New CBPP Report: I-1033’s Problematic Measure of Inflation

Initiative 1033 proposes to limit revenue collections at the state, county, and city levels according to a formula based on the rate of population growth plus inflation. A key feature of Colorado’s TABOR amendment, this formula is deeply flawed because it fails to keep pace with the costs of providing essential public services such as health care and education. Under I-1033, the inflation component of this formula would limit revenue growth according to the “implicit price deflator for personal consumption expenditures” (IPD).

A new analysis from the Center on Budget and Policy Priorities shows that using the IPD to restrict revenue growth would do great harm to basic public structures in Washington. The report explains that the IPD only reflects changes in costs faced by consumers; it does not reflect the ongoing costs of providing state and local public services. The costs of education, for example, rise faster than the general rate of inflation. Education accounts for only two percent of expenditures for the typical consumer. For the state government, however, K-12 and higher education account for 53 percent of expenditures in Washington. As a result, restricting state and local revenues to growth in the IPD would lead to severe cuts in education and other core public services.

The CBPP report also shows that the IPD is even more restrictive than the measure of inflation that was used in Colorado under the TABOR amendment. Under TABOR, state and local spending was restricted to the rate of inflation as measured by the Denver Consumer Price Index (CPI). The graph below shows that from 1993 to 2005 – the period in which TABOR was in effect – the CPI grew at an annual rate of 3.4 percent while the IPD averaged 2.2 percent.



Yet even under the faster-growing CPI, TABOR lead to devastating cuts in education, health care, and other vital services in Colorado, prompting voters to suspend the amendment in 2005. According the CBPP report, “if Colorado had been operating under an I-1033-style IPD-based formula, the state would have had to cut services by an additional 10 percent beyond what the state enacted under the actual CPI-based formula.”

The view the entire report, click here.

Special Series: The Impact of I-1033 on Yakima County

I-1033 would do great harm to basic public services in Yakima County. An analysis of historical revenue data from the Yakima County Auditor’s Office shows I-1033 would have cost the county nearly $45 million, had it been in place from 1996-2008. In particular, investments in public safety and criminal justice would likely have been significantly reduced, as 80 percent of the current operating budget in the county is dedicated to these essential services.

The graph below shows how I-1033 would have lead to progressively higher revenue losses each year from 1996 to 2008 in Yakima County. In 2008 alone, the county would have lost $5.9 million, or about 11 percent of the general fund budget.



To put this into context, $5.9 million in the 2008 Yakima County general fund budget would have been equivalent to:

• Two-thirds of expenditures on the Sheriff’s Office ($8.3 million);


• Eighty-four percent of the combined budgets for the District Court, the Superior Court, and the county clerk ($7.0 million);


• More than the combined general fund expenditures on indigent defense, juvenile justice, and the Washington State University extension program ($5.0 million).

As a result of the ongoing national recession, revenue collections among local governments in Washington have fallen dramatically in the past year. In Yakima County, officials had to draw down reserve funds and eliminate more than 30 vacant positions in order to keep the 2009 budget in balance.

Revenue collections continue to decline in Yakima County, however. The county also faces rising costs and increased demand for services. For example, the county jail has experienced a recent influx of new inmates which drives up the cost of providing corrections services. Together, lower revenues and increased costs are resulting in a $3.3 million deficit going into the 2010 budget cycle in Yakima County. To fill this gap, county officials may have to lay off as many as 60 county government employees.*

It is important to note that 2009 would become the basis for all future budgets in Yakima County under I-1033. As a result, all of the cuts enacted this year and in 2010 will be locked into place, making it impossible to restore services even after the economy recovers.

Editor’s Note on Methodology: There has been much debate about which revenue sources would be subject to the population-growth-plus-inflation cap under I-1033. For this analysis, we assumed that general fund revenue -- including general fund tax revenues, revenues from permits and licenses, and revenues derived from charges for government services -- would have been subject to the I-1033 limit. It is important to note that expanding the scope of revenues subject to the I-1033 limit would substantially increase the estimates of annual revenue losses as well as expand the scope of county services negatively impacted under the initiative.

*David Lester, “Budget gap may force Yakima County to make 60 layoffs,” Yakima Herald-Republic, October 10, 2009.

Special Series: The Impact of I-1033 on Clark County

This year, Clark County officials have struggled to maintain basic county services amidst the deepest national recession since the 1930s. If I-1033 is enacted, spending on law and justice, public safety, and other essential county services would be frozen at 2009 levels. And in future years, Clark County would face rising revenue shortfalls, forcing deep cuts in these services.

Clark County would have lost more than $115 million had I-1033 been in place from 1995-2008, based on an analysis of historical general fund revenue data from the Clark County Office of Budget and Information Services. As the graph below illustrates, during the 2007-08 biennium the county would have lost about $30.3 million (11 percent of the general fund budget).



In the 2007-08 Clark County general fund budget, $30.3 million would have been equivalent to:

• Nearly 60 percent of expenditures on the Sheriff’s Office ($51.5 million);


• Eighty-seven percent of the budget for the county jail ($34.7 million);


• More than the combined expenditures on parks and public works ($7.0 million), community corrections programs ($11.6 million), and indigent defense services ($9.6 million).

The national recession has caused severe budget deficits, impacting local governments throughout Washington. During the current crisis, Clark County officials have struggled to keep the county budget in balance without reducing essential services or laying-off scores of county government employees. So far, this has been accomplished through the use of across-the-board budget cuts and one-time measures -- such as extending the lives of county patrol cars and diverting revenues from the county road fund.

Yet even with these actions, Clark County continues to face a projected $12.7 million budget deficit for the remainder of the 2009-10 biennium.* With few remaining options, county officials may be forced to completely eliminate services in order to fill the current gap. Under I-1033, the 2009-10 budget would form the basis for all future budgets in Clark County and it would be virtually impossible to restore services even after the economy recovers.

Editor’s Note on Methodology: There has been much debate about which revenue sources would be subject to the population-growth-plus-inflation cap under I-1033. For this analysis, we assumed that general fund revenue -- including general fund tax revenues, revenues from permits and licenses, and revenues derived from charges for government services -- would have been subject to the I-1033 limit. It is important to note that expanding the scope of revenues subject to the I-1033 limit would substantially increase the estimates of annual revenue losses as well as expand the scope of county services negatively impacted under the initiative.

* Clark County Office of Budget, General Fund 2009-10 Projections, October, 2009.

Special Series: The Impact of I-1033 on Spokane County

Under I-1033, Spokane County would face erosion in basic public services. An analysis of historical revenue data from the Spokane County Auditor’s Office shows the initiative would have cost the county about $105 million in general fund revenues, had it been in effect from 1996 to 2008.

The graph below illustrates the annual impact. Under the initiative, Spokane County would have lost $16.6 million in 2008 alone.



To put that in perspective, in Spokane County $16.6 million was more than the combined general fund expenditures on the District Court ($5.8 million), the Superior Court ($6.6 million), and the county medical examiner ($1.4 million) in 2008. In relation to other services, $16.6 million was equivalent to half of the general fund expenditures for the Sheriff’s Office ($33.2 million), 90 percent of the combined budgets of the county prosecutor and public defender ($18.8 million), and 85 percent of all general fund spending on county jails ($19.6 million).

Under I-1033, 2009 would form the base year for future county budgets in Washington. However, the current recession has caused serious revenue shortfalls in Spokane County and throughout Washington. To balance the 2009 budget, Spokane County officials have already used about $3.4 million in budget reserves, enacted another $3 million in spending cuts, and instituted a hiring freeze that eliminated 56 county government positions. But despite these actions, the county currently faces a projected $12.5 million budget shortfall in 2010.* If enacted, I-1033 would make it impossible for Spokane County to restore services to pre-recession levels.

Editor’s Note on Methodology: There has been much debate about which revenue sources would be subject to the population-growth-plus-inflation cap under I-1033. For this analysis, we assumed that general fund revenue -- including general fund tax revenues, revenues from permits and licenses, and revenues derived from charges for government services -- would have been subject to the I-1033 limit. It is important to note that expanding the scope of revenues subject to the I-1033 limit would substantially increase the estimates of annual revenue losses as well as expand the scope of county services negatively impacted under the initiative.

* Jim Camden, "Budget woes may force Holmberg's closer," The Spokesman-Review, August 4, 2009.

Special Series: The Impact of I-1033 on Snohomish County

I-1033 would be a disaster for Snohomish County, requiring deep cuts in essential public services. If it had been put in place in 1996, the initiative would have led to severe revenue shortages in each subsequent year. In total, Snohomish County would have lost about $245 million in general fund revenues between 1996 and 2008 under the initiative (see graph below).




In 2008 alone, Snohomish County would have lost about $33.5 million -- 16 percent of the general fund budget. By way of illustration, $33.5 million in the Snohomish County general fund budget would have been equivalent to:

• Seventy-three percent of the general fund spending for the Sheriff’s Office ($46.1 million);


• More than the combined general fund budgets for the District Court and the Superior Court ($31.6 million);


• Ninety-one percent of spending on the Department of Corrections ($37 million);


• Three times the general fund budget for the Parks and Recreation Department ($10 million);


• Twice the amount of general fund spending on the Prosecuting Attorney ($15.2 million).

In total, 70 percent of the general fund budget in Snohomish County was devoted funding for the law and justice services in 2008. Deep cuts in these services and others would have been unavoidable under I-1033.

More troubling, I-1033 would be implemented during the deepest recession of the post-World War II era. Under the initiative, 2009 would become the base for all future budgets in Snohomish County. The current recession has already taken a heavy toll on the current county budget. Last year, in crafting the 2009 budget, Snohomish County lawmakers faced a budget deficit totaling $21 million. To fill this gap, Snohomish County lawmakers implemented a hiring freeze and eliminated dozens of vacant county government positions.

In early 2009 the economy worsened, forcing the county to close an additional $6.7 million shortfall in April. To fill this gap, the county extended the hiring freeze and instituted a series of 11 unpaid furlough days, amounting to a four percent pay cut for affected county government workers. Yet, the budget situation in Snohomish County remains grim. To balance the next year’s 2010 budget, Snohomish County Executive Aaron Reardon recently proposed increasing the number of furlough days to as many as 15, and decreasing pay for jail workers and Sheriff’s deputies.

Editor’s Note on Methodology: There has been much debate about which revenue sources would be subject to the population-growth-plus-inflation cap under I-1033. For this analysis, we assumed that general fund revenue -- including general fund tax revenues, revenues from permits and licenses, and revenues derived from charges for government services -- would have been subject to the I-1033 limit. It is important to note that expanding the scope of revenues subject to the I-1033 limit would substantially increase the estimates of annual revenue losses as well as expand the scope of county services negatively impacted under the initiative.

Special Series: The Impact of I-1033 on Counties

Washington State’s 39 counties play key roles in our public infrastructure, including public safety, public health, transportation, parks, and libraries. The recession has hit county budgets hard and many are facing deep budget cuts.

If Initiative 1033 were to pass, it would have a disastrous impact on county governments and on the services they provide, at a time when they can least afford it. According to the Office of Financial Management, counties stand to lose a total of $694 million by 2015, as shown in the graph below.



Tomorrow, schmudget will begin a series outlining the potential impacts of I-1033 on individual counties. We'll begin tomorrow with Snohomish County.

Toxic Twins Part 4: TABOR Did Nothing for Colorado's Economy

Supporters of initiatives like I-1033 argue that rigid public spending limits can be a boon for state economies. In Colorado, however, TABOR had no positive impact on the state’s economy. In fact, after enacting TABOR, employment growth in Colorado slowed relative to other states in the region. Worse, following the last recession employment recovered much more slowly in Colorado compared to neighboring states.

The table below shows that employment in Colorado grew at an annual rate of only 0.2 percent between 2001 and 2006. At the same time, the median annual growth rate among the remaining seven states in the mountain region was 9.3 percent.

For more information on how TABOR adversely impacted core public services in Colorado, see our recent report, Toxic Twins: I-1033 Mirrors Colorado’s Corrosive TABOR, coauthored with the Colorado Fiscal Policy Institute.

Editor's note: This is the final post in series about TABOR's adverse effects on essential public services in Colorado. Previous posts in the series detail the sharp declines in education funding, health care services, and transportation infrastructure that ocurred in Colorado under TABOR.

Toxic Twins Part 2: TABOR Caused Sharp Declines in Health Care Funding

Our latest report, co-authored with the Colorado Fiscal Policy Institute, details TABOR’s impact on education, communities, health, and transportation infrastructure. This post highlights some of our findings regarding TABOR’s disastrous effects on public health programs in Colorado.

In Colorado, TABOR greatly compromised a critical part of the public safety net – health care services. From 1992 to 2005, TABOR-induced shortfalls forced deep cuts in health care services throughout Colorado. The result:

• Between 1992 and 2004, the share of lower income children with no health insurance doubled from 16 to 32 percent, making Colorado the worst in the nation by this measure.
  


• In 2002, the state could no longer afford basic vaccines and had to suspend the requirement that all students be vaccinated against common diseases such as tetanus, diphtheria, and whooping cough.
  


• In 2003, budget restrictions forced the state to temporarily stop the enrollment of children in the children’s health program and suspend the prenatal program.

TABOR had numerous adverse effects on health care and other public services in Colorado. For more detail, please click here to view the entire report.

Editor’s note: This post is the second in a series about the sharp declines in Colorado’s core public services that occurred as a result of the TABOR amendment. There will be two future posts: The next post will cover TABOR’s effects on transportation infrastructure; the final post will discuss economic growth in Colorado during the period in which TABOR was active.

Toxic Twins: I-1033 Mirrors Colorado's Corrosive TABOR

To understand how Tim Eyman’s I-1033 would undermine public investments and our economic recovery in Washington, look no further than Colorado. Our new report, co-authored with the Colorado Fiscal Policy Institute finds that Colorado's TABOR amendment greatly undermined that state's capacity to maintain core public services such as education and health care. Initiative 1033, which will appear on the ballot in Washington State this November, possesses the same fundamental characteristics as TABOR and would have a similar impact on Washington.

Editor's note: This post is the first in a series about TABOR's impact on services and public priorities in Colorado. Future posts in this series will detail TABOR's impact on other crucial services -- including health care and transportation infrastructure. The final post in this series will discuss economic growth in Colorado while TABOR was in effect.

To view the full report click here.

TABOR's Impact on Education and Opportunity

Under TABOR, funding on K-12 and higher education declined substantially, leading to harmful budget cuts throughout the education system. As a result:

• The state fell from 35th to 49th in the nation in spending on K-12 education as a share of personal income.


• Average teacher’s salaries fell from 30th to 50th in the nation compared to pay in other occupations.


• Higher education spending per resident student declined by 31 percent after adjusting for inflation, from $5,188 to $3,564.

The shortfalls created by TABOR adversely impacted Colorado’s education system in numerous other ways. For more information on how TABOR led to steep declines in education funding throughout Colorado, view the entire report by clicking here.

UPDATE: Official State Analysis Shows High Cost of I-1033

Initiative 1033 would negatively impact the ability of the state, counties, and cities to fund public priorities such as education, economic security, health care, and community development. This would come at a time when Washington is struggling to recover from a severe recession.

A new analysis by the Office of Financial Management estimates the fiscal impact of the initiative on the state, counties, and cities for calendar years 2010 through 2015 (shown in the graphs below). The results emphasize the fact that the impacts of I-1033 will compound from year to year.

At the state level, the cumulative impact is expected to be nearly $6 billion over the six years:



Counties stand to lose a total of $694 million in capacity to support essential public services by 2015:



Cities stand to lose $2.1 billion cumulatively:

Initiative 1033: Experience in Colorado Shows Harmful Effects

In 1992, Colorado passed a state constitutional amendment similar to 1033. Known as TABOR, the Colorado initiative restricts spending in state, county, and city governments to the previous year’s level plus population growth and inflation. This formula has proven to be insufficient to fund the ongoing cost of government and has created a permanent revenue shortage.

A growing body of evidence shows that TABOR has contributed to a significant decline in Colorado's public services. This includes:

• Colorado declined from 35th to 49th in the nation in K-12 spending
  
• Higher education funding dropped by 31 percent
  
• Colorado fell to near the bottom of national rankings in providing children with full, on-time vaccinations
  
• The share of low-income children in the state who lacked health insurance doubled, making Colorado the worst in the nation by this measure

The effect of 1033 may be worse for Washington than it was in Colorado because it would go into place during a fiscal crisis. Again, Colorado provides an apt example: the state's economy was slow to recover following the 2001 recession with a job growth rate at a meager .2 percent. Other surrounding states had job growth rates that were much higher.

Below is a video that describes the experience of TABOR for Colorado voters and lawmakers.

Initiative 1033: Harmful Effects Worsen Over Time

As we’ve discussed in previous posts, Initiative 1033 would have a harmful effect on the ability of state and local governments to fund investments in education, health, public safety, and economic security. Importantly, this restricting effect will grow bigger over time making it increasingly difficult to fund these and other public priorities.

Take for example, the effect on the state budget if 1033 had been put into place in 1995. Economists measure the size of state budgets as a share of total personal income. This provides insight on the share of total resources that are used for public investments.

Even without 1033, the share of personal income in the state general fund has declined between 1995 and 2011, from seven percent to 5.5 percent. If 1033 had been in effect in 1995, there would have been a much more dramatic drop in the state general fund, from seven percent down to just over four percent. As the graph below shows, this means we would have had $6 billion less to spend in the current biennium than we actually had.


This $6 billion amounts to the entire two-year state budget for higher education, natural resources, public health, early learning, corrections, and the Basic Health Plan.

Initiative 1033: Harms Our Ability to Recover from Economic Downturns

Initiative 1033 would dramatically limit state and local spending starting in 2010. It is particularly troubling that this initiative comes during a time of economic recession when revenue is especially low. The spending cap imposed by 1033 would be based on the previous year’s revenue with a flawed formula for annual increases using population growth plus inflation.

It would also be tough to recover from future economic downturns. According to the 1033 proposal, if revenue drops below the spending limit in a given year, the following year’s limit is based on the lower number. The state, county, or city permanently loses that spending capacity.

To illustrate this point, imagine a scenario in which the spending limit grows according to the 1033 formula over a period of three years. In the fourth year, the economy falters and revenue falls below the limit at the beginning of the three year period. Then it starts to grow again, but starting at the lower rate. As the graph below shows, the limit is permanently lower. Short of a voter-approved tax increase, revenue cannot catch up to previous levels.


In our current economic climate, the state anticipates raising $1.04 billion more revenue in 2011 than it did in the previous year. If 1033 is passed by voters this November, we would only be able to use $471 million. The other $571 million would be required to go to a property tax cut in 2011-13.

To view a comprehensive slideshow about 1033, please click here.

Budget & Policy Center's Remy Trupin Discusses Flaws in 1033 on KUOW

Today our Executive Director Remy Trupin was invited to speak on the harmful effects of Initiative 1033 on KUOW's The Conversation. During the program, Remy said that 1033 would be:

1. Fiscally irresponsible because it would make it very hard for state, county, and city governments to set aside money for a rainy day.

2. He also noted that the timing of the initiative would be especially damaging, as it comes during an economic recession when revenue is down.

3. Finally, Remy pointed out that the state of Colorado had a terrible experience with a similar initiative that led to dramatically diminished public services and programs.

To listen to the program, please click here.

I-1033 Would Limit Government's Ability to Save for a Rainy Day

One of the lessons of the last year is that we should have been building more robust rainy day funds before the economy went sour. Hopefully, it is a lesson we will remember when the economy starts to rebound.

I-1033 will make that difficult. It sets a strict limit on the amount of state, county and city revenue that can be spent. Any money above that limit must be used for property tax cuts; it cannot be used to build savings for the next downturn.

At the state level, I-1033 would exempt constitutionally-mandated deposits into the rainy day fund from the calculation of the limit. However, deposits above the minimum would not be exempt.

At the city and county level, there does not appear to be any exception made for rainy day funds.

To view our slideshow that provides more details on I-1033, click here.

Initiative 1033: Severely Constricts State and Local Spending

Today, Tim Eyman filed Initiative 1033, a measure that would severely limit the amount of state, county, and city revenue that could be spent starting in 2010. Any revenue raised above the limit would be required to go to reducing property taxes in the following year.

According to the initiative, the spending limit would grow annually by a formula adjusting for inflation and population growth. This formula is flawed in a number of ways. First, it adjusts for inflation using a measure of the change in costs of goods and services consumers buy, not those purchased by government. Secondly, the change in population growth only looks at changes in the general population and does not account for special populations, such as the rising numbers of retiring baby boomers.

Importantly, I-1033 leaves no room for unanticipated costs, such as those that come with natural disasters, unfunded mandates, or emerging public priorities.

But even with regard to maintaining current commitments, I-1033 will fail to keep up with spending needs. The graph below illustrates the discrepancy between state estimates for rising costs of maintaining current investments and the spending limit that would be imposed by I-1033.



In upcoming blog posts, we will look at why it would be especially damaging to enact this initiative during an economic recession, the effect on the state budget over the long term, and the negative impact a similar measure has had in the state of Colorado.

To view our slideshow that provides more details on I-1033, click here.

I-1033: What's At Stake for Washington State

I-1033 is a ballot initiative expected to qualify for the November 2009 ballot. Our analysis finds that it would:

• Constrict the ability of state, county, and city governments to make essential public investments.
• Exacerbate the effects of economic and fiscal downturns.
• Increase the current deficit by half a billion dollars.

Watch the slideshow below for more details:



Stay tuned to schmudget for continued analysis.

(You can access individual images from the slide show by clicking in the lower left corner.)