MyGovCost News & Blog

In 1990, Gilbert Hyatt was awarded the patent for the first single-chip microprocessor. The computer industry welcomed this invention, earning Hyatt a lot of money. He soon moved to Nevada, which has no state income tax. California’s Franchise Tax Board (FTB) claimed Hyatt lied about his residency, and that he owed $7.4 million in taxes for a six-month period from 1991 to 1992. In Nevada, California’s FTB goons ransacked Hyatt’s trash without warrant, told his business partners and doctors he was under investigation, and shared Hyatt’s personal information with the media. Hyatt sued the agency for harassment and violation of privacy. California tried to get the suit dismissed, but in 2003 the U.S. Supreme Court ruled that Hyatt had a right to go to trial. In 2008, a Las Vegas jury awarded him $388 million, including $250 million in punitive damages. California’s tax hacks duly appealed to the Nevada Supreme Court, calling the award “flagrantly excessive” and claiming they did nothing wrong. In 2014, Nevada’s Supreme Court tossed much of the award, but Hyatt retained the $1.2 million for fraud. Even so, California’s pillage people kept up the chase.

This week California’s Board of Equalization will attempt to decide whether Hyatt lived in California or Nevada when he started cashing in on his invention. If Hyatt wins, the state may be on the hook for tens of millions in legal fees accumulated since 1993. If the state wins, Hyatt, now nearly 80, will have to pony up some $13.3 million in taxes and penalties from 1991 and 1992, and the FTB says that, with interest, the full tab comes to more than $55 million. As it turns out, the FTB has already spent $25 million trying to grab Hyatt’s money, so the pillage people are not very cost effective. George Runner of the Board of Equalization says “it’s all about residency,” but it’s really about government greed, which as this case shows, is truly fathomless. Inventors of useful products such as the single-chip microprocessor will find better conditions in other states.

The ongoing saga of Dallas’ failing government employee pension fund for its police officers and firefighters is continuing to play out to the detriment of the Texas city’s residents.

When MyGovCost last checked on the story, the city’s mayor had rejected new property taxes to finance a taxpayer bailout of the insolvent pension fund. At the same time, the city must still find a way to pay the monthly pension payments that they have guaranteed to the city’s retired police and fire fighters, where the high costs of doing so has damaged the city’s credit.

The city’s leaders have primarily chosen to address the situation by shrinking its police department. Jolie McCullough of the Texas Tribune describes what that has meant in Dallas:

Since 2011, Dallas’ police force has shrunk by more than 600 people, according to department reports. More than 40 percent of that drop has been since 2016, and officials continue to report large numbers of departures every month….

“It’s kind of like the perfect storm,” said Robert Taylor, a criminology professor at the University of Texas at Dallas. “You got failing pension plans, you have low pay, and then you have all sorts of political turmoil doing the job of enforcing in major cities.”

Dallas’ situation has been caused in part because unlike other cities in Texas, it has followed a strategy of paying its police officers less while providing them with much more generous defined benefit pensions as part of their total compensation package to be attractive to experienced officers. With the failure of the city’s police and fire pensions however, it has been increasingly unable to retain its experienced officers, who can get better pay and benefits from neighboring cities. Consequently, Dallas’ residents are now getting far less police for what they pay in taxes, with the results showing up in slower response times to emergency calls and delayed resolutions to criminal investigations.

Dallas’ situation in this case makes a strong argument in favor of governments adopting defined contribution pension plans for their employees (like the kinds of IRAs and 401(k)-type plans that are common in the private sector), over the kinds of traditional defined benefit pension plans that are proving to be overly burdensome to hundreds of local governments and dozens of state governments across the United States, which Bloomberg describes as “America’s Pension Bomb“.

By adopting this kind of reform, local and state governments could better protect the interests of their citizens and residents, who would no longer have to bear the cost of higher taxes to bail out a failed government employee pension fund or be made to suffer from a reduction in desired government services like those provided by police and fire departments. Meanwhile, government employees would benefit from being freed from the consequences of their government employers being unable to make adequate provisions to fund their promised retirement benefits.

Best of all, they would have more in common with their fellow Americans who work in the private sector.

It’s official! The 2017 edition of Government Shutdown Theater, which MyGovCost hinted was coming less that two weeks ago, was initiated by President Trump at a speech in Phoenix, Arizona on Tuesday, August 22, 2017. The Hill‘s Mike Lillis reports on the now increased chance that the U.S. government will be partially shut down in October.

The chances of a government shutdown in the fall are growing.

Congress returns to Washington next month facing a full plate of must-pass legislation and a shutdown threat that looks more serious after President Trump suggested on Tuesday he won’t support a spending package that omits new funds for a southern border wall.

“Believe me, if we have to close down our government, we’re building that wall,” he said during a fiery rally in Phoenix….

So what would a federal government shutdown mean in 2017 if it comes to pass?

Today, we got a surprising answer to that question, where we learned from Reuters Richard Leong that so long as the U.S. Treasury Department prioritizes making principal and interest payments to the U.S. government’s creditors over its other non-debt liabilities, it won’t affect the U.S. government’s top-notch credit rating from one of the world’s big three credit rating firms.

Moody’s Investors Service said on Thursday it would consider stripping the United States of its top-notch rating in the event of a default, not over late or skipped payments on non-debt obligations, as the federal government faces the possibility of running out of cash in coming weeks….

Delays on non-debt payments including salaries to federal employees and payments to social programs such as Social Security would not result in Moody’s stripping the U.S. government of its Aaa rating, the agency said in its annual analysis of the United States.

“If the Treasury were to fail to meet some of its non-debt obligations as a result of a political deadlock over this issue, that would not affect the U.S. sovereign rating because our ratings reflect the risk of default and loss on government debt, not the risk of failed or delayed payment on non-debt obligations,” Moody’s said.

Moody’s did give an estimate for the size of what would amount to a partial government shutdown in the event the U.S. government’s debt ceiling is not raised to allow the government to borrow more money. With the U.S. government limited to spending just the money it collects through regular tax withholding payments, tariffs and other fees and penalties, only 14% of the U.S. government would need to be shut down.

By comparison, when the 2013 edition of Government Shutdown Theater played out, 17% of the federal government closed down. In 2017, more of the federal government would be staying open for business.

Now, if the U.S. Congress and the President could just get their collective act together and restrain the growth of the government’s spending to be slower than the growth of its revenue, we might finally get to the point where we can officially cancel any new performances of Government Shutdown Theater.

Update: The second of the big-three credit rating firms, Standard and Poor, has affirmed that the U.S. government’s credit rating will not be reduced if the U.S. Treasury Department prioritizes debt payments to U.S. creditors over the government’s non-debt obligations.

With President Trump getting so much press, a few hangovers from the previous administration have managed to escape notice. As we noted, Operation Choke Point, supposedly a measure against consumer fraud, pressured financial institutions doing business with allegedly “high risk” companies. These included Ponzi schemes, payday lenders, escort services and such, but the DOJ also saw fit to put legitimate gun and ammunition dealers on the list. Guns were the primary target and the federal DOJ sought to put dealers out of business by making it impossible for them to conduct banking operations. As former U.S. Marine Mike Schuetz of Hawkins Guns LLC explained, Operation Choke Point was “a back-door way for those wanting to infringe on your rights to keep and bear and is nothing more than discrimination to gun owners.” Brian Wise, of the U.S. Consumer Coalition, told reporters that thousands of businesses have had their bank accounts closed, and Operation Choke Point was “one of the greatest abuses of power that the country has never heard of.” That is true, but now that abuse has come to an end.

Fox News reports that after pressure from House Republicans, the Trump administration duly ended Operation Choke Point. As Assistant Attorney General Steven Boyd explained, “All of the Department’s bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again.” Legitimate gun dealers were jubilant, but some, including Mike Schuetz, are still dealing with the fallout. Government disregard for constitutional rights always has negative consequences, and this calls for reflection and vigilance. Concerned Americans might review the way Nazi Germany handled the issue in Stephen P. Halbrook’s Gun Control in the Third Reich: Disarming Jews and “Enemies of the State.”

Since 1996, U.S. presidents have deployed the 1906 Antiquities Act to create 27 national monuments, including the Grand Staircase-Escalante National Monument and Bear Ears, both in Utah, and the 1.6 million-acre Mojave Trails National Monument in California, created in early 2016. President Donald Trump calls this a “massive federal land grab” that unilaterally puts “millions of acres of land and water under federal control.” In similar style, Interior Secretary Ryan Zinke says “the Act has become a tool of political advocacy rather than public interest.” The unilaterally declared monuments, Zinke argues, limits the land’s use for farming, timber harvesting and mining, along with oil and gas exploration.

Back in April, President Trump signed an executive order that “reviews enforcement of the law that gives him power to designate lands as national monuments.” The president tasked Zinke to produce a final report within 120 days. As the August 24 deadline looms, it remains uncertain which monuments the president will reduce or eliminate. Many in California, Utah and Nevada, would agree that the monuments, as Trump also said, are “another egregious abuse of federal power.” The decision will test Trump’s claim that he wants to “give that power back to the states and to the people where it belongs.” Meanwhile, in the Golden State, governor Jerry Brown has empowered a different kind of land grab that poses a stronger threat to property rights.

Last year Brown signed AB 2492, a militant surge in the abuse of eminent domain, which gives government power to take private property for public use—roads, parks, bridges, schools and so forth—in return for “just compensation.” The California legislation, in the style of the Supreme Court’s 2005 Kelo v. City of New London ruling, allows governments to grab property and hand it over to private developers. The legislation does this by making it easier to target certain areas as “blighted.” As Justice Sandra Day O’Connor wrote in her dissent to the Kelo decision, “the government now has license to transfer property from those with fewer resources to those with more.”

For a very long time, the employees of the U.S. government have had it really good. According to the Congressional Budget Office, the combination of regular wages with extremely generous benefits puts the total compensation of the federal government employees well ahead of their peers in the private sector.

But that’s not all. Downsizing the Federal Government’s Chris Edwards recently described another perk of federal government employment:

There is another important benefit of federal employment: extremely high job security. Federal workers are supported by strong civil service protections, and about one-third of them are represented by unions. Bureau of Labor Statistics (BLS) data show that the rate of “layoffs and discharges” in the federal workforce is just one-quarter of the rate in the private sector.

Federal workers are almost never fired. An investigation by Government Executive noted, “There is near-universal recognition that agencies have a problem getting rid of subpar employees.” Just 0.5 percent of federal civilian workers a year get fired for any reason, including poor performance and misconduct. That rate is just one-sixth of the private-sector firing rate. For the senior executive service in the government, the firing rate is just 0.1 percent. By contrast, about two percent of corporate CEOs are fired each year, which is a rate 20 times higher than in the senior executive service.

All in all, the federal government is a very well-compensated place to work. A final piece of evidence can be found by looking at quit rates, or the rates that workers voluntarily leave their jobs. BLS data show that the quit rate in the federal government is just one-quarter the quit rate in the private sector. Federal workers know that they have a lucrative combination of compensation and job security, and so they stay much longer than in other industries.

Recent initiatives to improve the efficiency and effectiveness of the federal government’s operations by eliminating waste appears set to change that costly status quo, where the ride on the federal gravy train to Easy Street may be set to come to an end for a significant number of the federal government’s civilian labor force. Government Executive‘s Eric Katz breaks the news:

Federal agency managers are privately telling members of the Trump administration they will soon lay off employees, according to Office of Personnel Management officials, and are seeking advice for how to do so in the most effective manner.

Agencies are “pretty certain” they will need to institute reductions in force as they aim to satisfy an executive order from President Trump and ensuing guidance from the Office of Management and Budget, said Leslie Pollack, deputy associate director of OPM’s HR Strategy and Evaluation Solutions, on WJLA’s “Government Matters” program. Those documents required executive branch agencies to reorganize themselves and, in the process, cut the size of their workforces. Pollack’s office, which provides human resources consulting to federal agencies, has assisted officials across government looking at “closing down or realigning functions.”

“They are coming to us specifically and saying ‘I’m pretty certain I need to run a reduction in force,’ and that is one area where OPM and our group in particular has some expertise in helping agencies…to take a look at their situation and actually execute according to the restructuring rules and all the policies and procedures that are in place,” Pollack said. “So we’re definitely getting those questions.”

The federal government’s agencies must submit their proposals to streamline and to reduce the cost of their operations by the end of the U.S. government’s current fiscal year on September 30, 2017. Their proposals will then likely be incorporated into President Trump’s budget proposal for the government’s 2019 fiscal year.

When it comes to the amount of money that’s wasted by governments, it’s hard to beat corporate welfare for both its size and its endurance.

All too often, once a company is gifted with taxpayer money to “stimulate the economy” or to “stabilize the market” or to “keep jobs here”, it opens the door to a continuing stream of subsidy payments or outright bailouts that once turned on, take on a life all their own, where the companies benefiting from the largess of politicians become completely addicted to the point where they cannot survive without them.

Worse, the politicians in charge of providing the welfare don’t seem to be either able or willing to truly stop it.

There’s a great example of the unintended consequences of corporate codependency on government welfare in New York, where Tim Knauss of the Syracuse Post Standard reports on the continuing gifts of public tax dollars to private corporations years after their funding spigot was supposedly turned off.

New York state shut down its out-of-control Empire Zone business incentive program in 2010 after providing millions of dollars to companies that state officials never intended to help.

Unfortunately for state taxpayers, the costs continue to pile up. Businesses that got in before the door shut can earn lucrative tax credits for up to 14 years.

The ultimate cost is likely to be at least $3 billion – with a B.

It could go even higher. Businesses are holding more than $1.5 billion in unused credits they hope to use someday to offset their taxes. That could push the final cost over $4 billion.

A lot of that money went to businesses that had already been operating for decades, added few if any new jobs, and were never at risk of leaving for North Carolina.

Knauss provides examples of the kinds of companies that cashed in on the New York state government’s willingness to give away tax dollars without any real consideration. Starting with the owner of two antiquated power plants.

The owner of two Korean War-era power plants near Buffalo received more than $190 million in Empire Zone tax credits between 2003 and 2015. During part of that period, the state was suing the Huntley and Dunkirk generating stations over their heavy pollution.

After 13 years of subsidies, both Huntley and Dunkirk closed, eliminating 136 jobs.

Another way to think of that money is that the utility owner was paid $107,466 per job “saved” per year to keep polluting the environment, which the state is also paying to clean up. Here’s another example of wasted stimulus spending for a different kind of utility company.

A company that owns 71 hydroelectric plants acquired from Upstate utility company Niagara Mohawk Power Corp. estimated a combined Empire Zone take of roughly $142 million. Most of the hydros were built at least 60 years ago. Some were built 100 years ago by predecessors of Niagara Mohawk.

Empire Zone credits were so lucrative that the hydro company paid $1 million a year to the town and village of Potsdam in return for drawing their Empire Zone to include nearby dams.

What kind of return on investment do you suppose the corporate owner of the hydroelectric plants got by “investing” $1 million of their money in the local politicians of an nearby town and village to incent them to redraw the map to their benefit? It was probably quite a bit higher than what the return would have been if they had invested in upgrading the company’s well-aged infrastructure!

Knauss concludes his reporting on the waste generated by New York’s Empire Zones by quoting Howard Zemsky, who is currently the state’s economic development commissioner.

“I’ve never done a study on Empire Zones,” Zemsky said. “(But) I would say the empirical evidence on the Upstate economy over many decades suggests that what we were doing, we should not be doing. This doesn’t really require a whole lot more analysis, in my opinion, than that.”

Although New York’s Empire Zone economic development program was terminated seven years ago, they tax credits they left behind don’t have an expiration date. The corporations that collected them can still cash in an additional $1.5 billion over as long a time as they might choose. It’s a gift from state politicians to their cronies in the corporate world that just keeps giving.

In California’s capital of Sacramento, rapid transit has been in terrible shape, but not for lack of spending on management. As we noted, after hiring Mike Wiley as manager, the RT district plunged into financial distress, tapping reserve accounts to balance its budget and raising fares 10 percent. Though a major bust as transit boss, Wiley was eligible for a pension of $278,000, a full $48,000 more than his final salary of $230,000 and $68,000 higher than the federal pension maximum of $210,000. He opted for a plan that will pay him $220,000 a year, a full $10,000 above the federal maximum. The district kept Wiley on the job as a “retired annuitant,” while hiring new boss Henry Li.

On Li’s watch, the district’s emergency account is “still anemic,” fares remain among the highest in the nation, and ridership has dropped. In two years, according to news reports, the district could face an annual shortfall of $3.6 million on debt payments. Even so, the district does not hesitate to throw money at Henry Li.

His new five-year deal boosts his pay 33 percent to a total compensation package of $379,000. Some locals told reporters the huge raise was “tone deaf,” but there’s more to it than that. The whopper package is not based on Li’s job performance but as RT board chairman and Folsom mayor Andy Morin put it, on “what other transit chiefs make.” That’s a good deal for Li, who like Mike Wiley will be eligible for a pension higher than his salary. Like other ruling-class largesse, it’s a bad deal for California’s embattled taxpayers, recently slammed with a $5.2 billion hike in gasoline taxes and vehicle fees.

In what is almost an annual tradition now, the U.S. Congress will soon come up on the deadline where it must either approve a new increase in the statutory debt ceiling, the total amount of public debt outstanding that the U.S. government is officially allowed to have on its books, or risk defaulting on payments owed to the U.S. government’s creditors.

Business Insider‘s Bob Bryan outlines the worst case scenario facing the nation if the Congress fails to increase the debt limit to cover the amount of spending it has previously approved.

Congress, in the midst of a month-long August recess, faces a massive policy threat when lawmakers return to Washington next month.

By the end of September, Congress must approve legislation to raise the nation’s debt ceiling — or risk a goal economy disaster. And it already sounds like the attempts at a compromise aren’t going well….

If breached, it could lead to disastrous consequences for the federal government, the US economy, and the global financial system. If the debt ceiling is not raised, the federal government would lose the ability to pay bills it already owes in the form of US Treasury bills and could lead the US to default on some of that debt.

The possible fallout from a default, according to a study by the Treasury Department, would include a meltdown in the stock and bond markets, a downgrade of the US’s credit rating, which would increase the government’s borrowing costs, and the undermining of the full faith and credit of the country.

Currently, the Congressional Budget Office estimates that the Congress has until sometime in mid-October to act, while the U.S. Treasury Department is more conservative in estimating that the U.S. Congress must act on or before September 29, 2017.

This isn’t our first rodeo in contemplating the potential for the U.S. government to not have sufficient funds to make principal and interest payments to its creditors, where we’ve come to view much of the rhetoric coming from Capitol Hill as being a lot like the annual exercises of what we call government shutdown theater, where the positions that will soon be loudly taken by politicians on all sides of the issue are done more for publicity than for public purpose.

That wasn’t always the case. Just a few years ago, the combination of skyrocketing national debt with a peculiarly vindictive Presidential administration seeking to exploit risking the full faith and credit of the U.S. government for political advantage gave great cause for concern, but since then, things have changed.

The most noticeable change obviously is the current occupant in the White House, but much more significantly, is the demolition of the legal rationale used by the Obama administration to justify its partisan gamesmanship in playing with the national debt ceiling.

Simply stated, that rationale was that the U.S. Treasury Department could not legally prioritize payments to the U.S. government’s creditors over all its other spending. If the federal government didn’t have enough money to go around to cover all its planned spending along with all of its debt payments, the Obama administration argued that cuts in payments to all would have to be made equally across the board, thereby ensuring that a default on the nation’s debt would occur.

Since then, a number of institutions on what the U.S. Treasury Department can legally do in managing the federal government’s money and debt, with the Congressional Budget Office specifically addressing the question in its June 2017 report on the debt ceiling.

When Would the Extraordinary Measures and Cash Run OUt, and What Would Happen Then?

If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in the amount of maturing debt or the amounts cleared by taking extraordinary measures.) That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both.

Writing at International Liberty, economist Dan Mitchell translates what that means.

In other words, the government can choose to pay interest on the debt and defer other bills. As I’ve repeatedly said in all my public pronouncements, a default will occur only if an administration wants it to occur.

But that’s not going to happen. Just as Obama’s various Treasury Secretaries would have “prioritized” payments to bondholders, Trump’s Treasury Secretary will do the same thing if push comes to shove.

In fact, the Obama administration actually had a secret plan to do exactly what it claimed it could not do.

Given President Trump’s business background, there’s every reason to think that his administration would prioritize principal and interest payments to U.S. government bondholders over all its other spending, despite recent statements by administration officials to the contrary. Not having the legal authority to borrow more to get the cash it needs to spread around to pay for all its spending no longer automatically means that the U.S. government must default on its debts.

But between now and such a time however, we will have a lot of highly stylized political theater in Washington D.C. to get through.

Earlier this week, MyGovCost celebrated the termination of a wasteful spending program that would save $10 million a year.

That success however must be measured against Washington D.C.’s projected $4,100,000 million ($4.1 trillion) spending, where a $10 million reduction is not any more than the barest amount of nibbling around the edges.

Part of the problem is that when politicians get to Washington D.C. after getting elected, they prove incapable of following through on their campaign promises to rein in wasteful spending. It’s not that the idea is wrong, instead it’s a failure to execute on delivering the promise of the idea.

In the words of popular author Sue Grafton: “Ideas are easy. It’s the execution of ideas that really separates the sheep from the goats.” And we sure do have an awful lot of goats on Capitol Hill these days.

Writing at Reason, Veronique de Rugy explains what that means in 2017 after years of promises to put the U.S. government onto a fiscally sound path.

An amazing thing happened, though, when Barack Obama was elected and the Democrats regained control of Congress. Republicans suddenly remembered the horrors of federal overspending, mounting debt and the endless intrusion by the federal government into every aspect of our lives. Republicans lambasted the notion that Keynesian-style big-government spending would boost the economy. They decried Obamacare and the Democrats’ love for “socialized medicine.” They bemoaned continuous growth in federal debt and conveniently laid the problem at Obama’s feet.

Then another amazing thing happened: Donald Trump was elected, and the GOP was once again in charge. Almost immediately, Republicans began touting increased military and infrastructure spending to create jobs and spur the economy—the very Keynesian-inspired policies they attacked when advocated by Democrats. Even the small number of federal program terminations proposed by the Trump administration were too much for congressional Republicans. Nope—when it comes to the federal budget and yet another looming brush-up against the federal debt ceiling, Republicans reveal that they’re content to maintain an untenable status quo, despite all the lip service paid to the dangers of big government over the years.

It is not terribly surprising that today’s members of Congress aren’t proving capable of delivering on their major campaign promises to restrain government spending. It’s a sad thing that the best constraint that we’ve seen to achieve that result to date is a government where control of the various branches are divided between political factions. About the best news we have is that gridlock has survived, which may limit the damage.

But we still have the age old problem of what to do about all the goats.