Illinois to outsource pathhole repairs

The Chicago Tribune (4/29, Channick) reported that, "overwhelmed by the depth and breadth of potholes, the Illinois Department of Transportation is turning to outside contractors to help with repairs."

IDOT has the capacity to dispatch 60 patching crews a day, but it has been receiving up to 500 pothole complaints a day "during a long winter of brutal freeze-thaw cycles and near-record snow." Unable to keep up, officials took the unusual step of bidding out eight contracts for Cook and five collar counties this month, with about $25.5 million to be spent on contracts for the work.

I am currently working on some projects to model governmental outsourcing. This case is unique in two ways. First, it is the state that contracts with local governments to provide a service, due to state's diseconomies rather than economies of scale. Second, the purpose is to improve responsiveness rather than to save money. Essentially it resembles a case of devolution in market style.

Illinois to outsource pathhole repairs

The Chicago Tribune (4/29, Channick) reported that, "overwhelmed by the depth and breadth of potholes, the Illinois Department of Transportation is turning to outside contractors to help with repairs."

IDOT has the capacity to dispatch 60 patching crews a day, but it has been receiving up to 500 pothole complaints a day "during a long winter of brutal freeze-thaw cycles and near-record snow." Unable to keep up, officials took the unusual step of bidding out eight contracts for Cook and five collar counties this month, with about $25.5 million to be spent on contracts for the work.

I am currently working on some projects to model governmental outsourcing. This case is unique in two ways. First, it is the state that contracts with local governments to provide a service, due to state's diseconomies rather than economies of scale. Second, the purpose is to improve responsiveness rather than to save money. Essentially it resembles a case of devolution in market style.

The fiscal state of states

Last Friday (04/25) Arturo Perez from NCSL present a newly-released survey of state budget conditions in a practitioner panel, "The Fiscal State of States," WSSA 2008 (Denver).  The picture is gloomy nationwide for most states in the coming 19 months. States that are hit the hardest include New York, California, Florida, and Arizona, etc, most of which are suffering from the burst of housing bubble. A couple of states are exceptions: Alaska, Wyoming, and North Dakota see surprisingly large budget surplus due to oil reserves.  

For more information, see the Stateline.org report (04/28, Prah), 23 states face budget gaps in '09.

Line-item veto for the President?

I came across this webpage on Minnesota Budget Project about a proposal in 2006 to give the President line-item veto. Although it is a bit outdated, the article makes good sense to me.

The line-item veto is the power of an executive to nullify or "cancel" specific provisions of a bill, usually budget appropriations, without vetoing the entire legislative package. This power is held by governors in all but seven US states, albeit with wide variety in its details. Presidents of the US, however, do not have this power except for a very short-period. In 1996, President Clinton was granted this power by the Line Item Veto Act, passed by Congress in order to control "pork barrel spending" that favors a particular region rather than the nation as a whole. The line-item veto power, however, was ruled unconstitutional in 1998. Since then, a constitutional amendment to give the President line item veto power has been considered periodically. This webpage in MPB talks about a recent attempt in 2006, the Gregg bill, initiated during the Bush administration.

Proponents of the bill suggested that giving the President this new authority to single out specific items in appropriations bills would force Congress to become more fiscally disciplined. However, critics pointed out that the Gregg bill had gone well beyond the traditional concept of the line-item veto in the states (such as this recent case in Minnesota) and attempted to grant the President unprecedented authority, for instance, by withholding appropriations even after a line-item veto has been defeated by the Legislature, or by bundling together line-item vetoes from separate appropriations bills in order to make it more difficult for the Legislature to override.

Critics contend that this proposal would provide the President excessive bargaining power well above political considerations [of the Congress] and consider this notion "unsupportable." It would be "an invitation to mischief" and we should find "better ways to achieve accountability" if the goal is indeed to prevent wasteful “pork barrel” spending or to reduce federal budget deficit.

States facing "the worst deficits"

The AP (3/18) reports that states are confronting "the worst deficits they've faced in a decade or more" as the economy worsens. In response, states may "take away government health insurance and benefits from millions of Americans,"including children, the disabled, and the elderly. Also facing cuts are "aid to schools and universities," as well as state workforces. The AP notes that states are even considering "releasing prisoners before their sentences are completed."

Nevertheless, few states are considering [general] tax increases to close budget gaps. Instead, they may increase lottery ticket sales, promote Indian gambling, or further raise taxes on cigarettes and alcohol. As AP points out, those types of revenue-generating mechanisms tend to be regressive, "disproportionately hit the pocketbooks of the same poor and working-class that would be hurt by the spending cuts."

(Courtesy to ICMA Newsletter.)

Civic Education Video Collection: State Budgeting

From Website of Minnesota Senate Office, Civic Education Video Collection:

• 2005: Funding Capital Improvement Projects (.rm, 00:03:00)
• 2004: The General Fund (.rm, 00:03:00)
• 2004: Budget Forecasting (.rm, 00:06:00)

Videos about Education Finance in Minnesota

From Website of Minnesota Senate Office:

• Video of Capitol Reports (Saturday, June 02, 2007; 00:28:32)
  

Education funding is always the top priority for state lawmakers when they set the state’s budget. According to the biennial 2007-2009 budget, about $13.7 billion dollars over two years will be directed towards early childhood through high school education programs. Host Jannell Trobec interviews House Education Finance Chair Mindy Greiling and Senator David Hann about the new funding initiatives.

• Video of Capitol Reports (Saturday, October 13, 2007; ?)

School districts across the state are seeking support from voters to increase education funding through their property taxes. Students, teachers and administrators in the White Bear School District offer their perspective on the status of education funding in Minnesota. Plus, Assistant Senate Majority Leader Tarryl Clark and Education Commissioner Alice Seagren talk about past and future state efforts to fund our public schools.

How Does Minnesota Compare?

Minnesota Center for Public Finance Research (MCPFR) publishes a series of reports called "How Does Minnesota Compare," which is designed to provide just one snapshot of the fiscal picture of Minnesota, in particular how Minnesota's overall tax collections or spending compare to the other states. You can click below to watch videos of Capital Reports about the two last tax comparison reports.

• Video of Capitol Reports (Saturday, July 8, 2006)
  

Segment 2 – Minnesota’s state and local tax collections during Fiscal Year 2004 ranked lower compared to other states than in previous years. Minnesota Taxpayers Association’s Executive Director Lynn Reed explains the latest study. (8:00 minutes, 12:40/20:50)

• Video of Capitol Reports (Saturday, October 23, 2004)
  

Lynn Reed, Executive Director of the Minnesota Taxpayers Association, presents Minnesota's tax and spending rankings in 2004. (12:45 minutes, 0:30/13:15)

The Way We Tax

The Governing.com did a great job in The Way We Tax, A 50-State Report(2003), which evaluates the way each state raises its revenues. The two charts above compare state tax burdens per capita or as a share of personal income -- I just love the balance of colors.

For more comparison studies, see other grading-the-governments reports by the Government Performance Project.

State and Local Tax Burdens, 1959-2000

From Robert Tannenwald's article, Are State and Local Revenue Systems Becoming Obsolete?

State and Local General Revenues, 1977-1999

From Robert Tannenwald's article, Are State and Local Revenue Systems Becoming Obsolete?

What makes Wilmington, Delaware, so special?

Why incorporate in Delaware? A key factor of the state's attractiveness to businesses is its pro-business finance laws. For example, there is no Delaware corporate income tax for corporations that are formed in Delaware so long as they do not transact business in Delaware. In addition, shares of stock in Delaware corporations are not subject to Delaware taxes if the owner lives outside the state. For those reasons, many companies like to establish their headquarters in Delaware and the state receives a large percentage of its revenue from corporate registration fees. In 1988, the Delaware legislature enacted a law which required a would-be acquirer to capture 85 percent of a Delaware chartered corporation’s stock in a single transaction or wait three years before proceeding. This law strengthened Delaware's position as a safe haven for corporate charters during an especially turbulent time filled with hostile takeovers.

As the most populous and readily accessible city in Delaware, Wilmington has become a national financial center for the credit card industry, in part because in 1981 the state has eliminated the usury laws enacted by most states, thereby removing the cap on interest rates that banks may legally charge customers. Many major credit card issuers, including Bank of America (formerly MBNA Corporation), Chase Card Services (part of JPMorgan Chase & Co., formerly Bank One/First USA), and Barclays (formerly Juniper Bank), are headquartered in Wilmington. The Dutch banking giant ING Groep N.V. headquartered its U.S. internet banking unit, ING Direct, in Wilmington.

NCSL's reports on state and local taxation

The Foundation Fiscal Partners is a group of members of the National Conference of State Legislatures (NCSL) Foundation for State Legislatures. Since 1991, the group has been working together to examine specific areas of state fiscal policy and then make recommendations on these state fiscal policy issues. These reports on their website are very helpful for our course of State and Local Public Finance:

• A Guide to Property Taxes, in three parts: An Overview (May 2002), Property Tax Relief (November 2002), and The Role of Property Taxes in State and Local Finance (August 2004).
• The Appropriate Role of User Fees in State and Local Finance (July 1999)
• Critical Issues in State-Local Fiscal Policy: A Guide to Local Option Taxes (November 1997)
• Critical Issues in State-Local Fiscal Policy: Sorting Out State and Local Responsibilities (July 1997)

LLC vs corporation

A Limited Liability Company (LLC) is a relatively new business structure in the US allowed by state statutes since 1970s. Owners of an LLC are called members, which in most states may include individuals, corporations, other LLCs and foreign entities. Many states including Minnesota also permit “single member” LLCs with only one owner.

Similar to a corporation, owners of LLC have limited personal liability to for the debts and actions of the company. But a LLC functions more like a partnership and so is more flexible in management and free from some paperwork requirements. One significant advantage of LLC is that it allows for pass-through taxation, that is, the profits will be allocated to members and be taxed on their individual income level only. This avoids the double taxation of typical business profits that are subject to both (federal and state) corporate income tax and individual income tax (once the profits are allocated).

LLC has its disadvantages too. Many states levy a franchise tax or capital values tax on LLCs as a "fee" for them to benefit from the privilege of limited liability. It may be more difficult for an LLC to raise financial capital as investors may be more comfortable investing funds in the better-understood corporate form. In addition, a few types of businesses, such as banks and insurance companies, generally cannot be LLCs, and there may be addition restrictions in some states.

Deconstructing the transportation finance bill

Gather (Raabe, 03/03) reports that Minnesota House Legislators Denise Dittrich, Kathy Tingelstad and Melissa Hortman answered questions about the newly effective Transportation Finance Bill (HF2800) in a well-attended Town Hall Meeting in Senate District 47 on March 1. They explained specifics including what exactly is in the bill, how it is being funded and what compromises were agreed upon in order to get a transportation bill of any kind passed.

It is well known that the bill will adds $6.6 billion to state transportation funding in the coming decade through increase gas tax, metro sales tax, and vehicle license tab fee. Yet few may know that the bill also includes 40 additional state troopers, qualifies the state of Minnesota for $160 million in federal matching funds and includes tax credits for the lowest income bracket.

Before it was passed, the bill went 17 revisions and many compromises have been made. Take several examples. The wheelage tax and indexing were taken out of the bill. The increased gas tax is still below the proposed $.10 tax that was vetoed back in 2005. A tax credit was included to accommodate the Governor's position that the "gas tax is regressive." The proposed metro sales tax for transit was decreased from .5% to .25%. In addition, the bill includes the bonding that the Governor asked for, as well as the Urban Partnership Agreement.

It is estimated that the bill will create approximately 33,000 new jobs, and will reduce the cost of congestion, which amounts to $790 a year for the average driver and 43 hours of delays.

Grading the States 2008

Today, the Pew Research Center released the Grading the States 2008, which is the new report of the Government Performance Project in assessing the quality of management in the 50 states. The report’s findings are generated from extensive interviews and surveys of state-level managers and opinion leaders. The performance scores are based on four categories of criteria:

• managing fiscal resources from budgeting to procurement ("money"),
  
• recruiting and retaining highly qualified, productive public employees ("people"),
• maintaining and improving transportation facilities ("infrastructure"), and
  
• using information and technology to measure performance and communicate more effectively with the public ("information").

Overall state performance in 2008 ranged from A- (Utah, Virginia, and Washington) to D+ (New Hampshire). The national average among the 50 states was B-, which is also the score for Minnesota.

Among four criteria, the only one that Minnesota gets below average is infrastructure (C+). This is not surprising at all with the collapse of I-35 Interstate Bridge. Although the tragedy is now believed to be caused by a design flaw common for all bridges built around 1960s, it has raised a big public profile and has led to closer scrutiny of the state's efforts in capital budgeting, asset management, and infrastructure maintenance and renewal.

For more about the state's performance report card, see here.

Minnesota: State general property tax

The state general property tax in Minnesota was enacted in 2001 as part of a broader package of property tax reforms that included class rate reductions, the state takeover of transit levies, and replacement of the state-determined school district general education property tax with direct state-aid payments. Prior to 2002, the last levy of a Minnesota statewide property tax was in 1967.

According to "Minnesota Tax Handbook, 2006" (p. 42), the state general property tax has the following features:

• Tax Base: Net tax capacity of commercial-industrial, public utility, railroad, mineral, and seasonal recreational property. Net tax capacity is the estimated market value multiplied by the net class rate. For seasonal recreational property, the class rate for the first $76,000 of market value is 0.4% rather than 1%.
• Rate: Tax rate is determined annually to equal the mandated levy. The levy was $592 million for 2002 and for subsequent years is increased by the rate of increase in the implicit price deflator for state and local government consumption expenditures and gross investment. Of the total amount, 95% is levied on commercial- industrial property and 5% on seasonal residential recreational property.
• Exemptions: Electric generating public utility machine
  

A proposal of property tax-increase blocker

[Thank you Jeff for suggesting this case.]

In 2005, Minnesota Governor proposed a property tax-increase blocker through "taxpayer satisfaction surveys," according to Star Tribune (Smith, 03/10/2005). Also known as the "turbo-charged, truth-in-taxation" proposal, the bill would allow property owners to challenge the property tax levy decisions of the City Council through a reverse referendum process.

This is how it is supposed to work. Together with their annual property tax statements, property owners will be provided a survey, which would include a question, “Are you satisfied with the proposed property tax levy?” and will provide a space where the taxpayer can answer “yes” or “no”. If at least 20 percent of the surveys are returned with a “no” response, the city would have to hold a referendum on the levy increase. The hearing would be held in January. If the voters do not support the proposed levy, the final levy would be reduced to the previous year’s levy.

Ironically, the Governor initiated this idea while he was significantly reducing local government aid (LGA), which by nature adds pressure for local governments to increase property tax levy so as to keep up with their services. Not surprisingly, "local government officials fought this legislation tooth and nail ," and the bill went nowhere.

Minnesota: 20 years behind in transportation investment

Growth & Justice, a "progressive" economic think tank in Minnesota, claims that Minnesota is 20 years behind in transportation investment. According to their research, if the state had kept up with its highway funding in 1986, "adjusting for inflation and dramatic growth in highway usage, it would have invested $13.89 billion more over the last 20 years."

The complete report is titled “Twenty Years Behind: Highway Spending & Revenues by Minnesota’s State Government, 1986-2006.” According to the report, the trend line for overall highway spending in Minnesota lags behind that for overall spending by all states combined.

Over the years, Federal highway funds to Minnesota declined significantly, adjusted for inflation and miles traveled. The trend is driven in part by a problematic formula of federal gas tax distribution, which was recently fixed by Congress, and in part by the fact that federal gas tax revenue has failed to keep up with inflation for the rate has not been increase for many years.

Regarding own-source revenue, Minnesota's Motor Fuel Tax, a major source of the state Highway Fund, dropped by more than a third from 2006 to 1986.

Ambitious Transportation bill proposed by legislative session.

The legislative session in Minnesota opened on Feb. 12 and on its very first day proposed an ambitious transportation finance bill with an $8.4 billion package that includes up to a seven-and-half cent gas tax increase, tab fee increase on new cars and a possible half-cent metro sales tax.

The bill is likely to be vetoed by Gov. Tim Pawlenty, as was the fate of a similar bill last year. However, sponsors hope public pressure after last year's fatal Interstate 35W bridge collapse will help them win over the heated debate or at least gain partial success with some compromise.

Like many other states, Minnesota has a biennial budget. The legislature convenes in regular "long-year" session each odd numbered year from January to mid-May to discuss budget proposal submitted by the Governor. In even numbered year the legislature re-convenes for a "short-year" session, as "one of budget review; action on the results of interim studies; consideration of emergency measures and the result of the evaluation of the needs of the state." This current session will end in April, when we will know the result of this transportation finance bill.