Keno As Proxy

The results are in on Ohio's Keno gambit and the numbers are pretty weak. According to the State Lottery Commission the expansion of games of chance as a revenue source fell short, really short.

The venture that was used to beef up revenue to the State by an estimated $73 million performed well below expectation. The annual take for keno in Ohio, $30 million, not so hot.

Officials blame the shortfall on hard economic times. I blame it on the over-rated nature of gambling schemes to solve State revenue woes. The money raised by keno is earmarked for education funding but thankfully money is fungible. The State won't have to cut funding to education due to the shortfall.

The pressing issue now becomes the massive gamble the State budget has placed on video terminal slots and whether they will perform as advertised. The working number for the foray into gambling is expected to back fill revenue to the tune of $930 million. That's nearly a billion dollars in programs that were spared from the chopping block during the FY2010 budget process.

If the VLTs perform as poorly as keno the Gov' could be forced to cut another $500 million from the freshly approved State budget. Any subsequent cuts made will most certainly hit bone.

Wrongsizing State Tax Revenue

The State's budget impasse may be near a conclusion but the real issues with the long term budget structure are not going away.

I've been barking about the massive failure of the tax reforms enacted in 2005 and 2007 for some time now. Those changes instituted under the guise of reform may have been politically expedient buy have contributed to the historic crash in State tax receipts.

The latest confirmation comes from an official analysis conducted by Office of Budget & Management. Careful examination reveals just how badly the reforms have buried Ohio government in a sea of red ink. Consider the findings released in this weeks GONGWER NEws Service (s/r) report for July 9th:

Agency spokesman John Kohlstrand said the annual drop is by far the largest in years for which the state has easily researched data, as he personally looked up numbers dating back more than 50 years.

"Nothing remotely like this has happened in the past half century," he said. "Certainly, it is a historic drop."

While not a surprise to officials given the dismal performance of the personal income tax and other revenue sources in the later months of FY 2009, the final year-to-date numbers were dragged deeper into the red by a month that saw Ohio's coffers take in nearly 24% less in tax collections than in June 2008.

State budget administrators have said the biggest factors in the drop are the economic anemia and the tax restructuring of 2005, which reduced income tax rates across the board by 21%, cut or eliminated certain business taxes and made other changes.

The economic impacts became clearer with the close of tax filing season, after which Gov. Ted Strickland's administration revised its already dampened financial projections and later announced the state faced a roughly $1 billion deficit for FY 2009. That hole was filled with the drainage of the Budget Stabilization Fund, which now stands at 89 cents.

Last fiscal year was the third in a row in which the state collected less tax revenue that the year before - a streak that's also considered a record. Mr. Kohlstrand said the agency could only find three other years dating back to 1957 in which such declines occurred.

The changes in fact did not ameliorate the impact of the recession as predicted by the supply side faithful and anti-tax geniuses that had insisted this would be the case. Why not? Tax cuts work in every situation.

It seems event the magic elixir of unbridled tax cuts didn't do the job of protecting the rust belt capital from the effects of the Great Recession. Maybe a more moderate and you know, sensible regime of changes would have left us a more sustainable budget structure.

This latest budget and future budgets will not be made right until someone has the courage to patch the flawed tax reforms of General Assemblies past.

High Noon In Columbus

The State General Assembly is still mulling, no agonizing over how to bring Ohio's next biennial budget into balance by next week. So far massive spending cuts and an anemic attempt at raising revenue from slot machines are the only means to achieve that end.

The cuts have hit just about every area of the State's operations including libraries and social programs. Of course there has been no serious push at rolling back at least part of the income tax cuts enacted in 2005. Although the Dispatch has reported on a small band of Dems that have requested a tax increase in lieu of the deep spending cuts. It looks like no new taxes and no new books will win out.

In a new development the Governor had requested a meeting with all elected State executives at noon today. I know this because State Treasurer Kevin Boyce was supposed to speak at a state sponsored training seminar today but was not able to attend. His staffer explained that Boyce and his elected colleagues had been summoned by Strickland to come and offer up "more blood from their respective turnips", the staffer's words not mine.

This move is interesting because much of the attention has been directed at cutting programs administered by the Governor's cabinet agencies. We'll see if the individual elected officials will be willing to sacrifice more of their kingdom to the alter of spending cuts.

The Fifteen Minute Budget Solution

Lawmakers in the Ohio General Assembly are just about done freaking out about the number $3.2 billion. Do you know how far 3.2 billion Tim Grendells stacked on top of each other would reach? Once the legislators have regained their footing they will have about fifteen days to reduce the projected shortfall in the FY2010 budget by that amount, seems like a daunting task. I sure hope that doesn't effect my life.

The gigantic budgetary gap caused in part by a cliff diving economy and a budget analysis apparatus instructed to keep things rosy will have to be closed within a short amount of time. The General Assembly conference committee has until the end of the month to get a balanced and realistic budget to the governor. How does a such a massive undertaking get completed on time? I am suggesting that rather than fifteen days the whole thing can be solved and wrapped in neat bow in fifteen minutes. Sounds facetious and politically improbable doesn't it?

Yes to Cuts

There will invariably have to be deeper cuts to programs and staffing. Perhaps the idea of an enforceable and State-wide earl retirement program could achieve savings within the two year horizon of the FY2010 budget. Mandatory furloughs are also in order. The State Treasurer and Attorney General have announced a steep two week furlough program all employees. Holy Mary Taylor and Jennifer Brunner are also "considering" a furlough measure for their respective offices.

Staffing takes up a large portion of administrative budgets in government entities. The need to further reduce staffing through layoffs will have to be considered. This will impact delivery of
services. The remainder of the cuts will have to be to programs. Everyone has their pet projects so agreeing on additional program will not be easy.

Jim Sigel's piece in today's Dispatch points out the difficult nature of whittling down the State budget to a discretionary core of programs ripe for cuts. Still, more reductions will have to be attained to meet the target. Those will most likely be done in a back room away from prying eyes of media and advocates.

In the end I don't see more than a few hundred million being cut from the existing lean budget proposal. This budget process will not be used as a de facto method for deconstructing State government into a model for Tea Party visionaries.

Yes to Creative Finance

Before moving on to revenue I should dedicate some space to what I call creative finance. No, that would not include investing in rare coins or drilling the shit out of the State parks. This category of budget fixes is reserved for creating new revenue sources or using financial tools to create new payment streams.

The most viable solutions in the near term are casino gambling and securitization of assets. Casino gambling has been bandied about for years and invariably gets voted down by the legions of puritans that inhabit Ohio's towns and villages. Creating the legal framework for casino gambling, one that focuses on gaming districts in a few select large urban centers could pay off. Siegel uses an estimate of $200 million over two years of ongoing revenue for this source.

We could dust off the plan to lease the Ohio turnpike. The last attempt to securitize this asset was championed by political loser and right-wing blowhard Ken Blackwell. Under the umbrella of a rational and carefully reviewed plan the State could realize a substantial revenue stream (billions) for a long-term lease agreement of the tollway.

Of course this would be a one time revenue stream and some of that money would have to be used to offset road improvements to the other highways in Ohio. The other caveat is the potential "tax increase" that Ohioans would face when the rates on the turnpike are increased by the private entity that operates the leased tollway.

Yes to Tax Increases

The last option is the most effective but least politically feasible of all budget fixes. The key members of the Senate, House and administration can meet at a local Applebees and agree to raise some tax rates. The numbers provided by Siegel make it clear that there is ample capacity to bridge the budget gap with tax rate increase alone. The tax increases could be kept in check if they are coupled with fixes from the spending cut and creative finance pots.

This move would require some very hard headed people to accept the premise that tax revenues have fallen to perilous levels in part because the tax reforms of 2005 were untenable and unrealistic. There will have to be some ratcheting up of income tax brackets in order to get the budget above water. The other change to tax rates will have to be the misunderstood CAT.

The commercial activities tax was implemented as part of the HB66 reforms as a low tax with a very broad base. The results on the CAT are still inconclusive but a slight increase to the already low rate would go a long way in increasing tax revenue. These changes may be enough to get us in balance while avoiding tinkering with the more regressive sales and property taxes.

There you have it, over $3 billion in fifteen minutes or less. Enjoy the potato skins gentlemen.

Kasich's Heartland Wisdom

A John Kasich gubernatorial campaign will be a melange a Fox News invective, Ken Blackwell style conservatism and Buckeye Institute policy babble. The added bonus will of course be the omnipresent use of Ohio as heartland theme that Kasich has parlayed into a career on cable television.

When the campaign starts Kasich will divide his time between enforcing supply-orthodoxy (think income tax phase out) and the reclaiming Ohio for the Tea Party elements of the GOP. The latter will involve bitch slapping us with heaping helpings of heartland wisdom. Think of this as the "what's the matter with Ohio" John Kasich. Ohio's voters as seen through the eyes of the Rovian political lens.

A great example of what to expect can be seen in his interview with Steven Colbert in March of 2006. In the segment Kasich extols the virtues of Ohio and its heartland sensibility. We don't windsurf in the heartland Kasich exclaims (Colbert led out of the previous show segment with 2004 footage of John Kerry kite surfing. I don't know why that was pertinent in 2006). Ohioans being heartland dwellers have a keen sensibility to stay away from water sports and wetsuits.

That moment highlighting Kasich's penchant for stoking the flames the urban versus rural nuttery stuck with me. The stupidity of his rant against windsurfing and equating Ohio to some antebellum agrarian society is troubling.

You see, there's this large body of water that runs along the entire northern edge of Ohio. The large body of water I'm referring to is called LAKE ERIE! Perhaps the millions of people who venture to the shores and into its waters partake in activities such as windsurfing and kitesurfing and even surfing! Imagine that, not all buckeye state residents grow alfalfa for a living. I heard that most of us actaully live in the urban centers these days.

Kasich is going to be hitting the trail this summer blabbering about taking back the heartland to the detriment of the real issues voters want to hear about. Let's party like it's 1994. At this point I already have an idea how this will play out and it won't be pretty for Kasich or Ohio's image. At this point I doubt Ted Strickland is loosing any sleep over Kasich's entry into the race. Can someone please prod Mary Taylor into running for Governor?

State Budget: Missing The Moving Target

The latest update on State tax revenue projections is grim.  Each time Pari Sabety's crew gets another round of revenue data their estimates bottom out even further.   The latest income tax numbers really stink.

Total tax receipts through March were about $200 million below revised estimates, and total income-tax collections for April alone were $322 million, or 22 percent, lower than the already-pessimistic projections...

Due to the cliff diving tax receipts a third round of budget cuts was announced in Tuesday by the administration.  With tax revenue in a tailspin Governor Strickland had no choice but to make deeper cuts to the current year budget, or what remains of it.  The latest reductions could total $900 million and will no doubt harm be felt by the already reeling local governments.   The fiscal year ends on June 30th at which time another beleaguered budget starts anew.

The question arose in my office today.  How can they continue to be off the mark by such a wide margin?  Could it be that no one in Columbus is willing to accept how detrimental an ailing economy couped with short sighted tax cuts can be to the State's revenue sources.  This episode reminds me of Nassim Taleb's book Fooled By Randomness .  The over reliance on historical data to predict where the bottom will be has not worked out to well.  This latest recessionary cycle has broken the mold.

No matter, the new budget will be anything but fresh.  In order to staunch the deficit flow Ohio will have to tap the budget reserve fund (rainy day fund) before the end of the fiscal year.  That means there will be less of those much touted one-time revenue available for the FY 2010 budget.  The Senate Republicans are already complaining.  They will have to find the billion or so dollars needed to restore equilibrium to the next budget

There is now an inescapable fact staring the General Assembly in the collective face. You hear that State senators?    Some form of tax increase coupled with additional cuts to programs will have to be factored into the latest budget bill.  I can't think of another way out of the mess. 

State Budget: Desperately Seeking Sources

Here's where we are with the revenue shell game being played within the State budget process.  The House version of the budget bill was passed last week and the Senate will take the next two months to craft a moderated and tax hike free version of the FY2010 state budget.

The issue of revenue was mitigated somewhat by replacing the administrations projections for tax revenue with the much friendlier estimates derived from the Legislative Service Commission.  Nothing has changed at the core of the budget outlook.  Ohio needs more revenue, preferably from increasing taxes.

Using some one time revenue sources and a newer parlor trick with State sponsored non-profits  being employed to dig up extra money for State agencies in the House Plan.  Willard covers the non profit plan here.  In the end tweaks and nuance can plug the budget hole for the temporarily but they will not erase a structural budget deficit.  

Sunday's Beacon editorial page joins my call to increase taxes, er, set them back to a responsible level:

The absence of stimulus cash. A structural deficit. A commitment to improving public education. Ohio needs a tax increase, one that can be crafted to enhance the state's prospects in the long run, one that reflects responsible stewardship of the state.

The latest battle cry from the reality challenged tax haters in the Ohio GOP is that the one-time revenue in the next biennial budget will lead to a tax hike.  Truth be told, it's the short sighted politically opportunistic tax reforms of 2005 that have gotten us to this low point in the revenue curve.  Think about that for a moment.

The Ohio Senate should meet us half way and address the structural deficit prevalent in the budget.  Find some more budget cuts that can reduce the level spending over the 2010-2011 budget period.  That's the easy part.  

The next step will require some of the more adult members (in both parties) of the Senate to step up and reset income tax rates to a realistic and sustainable level.  Let's face it, 2005 was a different time.  The days of ideological opposition to responsible tax rates is passing.  Let the tea baggers and Jon Kasich wage the losing battle against the income tax. 

The sooner we take these steps the sooner Ohioans can begin working on achieving the school funding reforms that are long overdue.

State Revenue Reprise

A belated tip of the hat is in order for Beacon Journal opinion page editor Michael Douglas. Mr. Douglas picked up my theme about the real problem with Ohio's budget outlook in his Sunday column. The one-time revenue being used to balance the next budget is a patch for the gaping hole created by the shortsighted tax reforms championed by the GOP several years ago:

Neither do Taylor and her fellow Republicans take responsibility for their ample share of the shortfall. In 2005, they engineered changes in the state tax code that reduced revenues by a projected $4.4 billion in the next biennium. They slashed individual income tax rates by 21 percent. The state's regimen for taxing businesses required much reworking. What wasn't necessary was lowering further the share of taxes paid by businesses,the percentage having fallen from 40 percent in 1975 to 26.5 percent today.

Governor Ted is left with a fiscal shit sandwich and not many options other than temporarily plugging the deficit with one time money.

I second Douglas' call for some mature members of the General Assembly to step up and begin looking for some solutions for Ohio's revenue pickle. There is a measured approach that can be employed to restore some of the tax reductions without creating undue pressure on taxpayers of Ohio.

One Time Revenue Ain't The Problem

Mary Taylor has unveiled her latest check on the Strickland administration's budget plan.   Auditor Taylor has stepped out of the normal role of the elected position she holds to evaluate what she thinks is the true deficiency in the governor's plan.  

The resulting opinion includes another admonishment of using one time revenues to to balance the budget. It seem the State Auditor doesn't believe the State  budget should depend on any one time revenue to cover an operating deficit.  Perhaps in an effort to lend some of her officialdom to the Tea Party movement Taylor criticizes the use of Federal Stimulus dollars in the budget as well.  This is becoming a frequent theme emanating from the AOS offices.

I have a news flash for Auditor Taylor, those one time revenues are not the real problem.  If she were to probe her memory she may recall one change she helped enact back in 2005 that preordained the need to depend on one time revenues. 

I am referring to the tax reforms enacted in HB66.  The reforms that Taylor and others supported included a sizable 21% decrease in income tax rates over a five year period. The last phase of cuts occurs this year barring any last minute acts of common sense from the General Assembly. The alteration of the tax regime has contributed significantly to Ohio's revenue woes.  A politically motivated rush to tamp down income tax rates has left the State with a insufficient level of tax revenue.  So much for the Laffer curve inspired myth of increasing tax revenue via tax cuts.

The revenue numbers themselves speak to the short sighted nature of the changes enacted in HB66. Until the change was made the State had never had consecutive years of revenue declines in the last fifty years of experience.  The loss trend started as soon as the income tax reforms began to phase in.  Can that be coincidental . 

Yes, the down turn in the economy is a factor in the revenue decline but, the tax reforms have contributed to the shortfalls that have placed Ohio in perilous budget territory.  Consider this, in the fifty years prior to the tax reforms, there were eight  recessions. In those eight periods of economic decline Ohio's tax revenue had never experienced two consecutive years of decreasing collections.

Taylor's memory is either suppressed or she would rather not admit that the actions taken several years ago by her and her Assembly colleagues and Governor Taft have contributed to Ohio's fiscal woes.  Instead Taylor has opted to be the Ohio GOP's factotum on all things critical of Strickland.  From her lofty perch as Auditor of State she can direct her staff to pop out reports focusing on the perceived shortfalls of the adminstrations handling of the budget and finances. 

In order to take on this role it is conceivable that resources have been redirected on churning out Strickland critiques in lieu of focusing on auditing local governments.  County governments alone could use a good deal of oversight, just look at what's transpiring in Cuyahoga County. In fact large entities like Cuyahoga have to pay a few million dollars a year to contract with a large accounting firm though the State to have the annual audit completed.  The AOS claims they don't have the staff to do the largest audits. 

Unfortunately Taylor has decided to provide lip service to local governments that need more audit and performance oversight analysis and go full bore on hunting down the weaknesses in Stickland's budget plan. Why not through in a few invectives about the use of federal ARRA dollars while your at it?  

We shouldn't expect politicking not to be force in shaping the way policy is sculpted by state office holders. The Auditor's role is much more prescient at overseeing local government finances where the lions share of State dollars actually get spent.  The technocrat veneer once imbued by Taylor is wearing thin.  When a candidate runs for office on her finance acumen and CPA credentials that she possesses it's dissappointing to see them cast aside in favor of the tea party antics currently on display.  I guess we can assume she is running for governor .

Taylor Launches Stimulus Watch

State Auditor Mary Taylor wants everyone to know she's watching over the Federal Stimulus dollars destined for local projects and programs.  The AOS has launched a basic reporting portal on the web to be used by local governments to report some basic information on how ARRA dollars are being spent.  The technical bulletin (2009-005) describing the MARY TAYLOR'S FEDERAL STIMULUS TRACKER!!! is here.

The website has a secure portal for reporting stimulus spending at the local level where users are greeted with the following admonisment from Taylor:

As Auditor of the State of Ohio, I am committed to a high level of transparency and accountability over all public funds in the state.  Therefore, as part of our responsibility in completing Single Audits over federal funds, the AOS will be collecting information on the federal stimulus dollars received in Ohio.  All state and local government agencies will be required to report any ARRA dollars they receive and the expenditure of those funds.

The front end of the site is being maintained for public consumption and promises to eventually provide how stimulus dollars are being spent state-wide. 

More transparency and accountability aimed at any use of taxpayer money is always a net benefit in my humble opinion.  I'm fine with any additional avenues of tracking ARRA dollars being offered to the public by the AOS.  What is curious to me is the way Taylor's office is linking the new reporting requirement to the single audit process. 

Cities and counties receive federal and state grant dollars every year.  Maintaining records of how those dollars are spent has always been required in order to pass single audit muster.  Of course the anticipated scale and speed of how the ARRA dollars will pass though to the local level is unprecedented this year. Taylor is going even further by planning to have interim audits of above and beyond the normal annual audit process.

I don't blame Taylor for wanting to be in the mix when it comes to joining the effort to monitor federal recovery dollars.  As State Auditor and lone Republican in the mix of State officers she has an important role in being the overseer of these resources.  This being said, I can't shake the feeling that this Stimulus Tracker is a bit gimmicky.  Color me skeptical.

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Cloud Based Education Reform

Ted Strickland's education reform plan has been receiving a good deal of attention and review from everyone. I though it would be refreshing to look at the plan's key points in a non conventional way. So here is Evidence Based Education Reform in word cloud, courtesy of Wordle.



This makes everything seem a little more cohesive.

SOS From Strickland, Send Money

Desolate, cold and inhospitable conditions were the backdrop for the day the Governor was to explain how Ohio is going to dig out of it's long winter of discontent.

Ted Strickland laid out his administration's plans for the next year and beyond at today's State of the State address. The speech started by tempering the policy agenda that followed with a reality check of the current economic conditions in Ohio. Lots of bad news on that front, increasing unemployment, foreclosures and the overall infirmity of the financial markets, but that was no surprise.

The State of our State, Strickland announced (after all that bad mojo) is "steadfast". Now that word steadfast really means, not subject to change or immovable. Maybe the State itself won't move away from Lake Erie but the conditions here better change or we're in trouble. Sometimes it's better to stick with the staples like "strong" or "resolute". What followed was a sometimes detailed set of proposals for improving Ohio's future through increased investment in infrastructure, technology and of course education whilst preserving the fiscal order of the State's shaky finances.

Balanced Budget In Three Easy Steps.

Stickland's budget office has estimated that a staggering $7.4 billion dollar budget deficit will have to be erased in the next biennial budget process. Achieving that level of savings (or revenue) will be a challenge. Something tells me this next biennial budget process won't end upor being passed by unanimous votes in the General Assembly like the last one did.

The Governor quickly let loose a three pronged assualt that will address the looming $7 billion plus problem. The next budget will achieve expenditure reductions of $3.2 billion, add new Federal Stimulus revenue of $3.4 billion dollars and additional revenue from fees ($800 million) filling the rest of the gap.

Ted of course steered clear of the third rail of Ohio politics, tax reform. He emphasized his intent to leave the misguided tax reforms of 2005 alone citing the savings realized by Ohioans, natch. Those changes to the tax structure have attributed to the cratering of State tax revenue and complicated the budget picture. Not including reforms as part of his agenda is a testament to the perceived political cost outweighing any good that would come from some practical changes to State taxes.

Investment Here and There

The plan to create film industry tax credit is still alive. Strickland vetoed the first attempt to create a transferable tax credit for the film industry. Now that he has some breathing room some of the details could be altered to make the credits more revenue neutral. I think Tom Patton is already working on a reworked version of the film industry tax credit bill. Shouldn't be too long before the production crew of the thriller Torso starts setting up in Cleveland.

Some of the other investment proposals were off the shelf recycled ideas that actually have merit. The proposal to run light rail between the three major C's in Ohio is way overdue. That is something I for one would love to see happen. There will be resistance from the local governments that don't want passenger trains running through their slice of heaven, but the greater good should prevail here. There is of course that small detail of paying for the whole thing. Did someone say gasoline tax? I did.

No policy speech would be complete without the obligatory show of support for the Third Frontier project. The plan has had bipartisan support in the Assembly and from the voting public. It is an attempt to channel $1.6 billion of funding to a wide array economic development research and technology related projects to the benefit of Ohio's citizenry and business community. The Buckeye Institute has labeled the programs of this type as pork laden waste but, if individual States can't funnel money to local projects of this sort who will?

Education Reform - The Meat of the Speech

The remainder of the address was dedicated to reforming education in Ohio. The Governor unveiled a multi-part plan called Evidence Based Education. Ted has journeyed all over Ohio like Carradine in Kung Fu and gotten ideas about what the education system needs. His answer is this evidenced based approach that was unveiled today.

The plan calls for a five part approach to reforming and preparing Ohio's schools for global competitiveness in the 21st century. The five parts include; teaching for the 21st century, expanding learning approaches, improving educator quality, a focus on measuring success and new standards for school districts themselves.

To be honest the proposals were expansive and I think covered a lot of ground for a State of the State speech. I watched this portion of the speech with my wife and the proposals elicited a number of comments from both of us. Pausing live television is a very useful tool.

I'll attempt to flesh out some of the details in a subsequent post because I'm still ruminating on the plan. I'd have to say that Pho was right on target with his predictions on what Strickland would propose today.

The Governor's GOP adversaries of course see things differently. There were criticisms about the details and of course questions about how the education plan will be funded. On that note I concur. The de facto sixth part of the Governor's plan was the funding changes he is seeking to make evidence based education a reality. The proposed changes are going to be significant in terms of cost. What was billed as Strickland's big speech to reform school funding was light on details. I'm not trying to take away from the innovations he is proposing but there was no paradigm shifting change introduced in Strickland's plan.

Aside from letting levy millage adjust with inflation (H.B. 920) and increasing the State's share of funding to districts (up to 59%) the reforms I and Dennis Willard expected to hear didn't materialize. No talk of consolidating districts or even creating district per County. No mention of trying to introduce an additional sales tax as a way of funding schools either. The proposals for reforming education were there but the means to pay for for these changes were meager in their current form.

Full text available here.

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State's Next Budget Is Shovel Ready

It's no secret that the next State budget is going to test Ted Strickland's ability to lead during a fiscal crisis. The current budget has already been trimmed back by over $1.2 billion in the past six months. A real overhaul of the 2010 SFY budget (effective 7/1/2009) is going to be required in order to eradicate a monster $7 billion projected deficit.

Digging out of this mess is not going to be easy. How unassailable is that $7 billion chasm? Even employing theoretical 25% cuts across the board would only yield $4.7 billion of savings according to the State budget office. The impact of reductions that deep would be felt by all Ohioans.

Unlike the federal government the States can't print money or deficit spend to get by in tough times. The budget must be in balance when all is said and done and the Governor will have to bring the State's fiscal house in order one way or the other. To keep it in simple budgeting terms, one way is to cut stuff and the other way is to increase revenue. With this two part approach in mind here are three bits of advice for the Ted to consider whilst navigating this seemingly impossible challenge that lays ahead.

Steady Teddy
There are some tough choices ahead for the Gov. Cutting popular programs and laying off State employees are just some of the decisions that await him. Ted doesn't need me extolling the virtues of showing political courage in the face of uncertainty to make the right choices. Shed the ministerial nicety and get tough.

He exhibited some spine this week by vetoing three bills passed in the lame duck session at the end of 2008. The veto included popular but unaffordable items including the veterans bonuses and the film industry tax credits. These things would be nice in good times but there's a budget crisis in the works. The other item was the shady election "reforms" that had no business being brought up in the final session on a last minute basis. A no brainer for the veto pens wrath but still a good commendable move.

A Little Help From The Feds
Help is on the way in the form of sizable Federal stimulus package to the States. Strickland has been on point not just for Ohio but for all of the States facing budgetary melt downs. In an interview on C-SPAN he made the case for a large injection of Federal money to States for infrastructure projects and education programs to help ease the strain on State budgets. Keeping the push for aid to the States front and center will yield benefits. Ohioans need to understand how their interests will be served and The Gov' will come across as a key leader on getting the thing done the right way.


The Tax Reality
There is no way around it some taxes and fees will have to be increased. That would seem to be political suicide for a guy that will be running for re-election or for Senate in 2010. Too bad dude, the budget has to be balanced and there is no way that's happening with budget cuts alone.

He could start by entertaining a restoration of income tax rates to a more responsible level for the higher income brackets. That would make sense. The minions on the right will surely pounce on this move. Ohioans will have to be reminded that it was the failed tax polices of the GOP lead General Assembly that are partly responsible for the revenue shortfalls crippling State finances. Let John Kasich explain how completely phasing out the income tax is a sensible way forward.

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Feel Free To Panic

"You better get on your knees and pray,
panic is on the way"
- Oasis

It's official, we are in a recession. So says the NBER, the organization that is assigned the noble duty of charting the boom and busts of the U.S. economy.

I'm only playing up to the hype that permeates the media and internets, there's no reason to panic yet. We just went through one of these recessionary periods seven years ago, no big deal. Anyway, economists say that recessions happen on the margins so most of you may end up doing fine. There is plenty of reporting on how the economic downturn is impacting our lives and fleshing out just where those margins are. A small sample of what I've found interesting over the last twenty-four hours.

It's Raining Bad News in Columbus
A follow up to my earlier post on the extreme duress being placed on State finances by lagging tax collections. Articles on GONGWER and the Plain Dealer add more information about the precarious position the Strickland administration is in. They are looking at another round of cuts followed by a new budget process that will require seismic changes in program spending to stay afloat. Ted can't even think about having the General Assembly freeze the final phase on cuts to the income tax lest he be branded "tax hike Ted". That ambitious plan to reform school funding is becoming more of a challenge every day.

Credit Market Bummer
Ignore the stock market for now and pain it is inflicting on your 401k. Market volatility is up so the wild swings in market value are becoming common place. The Volatility Index (VIX) has been averaging 40 as compared to the once normal 20. The real problem has been with the more pertinent credit markets. The untouchable ether where all financial activity comes to being.

Calculated Risk has continued to follow several key indicators and the news in the past few days is disconcerting. Credit markets are still exhibiting troubling signs including what CR called a "stunning flight" to Treasuries on Monday. This trend combined with other bad news (TED Spread up), indicates the problems that were caused by the collapse of the financial system have not gone away.

Portable Alpha, Sinkable Pension
The WSJ had a very interesting but short article on the plight of the Pennsylvania State Pension Fund. It looks like that fund and some others are taking huge losses from market downturns. Now, one would expect a pension fund to see a decrease in earnings and value considering the current market conditions. Unfortunately the managers at the PA pension fund had been imbibing the same elixir that other financial risk takers were drunk on. Using a hedging strategy called portable alpha the pension fund managers asserted they could beat the market and never pay the price for excessive risk taking. That decision hasn't worked out to well, they've lost billions in the last quarter alone.

The scope of problems and extreme difficulty the current financial crisis has created for public finance is impressive. There will most likely be more stories such as this one in the coming months.

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State Tax Reform Comes Home to Roost

As the economy continue to soften in Ohio the State is expecting to see alarming decreases in tax revenue. This comes as no surprise to observers of the State budget and local governments in general. What goes on at the State level may seem distant but it will have an effect on local governments. The State is getting ready to make deeper cuts in early 2009 and the pain will certainly trickle down to the county and municipal levels.

Reporting in last week's Columbus Dispatch highlighted the budget-sinking drop of revenue into the State's coffers. Tax revenue decreasing from one year to the next had only happened once in fifty years until 2006. They are now expecting to see a consecutive yearly drop three years running. The State will again have to make budget cuts to current the biennial budget in order to avoid depleting its cash reserves. This move does not include the massive reductions in spending that will have to be made once the new budget process starts in spring of next year.

The recessionary trends in Ohio's economy have definitely contributed to the downturn in tax revenue. Blame must also be assigned to the large scale reduction (21%) in the state income tax passed in 2005. While revamping of Ohio's aged property and corporate tax structure was needed, the cuts to the income tax rates have proven to be reckless. Bill Harris was quoted in the Dispatch article supporting the belief that the income tax cuts have ameliorated the negative impacts of the the sour economy.

Too bad history is not on the Senate president's side. As mentioned above the State had not seen consecutive drops in tax revenue in fifty years, until 2006. Hmm, 2006 would have been the first year the tax rate cuts and other "reforms" went into effect. Funny how dropping tax rates doesn't result in an increase in tax collections as claimed by the reformers. Surely in that fifty year time frame there were at least five or six recessionary periods. Even with the downturns over that half century, tax collections under the old tax regime had not resulted in a year over year decrease in collections.

At this point the administration doesn't have many options in the way of revenue enhancements. The window to freeze the fifth and final phase-in of the income tax reduction has passed. Governor Strickland has mentioned repeatedly that he will not touch the third rail of Ohio politics and consider raising any taxes, whatsoever. The State will be limited to two other options to bring the budget in line with current resources; cutting programs or creative financing. Reducing program spending includes cutting staff and cutting assistance to local governments such as counties, cities and schools. The Local Government Fund which is fed from State general revenue could be looking at once unthinkable levels of reduction. This step alone will have a serious impact on the mission critical programs of the locals.

The creative financing route entails tapping the rainy day fund or securitizing assets. The administration has been ambivalent about spending down the cash reserves in the rainy day fund. That option would only work in the short term as the burn rate for that cash would be very fast. The State already converted a larget asset, the tobacco settlement fund, into cash last year. Other than that fund there aren't many big time assets laying around to be converted into cash. Free money doesn't present itsle that often. The short of it is that cutting programs is the only tenable option for achieving the bulk of the savings needed.

The revenue from tax collections ebbs and flows with the cyclical economic patterns of boom and bust, nothing new. Reforming the tax system was not a bad idea but the shortsighted way that reform was implemented has put the State in an downward spiraling bind that will have far reaching impacts. The peril of H.B. 66 is that it accomplished political objectives than actually placing Ohio's finances on a path of long term stability.

At this rate that new "tax reform" proposal floating around the halls of the Buckeye Institute may be ready for the dustbin of history.

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Prison Is a Series of Cells

Go easy on him judge he's currently the longest serving U.S. Senator. Yesterday Ted " the internet is a series of tubes" Stevens was found guilty on all counts related to his indictment for public corruption. Uncle Ted, Big Oil's Manchurian candidate shows us that it's not the kickbacks but the lying about kickbacks that always gets you in the end.

Ted is still running for re-election despite the conviction. Unfortunately for him Alaska law prohibits Ted from voting for himself.

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Stickland's Reality Deficit

Governor Strickland announced $540 million in budget cuts to the State Budget to the chagrin of local governments and school districts all around the State. They know that the fiscal pain unlike Reagonomics will trickle down to bite them in the budgetary asses. Large counties like Cuyahoga are already contending with budget deficits in 2008 ($20 million) and onwards and this latest bad news will compound those troubles. These cuts are in addition to the first round($733 million) made this spring.

The state's Local Government Fund that reallocates State GF revenue down to counties, cites, schools and libraries is probably not in good shape. That translates into less dollars available for local services like public safety, education and social programs. According to the State Budget director, Pari Sabety all major revenue sources are off target (from GONGWER):

Director Sabety said that an ominous sign within the monthly revenue reports is the downward trend in personal income tax withholdings, which she described as "a significant negative indicator."

Ohio's dire budget predicament, while not unique among the states (see separate story), has also been underscored by recent reports on unemployment, the housing market, and other economic indicators.

"Every indicator we look at is pointing downward at this point in time," Ms. Sabety said.

The shrinking LGF allocations could be aggravated by reduced State funding in other areas to local governments and seriously hamper efforts to reign in budgets deficits at the local level. This could be referred to as a tail spin.

Our current governor is held hotage by a sinking economy and the bad tax policy choices of previous legislative sessions. One of the chickens that has come to roost is the 21% income tax reduction that was phased in over the past several years. Ted is now straddling the line between fiscal restraint and hard right taxcut mania. He has had to acknowledge the damage to the State revenue picture but admits he will not tamper with the near suicidal reduction in income tax rates, not even a temporary freeze.

"Without a doubt, if the tax reform had not taken place we would have had significant more resources for this biennial budget," he said, adding that under some estimates the cuts in that package may have reached $1.9 billion to this point. "Having said that, I have embraced the tax reform because I do believe that it is important to Ohio's future that our state be a state that is attractive to those who would invest and create jobs."

On top of that change the Commercial Activity Tax created to replace the tax on inventory and equipment lost a large chunk of its tax base last week. Raising taxes is not popular but the ability to cut State budgets will continue to negatviely impact local governments and their constituents (you and me). This puts the State's top Dem in a real bind. He will now have to fend off attacks from up and coming State Auditor Mary Taylor (again from GONGWER)*:

"The announcement today by Governor Strickland concerning the continued deterioration of the financial condition of the state of Ohio is troubling," Auditor Taylor said in a statement. She said that while the initial budget adjustments made last February entailed some cuts, "it also included a number of questionable fiscal management proposals such as Keno, delaying program expenditures from one fiscal year to the next and short-term cash management actions."

She and other top State Republicans will be prepping the battle field for the next round of state wide elections and the even the gubernatorial contest in 2010. This crowd is touting the Mechagodzilla of all tax cuts, a plan to eliminate the state income tax all together. This plan pushed by Blackwell et al at the Buckeye Institute has had some media exposure but limited examination of the consequences. The backers think the magic of the free market and the CAT (the one with an eroding base) will more than make up for the lost revenue.

Ted please come back to reality and consider freezing the income tax reduction. As unpopular and vunerable as it may make you, putting the brakes on for now could do some good. highlighting the weakness of the current plan could help demonstrate how supersizing the income tax cuts would be even more devastating to Ohio than the plan that is already in place.

* Sorry no links to GONGWER, it is a subscription only service.

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