Thursday, December 30, 2010

The History and Current Impact of the General Improvement Fund

Arkansas state government finds itself in a strong fiscal position, when compared to the disaster that is going on in other states. The credit for this goes not to any of our current political office-holders, but rather to the wisdom and virtue of men who lived 150 years ago. The men who wrote the state constitution of 1878 deserve the credit. They placed in that document a requirement that the state submit a balanced budget. They also wrote into it a requirement that we have a vote of the people before the politicians are allowed to put the people into debt.

For the last fifty years, much of the political class in this state has devoted great energy toward getting around these protections. To some extent they have succeeded. Various bond issues and amendments have given state government more power to increase the debt load on taxpayers than they once had. Debt is a tax on tomorrow. That’s proven to be a favorite tax for today’s politicians from either established political party.

Still, the conservative manner of government mandated by our constitution means that business is conducted in opposite order of politician’s preferences. In general the state collects money today that it will not spend until tomorrow. During the interim, the money is placed in interest bearing accounts. The interest that is collected on that money before it is spent is put into a separate account, called the “General Improvement Fund”, or GIF.

-editor's note: a friendly legislator called to let me know that the GIF is also fed when actual revenues for certain programs exceed budget. As such, there is a small-government dynamic for GIF. Legislators are motivated to keep baseline budgets small in these areas, hoping that revenues allotted to them exceed budget and get moved into the GIF so they can dole it out. Still, it's doled out as a one time shot rather than a new and higher baseline budget for next year. That is real inside-ball stuff, and you can judge for yourself how well that serves to restrain spending.

This fund often has a significant amount of money to disburse. For example, in 2009 there was over $58 million in the fund. The state did have a large surplus that year- since spent, but it does show the kind of numbers we are talking about. When divided among 35 state senators and 100 state representatives, it’s still a pretty good chunk of change. Even in 2007, each State Senator had about $750,000 that they could give to basically anyone they thought worthy. That’s changed of late, but I get ahead of myself in the telling of this tale.

...continued on the jump....

4 Comments:

Blogger Mark Moore (Moderator) said...

GIF funds have a disproportionate impact on the politics of this state precisely because they are so flexible and discretionary. But before I delve too deeply into the history and current impact of the funds, let’s talk about their morality.

Is taking the interest earned off of tax collections from everyone in the state and spending it on local projects an ethical and moral way to use the money? In an absolute sense, I’d say “no.” It’s kind of like the use of “earmarks” for pork in Washington, except not quite as bad. Some reasons that GIF money is morally superior to what’s going on in D.C. is that a) They are not doing it with money borrowed from the Chinese but with money they already have; b) Taxing Springdale to benefit Camden at least leaves the money closer than taxing Springdale to benefit San Francisco, and c) There is a strict limit to the amount of such looting which can occur when you specify that the money comes only from interest earned off of tax collections.

The question cannot be completely answered without addressing the issue of how the money is spent. For example, when former State Senator Jim Holt finally got in a situation where he had GIF money to distribute, he very carefully asked rural fire and police departments in his district what equipment they needed to get insurance companies to upgrade the safety classifications of those areas.

Notice how he spent the GIF money- it was used for essential services in place of what would have been paid for with local taxes, thus making it the same thing as a tax cut for his constituents. That’s what a lot of conservatives say is the moral thing to do with the GIF money anyway- give it back to the taxpayers. In this case, the upgrades to these rural fire departments caused insurance companies to lower home insurance premiums. In essence, the spending paid for itself and helped keep local taxes lower.

Add this though to the con side of the equation: There is a disincentive to give people a serious tax cut, even in good times when the money is plentiful, because of the way the GIF has been handled. Getting people around the state to pay for a project that is solely for the benefit of their district has always been popular with legislators. That is why all calls to return the state surplus to the taxpayers in the form of a tax cut has never gotten traction. The ledge wants to over-collect and maintain a huge surplus in order to earn huge interest payments. And the example I gave of a decent use of the GIF was from 2007, probably the most moral and ethical distribution of GIF money in state history. Speaking of history, this account would not be complete without a brief run-down of it.
...continued...

6:59 PM, December 30, 2010  
Blogger Mark Moore (Moderator) said...

When there is a pile of money that can be spent on almost anything one divvy’s it up for, who does the divvying becomes really critical. In the days before term limits, a few “old lion” legislators manipulated the process so that they and their buddies got the lion’s share of the GIF money. Governor Mike Beebe himself was once a member of that Old Guard. In that system, northwest Arkansas got “used”. The legislators from up here were in the minority party, and the majority party had the idea that if someone else had more than they did, then that was justification enough for the government to take it from them.

Term limits forced change. The Old Guard was on its way out. Finally in 2004 most Republican legislators made a deal with “outsider” conservative Democrats to break the grip of the cabal of favored (mostly liberal) Democrats. They then agreed to divide the GIF money evenly. This new group was often referred to as “The Brotherhood”. After “The Brotherhood” took over, every Senator got the same amount to spend and every Representative got the same amount to spend. Given that there had to be a GIF fund, it seemed like the most-even handed way to do it.

While that was fairer than the previous system in which a few south and east Arkansas Democrats oversaw the looting of the north and west, it still did not take into account the variance in taxes paid for various parts of the state. In other words, a Senator from northwest Arkansas got the same amount as one in the south, even if his constituents paid twice as much in state taxes.

Yet even that modest attempt at fairness was too much for some people. The guys who used to run things did not like being out-voted, so they did what is becoming the American way- they had some people take it to court.

7:00 PM, December 30, 2010  
Blogger Mark Moore (Moderator) said...

....continued...A court which respected the principle of separation of powers might have restrained itself and ruled that the way the legislature handles the purse strings is their business, and not the court’s. Of course that’s not the kind of State Supreme Court that we have (see the Lakeview decision). The court ruled that the whole way the GIF funds were distributed (which had gone on for years without challenge) was “unconstitutional”. After the ruling, the legislature made a change in their GIF distribution: To comply with the courts, a panel that represented competing interests would now divvy up the money. The pork didn’t go away in this system. Rather, the Governor and a few key legislators were able to determine who got the pork. That was a lot like the days of the Old Guard. Who says you can’t turn back the clock?

There was still an informal gentleman’s agreement among the legislature that the panel would honor legislator’s requests for funds so that the money was split pretty much evenly among the districts. Without confronting the court directly, the legislature would try to keep the state from returning to the days when a few powerful players would get to transfer wealth from the state as a whole into their favorite local interests.

They tried this new system in the 2009 session, but it turns out they were a few gentlemen short of being able to maintain a gentlemen’s agreement. Governor Beebe and another key member of the panel (Republican Senator Gilbert Baker from Conway) both wanted the same thing. They both wanted a new interchange built in Conway where a new plant was going in. It seems that Baker used his role on the panel to siphon over 10 times his share of the money to a project in his district, and Beebe sent a matching amount to the same project. It appears that central Arkansas Republicans like Baker are cutting deals with the Democrats in the rest of the state and leaving Republicans in NWA high and dry. It looks like the bad old days, with a lot of tax money collected from NWA that winds up being spent in the rest of the state.

7:00 PM, December 30, 2010  
Blogger Mark Moore (Moderator) said...

...continued...

The practical effect of the new method of GIF disbursement is to give the Governor a lot of power. He is using it to leverage the legislature into doing his bidding. If they play ball with him, they might be able to bring bacon home to their district. It’s working, and that’s a violation of the spirit of our state constitution.

Fresh from the heavy-handedness of Reconstruction, our state fathers wanted a weak executive branch and a powerful legislature. That’s why a simple majority can over-ride a veto in this state. It’s why executive power in this state is divided into many elected offices rather than made by appointment of the Governor. They wanted a separate Secretary of State for example, so that the person in charge of physical plant where the legislature worked was not an employee of the Governor whom the legislature might contend with. Rather, they were directly accountable to the people. This court-imposed change in GIF disbursement has tilted power back to the Governor at the expense of the legislature.

What does the future hold? Will we regain our bearings and turn GIF into a permanent tax rebate, or will it become history only because we become as bankrupt as California and there are no savings to distribute? That depends entirely on the wisdom and virtue of the true source of political power in this state- the People themselves.

7:01 PM, December 30, 2010  

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