State Treasurer Michael Fitzgerald doesn’t make the news often, but I am grateful for his recent frank comments to the Des Moines Register:

Fitzgerald, a Democrat who is chief custodian and investor of state government’s money, said last week that a lottery leasing proposal made recently by Kehl Management to Gov. Chet Culver “was a terribly bad deal.”

The governor should have been embarrassed when the details became public, Fitzgerald added.

“I am against leasing the lottery until somebody proves to me that it is a really good deal for the state. I think the lottery is worth $1 billion – minimum – and that is why I am highly suspicious of selling it,” Fitzgerald told The Des Moines Register. […]

Kehl Management, headed by Riverside casino executive Dan Kehl, has proposed a one-time cash payment of about $200 million for a 49-year lease of the Iowa Lottery, plus a 22 percent annual tax on the lottery’s adjusted gross receipts.

I have no idea how Kehl arrived at the $200 million number. Maybe that was a lowball starting point for negotiation, or maybe he thought state officials might jump at the chance to cover a fourth to a third of the expected hole in next year’s budget.

Either way, Fitzgerald’s comments are on the mark. No one should be talking about leasing the lottery for a price that is well below its value. That’s not only bad policy, but also bad politics, since it would create the appearance of Democratic leaders providing a sweetheart deal for large donors. Kehl gave $25,000 to Culver’s campaign committee in 2008.

Fortunately, Senate Majority leader Mike Gronstal has said, “I’ve not seen much interest inside our caucus in proceeding with the sale of the lottery.”

It’s time for statehouse leaders to definitively take selling the Iowa Lottery off the table.

Details about Governor Chet Culver’s proposed 2010 budget will come on Wednesday morning, but today the governor’s office announced plans to impose 6.5 percent spending reductions on 205 state programs in next year’s budget. According to the Des Moines Register,

“We’re not going to tax our way out of a tight budget,” [Culver] said. […]

Culver will continue to ask lawmakers not to raise taxes. His budget will propose no tax increases, according to a copy of the governor’s remarks provided before a speech at the Iowa Business Council’s annual meeting.

Culver would like to protect certain areas from the full effect of the 6.5 percent cut: public safety, workforce development, human services, disaster relief, the teacher quality program, and early childhood education.

He will recommend that $200 million from the state’s cash reserves be used during the next budget year.

Via e-mail I received this joint statement from Senate Majority Leader Mike Gronstal, Senate President Jack Kibbie, House Speaker Pat Murphy, and House Majority Leader Kevin McCarthy:

“In these tough economic times, we appreciate Governor Culver and Lt. Governor Judge taking another step to ensure a balanced state budget by releasing this proposal.

“Because of the deepening national recession, this year will be very tough for many Iowans.  While Iowans had little to do with the mismanagement, greed, and financial carelessness that is causing the worst national economic situation since the Great Depression, we will be sharing in the pain.

“In the coming weeks and months, we are committed to:

·        Listening to our constituents

·        Working with the Governor, Lt. Governor and Republican legislators, and

·        Passing a fiscally responsible state budget that attempts to protect the progress we’re making on creating good-paying jobs, improving student achievement and teacher quality, and ensuring affordable health care.”

As you can see, the Democratic statehouse leaders did not unconditionally endorse the governor’s proposal or the principle of relying solely on spending cuts and tapping reserve funds to balance the budget. Some statehouse leaders have advocated raising the gas tax to help pay for road works.

As I have written before, I think it would be a big mistake to rule out any tax increases for next year.

As a political sound bite, it’s appealing for a governor to say, “I balanced the budget without raising a single tax.” But seriously, does Culver believe that Iowa has no obsolete tax loopholes that cost the state far more than they benefit the economy? The Iowa Policy Project has identified “wasteful, secret subsidies to big companies through the tax code.” (pdf file) How about asking those companies to share in the sacrifices that need to be made in the coming year?

Borrowing money to pay for certain infrastructure projects is reasonable, but a modest gas tax increase could reduce Iowa’s debt burden in future years without much pain. There may be other tax increases that make sense, if the funds raised could be linked to specific spending priorities that create jobs.

Politically, it’s risky for any governor to raise taxes, but Culver should balance those considerations against the risk that large spending cuts could prolong the recession:

Almost every single economist agrees, the last thing we want to do in a recession is slash government spending. We want, in fact, to increase that spending so that it is a counter-cyclical force to a deteriorating economy. So the question, then, is how to most safely generate the revenue to maintain or increase that spending. By  “most safely” I mean how to raise the revenue in a way that will minimize any negative economic impact. And the answer comes from Joseph Stiglitz:

 

“[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”

So, first and foremost, you don’t want dramatic spending cuts (beyond the usual rooting out of waste/fraud) and you don’t want to raise taxes on middle- and lower-income citizens who both need the money for necessities, and are the demographics that will most quickly spend money in a stimulative way. That leaves taxes on the super-rich, and Stiglitz – unlike anti-tax ideologues – has actual data to make his case.

For more information, see Budget Cuts or Tax Increases at the State Level:

Which is Preferable During an Economic Downturn?

I’m sure the Iowa Business Council will applaud Culver’s promise this evening to balance the budget with no tax hikes of any kind.

But economic considerations as well as basic fairness dictate that taxes should be on the table when the legislature drafts the 2010 budget. We should not let the fear of Republican-funded attack ads scare us away from sensible steps to increase revenues.

The state budget is complicated. There are all kinds of ways to make the numbers add up, and you’ll never find consensus on the right approach. Increased expenditures on infrastructure look like overspending to some and a wise long-term investment to others. Tax cuts for business look like economic stimulus to some and unjustified corporate giveaways to others. Inevitably, most strategies for balancing the budget have their pluses and minuses.

Once in a while, though, a plan for plugging a budget hole emerges that is just bad on every level. Selling the Iowa Lottery is that kind of plan.

It’s bad policy because Iowa would be drastically reducing future revenue streams from the lottery in exchange for one lump-sum payment on the order of $200 million.

It’s plus-bad politics in the short term because the public will have no trouble understanding that this is a raw deal for taxpayers.

It’s double-plus-bad politics in the long term because it would play right into Republican talking points about Democrats being unable to manage public money and beholden to special interests. In fact, State Auditor David Vaudt (a likely GOP candidate for governor in 2010) has already spoken out against the idea.

Yet if a recent Des Moines Register column by David Yepsen is accurate, selling the Iowa Lottery to private investors is a done deal. Here’s an excerpt from his column:

So we need to start calling this for what it is: It’s a sweetheart, giveaway deal. It goes to a bunch of wealthy Democratic campaign contributors. It’s done to make a quick repair to a budget screw-up.

Democratic legislative leaders, who’ve taken hundreds of thousands of dollars from these gambling interests over the years, are now being asked by those donors and supporters for a return on that investment.

Organizers of the move say they’ll pay the state at least $200 million, plus give the state 22 percent of the gross receipts, in return for running the lottery for 49 years.

However, big investors aren’t going to plunk down $200 million, plus give up a fourth of the gross receipts each year, without expecting a profit. The only way to find that profit is to find ways to get Iowans to gamble more.

That could mean a return to TouchPlay. It also could mean that Iowa pioneers cell-phone or BlackBerry gambling. The promoters say we won’t do those things. Fair enough, then expect a blizzard of gambling advertising to get us all to scratch more lottery tickets or buy more numbers games.

This idea is just flat-out poor public policy. Iowa netted $57 million a year last year from lottery profits. Assuming that figure stays the same for the next 49 years, Iowa will give up $2.8 billion during that time to pocket $200 million now. If the gamblers pay a 22 percent gross-receipts tax to the state on top of their $200 million payment, Iowa’s lost revenue would be $2 billion, give or take a few million.

Don’t two generations of Iowa schoolkids need that $2 billion more than a bunch of gambling businesses and the out-of-state hedge-fund operators who’ll bankroll this thing?

If the lottery sale goes forward, expect to see variants of those points in Republican-funded attack ads against Governor Chet Culver and our incumbent legislators in 2010.

Culver and statehouse leaders can say political contributions from gambling interests and their advocates had nothing to do with this decision, but don’t expect that story to stick. Not when people in the gambling business are among Culver’s largest individual donors and have given generously to the Democratic House and Senate campaign funds.

Speaking of GOP talking points, Iowa Republicans haven’t been known for their brilliant political strategy lately, but I give credit to them for the very clever proposal they floated at a press conference on Thursday: sell the Iowa Lottery to the state public employee pension system.

Responding to a column published this morning by The Des Moines Register’s David Yepsen, Senate Minority Leader Paul McKinley, R-Chariton, said it appears some backroom deals have been made and Gov. Chet Culver and Democratic leaders are intent on selling the lottery to private investors.  Instead, the state should consider selling it to the Iowa Public Employees’ Retirement System, known as IPERS, McKinley said.

“This is only a scheme to get some very short-term financial gain for some long-term budget pain,” McKinley said. “There are other options that we should pursue, and one of those options that we’re pursuing is that the IPERS board look into buying the lottery.” […]

House Minority Leader Kraig Paulsen, R-Hiawatha, said Republicans don’t think the lottery should be sold, but if it is, the deal should not be limited to big Democratic donors. Dan Kehl, an Iowa casino operator who is heading a consortium that hopes to lease the Lottery, donated $25,000 to Culver in 2007.

“If we are looking at that, we need to ensure everyone gets the opportunity to bid on it, and if the rate of return is 17 percent, that sounds like a good deal for IPERS and they need to look at that,” Paulsen said. […]

IPERS manages a multibillion-dollar investment portfolio that finances the retirement benefits more than 300,000 Iowans. Since July it has lost more than $4 billion in the stock market.

Republican legislators have set themselves up very well now. They are on record opposing the sale of the Iowa Lottery, but they are also reminding people that the state budget could reap short-term proceeds from selling the lottery without rewarding a handful of large Democratic donors. Think about how many Iowans have a family member in the IPERS system.

If Democratic leaders are smart, they will announce that selling the Iowa Lottery is off the table.

UPDATE: I’m pleased to report that on January 24 Culver’s chief of staff Charlie Krogmeier said, “There is no plan to sell or lease the lottery. Period.”

SECOND UPDATE: The Cedar Rapids Gazette has more from Krogmeier:

“The idea that the Iowa Lottery might be leased is getting more attention from pundits and partisans than it deserves. There is no plan to sell or lease the lottery – period,” he said. […]

Krogmeier said he was concerned the lottery issue was erroneously being cast as the governor’s plan when the extent of Culver’s involvement has been agreeing to one meeting with a private group that pitched a lottery lease proposal.

“This has become nothing more than a silly political game that some in the Republican Party want to play, and at a time when Iowans want a balanced budget and deserve bipartisan results,” he said. “This much is certain: when the governor releases his budget proposal in a few days, it will not include a line item reflecting a lease of the lottery.”

My apologies for not getting this in closer to the actual new year, but you could say that “a day late and a dollar short” has been the theme of the new year so far for me. Or five days short, as the case may be.

In any case, before we start the new political year for real, I thought it might be fun to share our predictions for the new year. Here are nine predictions of mine for two thousand and nine.

1. The state budget is in far worse shape then we think. Expect the fight over the budget to get ugly, quick.

The Iowa state fiscal year runs from July 1 2008 to June 30 2009–right in the heart of the economic meltdown. Given that the estimates for this period are just starting to come in, it's reasonable to assume that the stories we're currently hearing about the “budget crisis” represent only the tip of a much larger iceberg. Likewise, the 1.5% across-the-board cut currently proposed by Gov. Culver isn't going to be nearly enough to solve the crisis. It's going to get ugly and fast.

2. Unemployment will hit 10% by the end of 2009, and recovery will not come until early 2010.

Call me a pessimist, but I think things are going to get much worse before they get better. When you combine the potential failure of the Big 3 (a still unresolved issue, by the way), plus a global manufacturing slowdown, with the fact that up to 25% of retail stores may declare bankrupcy in the next year–you have the recipie for unmitigated economic disaster.  

To complicate matters, I do not expect President Obama's recovery measures to be passed before May of this year. (There are already signs that a long battle is ahead for this bill.) That means that many of the infrastructure projects given funds through the program will miss out on the summer construction window–meaning they likely won't start until Summer 2010. Many other measures, like tax cuts or social programs won't go into effect until 2010 as well…moving the light at the end of the tunnel further and further away.

3. The Big 3 will not survive in their current form. Get ready for the Big 2.

Regardless of whether the auto bailout was the correct move at the time, by the time the big ball drops in 2010–there will no longer be a Big 3 as we know them now. My best guess is that one of the Big 3 automakers (most likely Chrysler) will implode into disorganized bankrupcy. No buyer will be found, and the brand will simply cease to exist. This will spark a crisis that will either lead to the organized bankrupcy/restructuring of the other companies, or government assistance with severe Bob Corker style conditions. 

The good news is that out of the multitude of laid-off engineers and designers, we could see new  and innovative technologies, designs, and companies form. By 2020 we could all be driving solar hybrids designed and built by ex-Big 3 designers who started their own companies.

6. The Supreme Court will rule in favor of same-sex marriage in the case of Varnum v. Brien.

Beware the ides of March rings true in Iowa in 2009. Expect a ruling on the case of Varnum v. Brien to come down with a rulings for several other cases on March 13, the conclusion of the Court's March session. When that happens expect a whirlwind of craziness to descend on the state: national media, a rush of spring weddings, celebrity attention, half-cocked legal challenges, right-wing rants, Fred Phelps-ian protests, legislative blustering, Steve Deace's head exploding, and who knows what else.

I don't think the moon turning to blood, the dead walking the streets, or any other Pat Robertson-style pronouncements will come true…but expect a wild ride.

5. The Republican candidate for Governor will be a serious contender who already holds a major elected office.

The current fight over the RPI chair has a definite and familiar theme: change. Old hacks are out, new hacks are in. While there is a faction of the GOP that clings to BVP like life preserver, the majority of the party is, I think, waiting for someone new to come along.

That someone is either State Auditor David Vaudt, Sec. of Agriculture Bill Northey, or 4th District Congressman Tom Latham.

Vaudt looks to emerge as one of the main faces of opposition to Culver on budget issues, a position he could use to slingshot him to the governorship. Northey is the darling of the Republican Party and, with agricultural issues on the back-burner this year and little to do, may find the Governor's race an attractive prospect. Latham, by all measures a low-importance member of the minority party might decide that its now or never for him. And he has nothing to lose: if he wins, he's the Governor; if he loses, he can run again as the elder-statesman in the dogfight that will be the new 3rd district.

Ouch:

Gov. Chet Culver announced an across-the-board budget cut today and said education and Medicaid won’t escape unscathed.

Culver announced a 1.5 percent across-the board reduction in an attempt to deal with the state’s declining revenues.

The governor said staff reductions and employee furloughs are likely, which will be determined by each department. “It’s going to be painful,” he said.

The cuts announced today amount to $91.4 million and will have an effect on services, Culver acknowledged. In addition, Culver ordered a transfer of $10 million of unused money into the general budget. Most of that transfer money will come from an underground storage tank account, which is used to investigate and clean up any past petroleum contamination from underground storage tanks.

A week ago, Culver announced $40 million in cuts, largely through a hiring freeze and limiting out-of-state travel. In addition, Culver said he will ask the Legislature to withdraw plans for a $37 million new office building.

Combined with cuts announced Dec. 9, the total is $178.4 million in reduced expenses in the current budget year that ends June 30.

Clearly spending cuts in the current year are unavoidable because of the decline in projected revenues.

When state legislators draft next year’s budget, though, I hope they will not rely only on spending cuts to make up for projected lower revenues. David Sirota explains why:

Almost every single economist agrees, the last thing we want to do in a recession is slash government spending. We want, in fact, to increase that spending so that it is a counter-cyclical force to a deteriorating economy. So the question, then, is how to most safely generate the revenue to maintain or increase that spending. By  “most safely” I mean how to raise the revenue in a way that will minimize any negative economic impact. And the answer comes from Joseph Stiglitz:

 

“[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”

So, first and foremost, you don’t want dramatic spending cuts (beyond the usual rooting out of waste/fraud) and you don’t want to raise taxes on middle- and lower-income citizens who both need the money for necessities, and are the demographics that will most quickly spend money in a stimulative way. That leaves taxes on the super-rich, and Stiglitz – unlike anti-tax ideologues – has actual data to make his case.

For more information, see Budget Cuts or Tax Increases at the State Level:

Which is Preferable During an Economic Downturn?

Will Democrats dare to raise taxes, knowing that Republican candidates and interest groups will hammer them for it in 2010?

I have no idea, but if drastic spending cuts send the economy further into recession, 2010 isn’t going to be a picnic for Democrats anyway. I doubt they’ll rally the troops with “At least we didn’t raise your taxes” as a campaign message.

When analyzing the new Iowa House Democratic committee assignments, Chase Martyn noticed,

Almost all vulnerable Democratic incumbents have been kept off the Ways and Means committee.  In a year of budget shortfalls, Ways and Means will likely have to send some tax-increasing bills to the floor.

Post any thoughts about the budget/spending/taxes debate in this thread.

UPDATE: The press release from Culver’s office is after the jump.

SECOND UPDATE: If you think Iowa’s budget outlook is grim, read this short piece about the situation in California.

THIRD UPDATE: Nancy Sebring, the superintendent of the Des Moines Public Schools, announced plans to cut $3.3 million from the current-year budget (about 1 percent) in light of the state budget cuts. Presumably most if not all school districts in Iowa will need to take similar action. I wouldn’t be surprised if fiscal constraints force more of our small school districts to merge.

Three days after he announced plans to cut $40 million from the current-year budget and delay a planned expenditure of $37 billion, Governor Chet Culver said on Friday that he will announce a further $60 million in spending cuts next week. The total state budget for the current fiscal year is $6.1 billion.

Iowa’s Revenue Estimating Conference met the same day and “lowered this fiscal year’s revenue estimate by $99.5 million and next year’s estimate by $132.6 million.”

Iowa House Republican leader Kraig Paulsen slammed Democrats in a statement:

Democrats have put this state in a precarious position […] At a time when the national economy was on it’s way down, Democrats increased state spending by over $2,000 per family, over the span of two years they’ve hired more than 2600 new state employees, and loaded up budgets with pork projects for their preferred constituents. The only thing they have left to show for it is a gaping hole in the budget.

Give me a break. The Republican Party long ago stopped being the party of fiscal responsibility. John McCain himself admitted this:

We lost the election in 2006 because we lost our way. […] Spending lurched completely out of control.

Anyway, the New York Times reported last month,

At least 37 states and the District of Columbia have faced or are facing budget gaps totaling $66 billion in the 2009 fiscal year. Most states, which rely on sales, income and property taxes, are seeing a significant drop in such revenues or increases that are below the inflation rate, compared to the same period last year.

Click here to view a graphic showing which states have budget problems. If you look at that map, you can see that many states’ projected budget shortfalls are larger per capita than Iowa’s. This is a tough economy, and not only for states run by Democrats.

Meanwhile, House Speaker Pat Murphy promised,

We will take action in January to keep the 2009 budget balanced. There will be difficult decisions to make, but we will not balance the state budget on the backs of middle class families in these difficult times.

House Majority Leader Kevin McCarthy commented,

We have over $620 million in the state’s rainy day funds and we have a Governor and state legislature that are committed to fiscal discipline.

Yet, we need to be prepared for real cuts in budgets for both 2009 and 2010.  There will be real cuts and there will be real pain, but I do believe that Iowa is in a better position to weather this budget storm than almost any other state.  

Jason Hancock’s piece about the various budget projections for Iowa is worth a read. The most pessimistic scenario is quite grim.

Very tough choices will have to be made during the legislative session. I wouldn’t expect the return of much, if any, of the state money that was “swept” from other programs last summer to pay for flood relief.

Cross posted at myDD.

CQ Politics is reporting on the Democratic leadership's desire for a second package to strengthen the economy that largely lines up with Barack Obama's plans. But are Congressional Dems omitting aid to state governments, one of the key planks of Obama's plan?:

Democrats have been contemplating a second effort to inject money this year into the faltering economy. The idea appears to have gained traction, particularly among congressional leaders, since Monday when presumptive Democratic presidential nominee Sen. Barack Obama of Illinois outlined a $50 billion stimulus proposal that will serve as the centerpiece of a two-week economic tour of battleground states.

Though the prospects for a second stimulus package are slim, the debate gives congressional Democrats an opportunity to rally around Obama.

The massive economic stimulus package enacted in February focused on tax breaks for businesses and rebates for individuals and families.

Obama has proposed a second round of rebate checks, an extension of unemployment insurance, aid to state governments and a new $10 billion fund to help stem the tide of home foreclosures.

He also proposed increasing investment in infrastructure such as roads, schools and bridges.

“There’s a need for additional targeted stimulus,” said Senate Budget Chairman Kent Conrad , D-N.D.

Schumer said infrastructure investment and a second round of rebate checks could be part of the new package, which Democrats are likely to unveil after the July Fourth recess

State government spending is a key prop holding up the economy during a recession. Dem leaders might want to check out the NYT, which pointed out earlier this week:

At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles.