh, come on now!”



The apprenticeship and education emphasis is especially telling, given my review of business openings and closings in the state.  If motivated self-starters are finding it difficult to build their dreams in Rhode Island, then most of the government’s investment in training and education either is preparing us to be cogs in somebody else’s machine or will go out out the window when our young go-getters go get it where it actually exists to be gotten — somewhere other than Rhode Island

Prices Are Just Signals That Create Incentives

Here’s a good video explaining a point that I make again and again.

Policies that attempt to fix prices (whether the price of labor known as wages or the prices of goods and services) are sort of like ancient medical practices based on superstition.  Sometimes they cover the symptom while the illness heals; sometimes they don’t really do anything; sometimes they make things worse; and most of the time, they fail to do anything, of themselves, to fix the underlying problem.