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Governor Walker Refused to Hide From Fiscal Reality

June 06, 2012

By Steven Malanga

Everyone seems to have an opinion on what the vote in Wisconsin means for national politics.

But beyond the issue of whether Scott Walker’s survival puts Wisconsin in play in November, his victory represents an example of the way politicians in our most pressed states are sorting themselves as they confront this long fiscal downturn. Increasingly they fall into two camps: those willing to undertake tough reforms in the face of severe fiscal restraints that don’t appear likely to improve anytime soon, and those who continue to put off the difficult decisions even as their states’ balance sheets deteriorate and investors grow wary of their budget instability.

Just a few days before the Wisconsin vote, for instance, neighboring Illinois’ legislators fled Springfield without passing pension reform despite enormous pressure on them to end the bleeding in the state’s budget caused in part by growing retirement costs. Even a coalition of Illinois municipal officials led by Chicago Mayor Rahm Emanuel couldn’t persuade the legislators to pass a bill reducing the costs of the pension system. Lawmakers openly admitted that they feared for their jobs in November if they voted for reform in May.

In Illinois, legislators fear government worker unions far more than they fear taxpayers, business leaders, unending red ink, and a dearth of new investment. In a fiscal emergency back in January of 2011, Springfield lawmakers rushed through $7 billion in tax increases that have managed to do little to right Illinois’ fiscal ship. Instead, the money has gone largely to cover rising retirement costs, including a $4 billion pension payment and $1.6 billion in interest costs on bonds floated to make the state’s annual pension payment in years when it didn’t have the tax money to do so.

The vanishing of that tax money into the great black hole of retirement costs has contributed to a fiscal instability that prompted Caterpillar, the giant Peoria-based maker of heavy construction machinery, to cite concerns about the state’s "business climate and overall fiscal health" when it announced earlier this year that it would not open a new manufacturing plant in Illinois.

Barely a year into its own reforms, Wisconsin hasn’t been top of the list of places for businesses looking to locate, or relocate in the Midwest, either. So far that’s been happening in Indiana, where Governor Mitch Daniels has a 7-year record of reform and restraint that has helped make the state an attractive place for businesses looking for fiscal steadiness. Earlier this year Indiana won 450 Caterpillar jobs that the company is relocating from a plant in Ontario, Canada, as well as 1,050 jobs that Amazon is creating at a new regional distribution center in Jeffersonville. Since recently starting a direct mail campaign targeting Illinois businesses, Indiana has snagged 15 firms from the Prairie State.

If Walker is going to make good on his promise to create 250,000 jobs (something that Wisconsin hasn’t done in any four-year period I can find since World War II), he still has a lot more work to do. In the budget cycle before he took office, Wisconsin raised taxes by about $3 billion, so that today Wisconsin has the 5th heaviest overall state and local tax burden, and the 7th highest on businesses, according to the Tax Foundation. By contrast, nearby Indiana has the 11th lowest tax burden on businesses.

But Walker’s controversial reforms have set the stage for the state and its localities to reduce the burden of government. One of Democrat Tom Barrett’s major problems in challenging Walker was that Barrett, the mayor of Milwaukee, used Walker’s own reforms to save some $20 million on his municipal budget, according to an estimate by Josh Barro in a Manhattan Institute report. Most of the savings came from changes to health care benefits that the city required of workers. Previously, workers and governments collectively bargained those benefits.

Over time, the cost savings to local government should pile up. Many school systems, including Milwaukee’s, haven’t yet taken advantage of Walker’s reforms because contracts with employees remain in force for several years. But if Milwaukee’s schools follow the pattern of the city and other districts, the school system could save about $64 million a year just on health care costs once its current contract expires.

Today it’s difficult for states and their municipalities, especially those with growing employee retirement costs, to escape the new fiscal reality around them. Tax revenues in some states still haven’t fully recovered from their peak in 2007 or 2008, while retirement and other employee benefit costs have continued rising relentlessly. Some lawmakers have tried to hide from this balance sheet nightmare by employing a host of gimmicks, from borrowing to finance operations to skipping pension contributions to shifting of money among accounts. But it’s hard to continue running from reality in such a long fiscal downturn.

Scott Walker decided not to hide from his state’s fiscal woes, and he spent the last year fighting for his political life as a result. Illinois’ lawmakers have been hiding from their budget plight since the downturn began, and they ran away from pension reform again last week to avoid a fight with the state’s government unions. But today it’s Walker’s Wisconsin that is the better for his battle.

Original Source: http://www.realclearmarkets.com/articles/2012/06/06/governor_walker_refused_to_hide_from_fiscal_reality_99706.html

 

 
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