Bamboozled by the Establishment

This is the third of three excerpts we'll be publishing from Bringing America Home: How America Lost Her Way and How We Can Find Our Way Back (Chronicles Press, 2010). Pauken is the chairman of the Texas Workforce Commission and was the chairman of the Republican Party of Texas when George W. Bush was governor.

The big-government crowd in Washington and elsewhere are bankrupting our country. And Republicans are just as culpable as Democrats in treating our taxpayer dollars as “other people’s money” to be spent as they and the special interests decide. If this is what “conservatism” has come to mean — spending whatever it takes to get and maintain power — then we might as well officially commemorate the death of conservatism. Americans at the grass-roots level had better wake up and realize that they have been bamboozled by the Washington establishment, which maintains control of the reins of government no matter which party is in control of the White House.

Fortunately, in my own state of Texas, Republican Gov. Rick Perry and the Republican-controlled Texas legislature have kept the growth of state spending at reasonable levels, tracking the rise of cost of living (the inflation index) and population growth. That was not the case, however, when George W. Bush was governor. Then, state spending grew far faster than inflation and population growth. Nor is that the case in many other states, which kept milking the cow of the productive private sector by imposing higher and higher taxes and spending more and more of the taxpayers’ money. Those high-tax states are feeling the pain, as companies and taxpayers, suffering from high taxes and the loss of good jobs, move elsewhere. Moreover, the drop in housing prices and the slowdown in the economy since 2007 means that many states are racking up even more debt to fund state government.

Even in an ostensibly low-tax state like Texas, many local taxing bodies have shown little fiscal restraint in recent years. The housing boom allowed many of these local governments to raise property taxes in a seemingly painless fashion through the “stealth tax” of skyrocketing appraisal values. Property-tax revenues rose ten percent or more annually without local governments actually raising the tax rate. Local officials could tell voters that they had not raised taxes since the tax rate hadn’t gone up, yet property-tax revenue grew from $9 billion in 1985 to $30 billion in 2004. That was approximately three times faster than the rate of inflation during the same period. Texas had the ninth-highest property taxes in the country until Governor Perry and the Texas legislature cut school property taxes by one third in 2006. Unfortunately, that set off a feeding frenzy among local taxing bodies, and a major portion of the education property tax cut was negated over the next three years.

When the Texas Task Force on Appraisal Reform (which I chaired at Governor Perry’s request) sought to implement reforms to rein in these excessive property-tax hikes, lobbyists for the local taxing bodies killed our proposals in the 2007 regular session of the Texas legislature. Many of those local elected officials (and the career bureaucracy that runs local government) wanted no controls placed on their ability to spend as much of that “other people’s money” as they could get their hands on. The local taxing bodies even used our own tax dollars to lobby against our proposals for property-tax relief and appraisal reform. Local and state governments regularly pay lobbyists to persuade state and federal governments to spend more tax dollars on projects benefiting their taxing entity. One well-connected transportation lobbyist from my home city of Dallas is paid $450,000 annually by local governments to get legislation passed that will help these localities pull down more transportation funding from the state and federal governments. In fact, the Republican legislator who led the effort to kill appraisal and property-tax reform in 2007 was hired by local taxing bodies to lobby for their interests in our state capitol after he retired from the legislature in 2008. Former state representative Fred Hill is now paid hundreds of thousands of dollars by local governments to block property tax and appraisal reform in Texas.

The system is out of control.

Unfunded pension liabilities at the local and state levels present another huge problem that most Americans do not even know exists. Shad Rowe, the former chairman of the Texas Pension Review Board, calls it a “time bomb.” The people who should care are taxpayers, “but they don’t know anything about it,” Mr. Rowe said in an interview with the Dallas Morning News. A report released in March 2009 revealed that the Texas Teachers Retirement Fund had unfunded liabilities of more than $40 billion as a result of the stock-market and hedge-fund collapse of 2008.

Economist Carl Pellegrini notes that the Michigan Public School Employee retirement system has $22 billion in unfunded pension and retirement medical liabilities. Huntington, West Virginia, spent about 20 percent of its city budget on pensions in 2008, or $7.5 million. According to the Charleston Herald-Dispatch, Huntington’s firefighter’s pension fund had assets to cover only three percent of its potential claims. The police pension fund was not in much better shape, at only nine percent funded. Unless the taxpayers of the state of West Virginia bail it out soon, West Virginia state senator Bob Plymate said in early 2008, the city of Huntington may have to declare bankruptcy.

Here in Texas, the Employees Retirement Fund of Fort Worth had more than a $400 million shortfall in early 2007. The states of New Jersey and Illinois have huge shortfalls in their pension plans— at least $18 billion in New Jersey and $46 billion in Illinois. A U.S. Senate Finance Committee report in early 2008 noted that a growing number of state pension funds are less than 80-percent funded.

Warren Buffett warned of the looming public-pension crisis in his annual report to Berkshire Hathaway shareholders in 2008:

Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed. Promises involving very early retirement—sometimes to those in their low 40s—and generous cost-of-living adjustments are easy for these officials to make. In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.

The situation got much worse in 2008 and 2009 when the economic bubble burst and the stock market collapsed. Where is the money going to come from to make good on these unfunded pension liabilities?

In an interview with the Financial Times in August 2007, the comptroller general of the United States, David Walker, drew parallels between America’s current fiscal irresponsibility and the fall of the Roman Empire:

Mr. Walker warned that there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”

“Sound familiar?” Mr. Walker said. “In my view, it’s the time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Walker argued that the fiscal imbalance in this country meant that the United States is “on a path toward an explosion.” The big-government conservatism of the Bush administration has made a bad situation even worse. To get spending under control, it will take either a serious economic crisis to wake us up or sound-thinking elected officials at every level of government, who treat taxpayers’ money as they would treat their own. The economic crisis hit our nation with the force of a hurricane in 2008. Yet our elected and appointed “leaders” in Washington, D.C., seem intent on solving the problems of spending and credit excess with larger doses of the same medicine.

Our motto needs to be, “Let’s do more with less.”