|TO:||Members of the Fiscal Affairs and Government Operations Committee|
|FR:||Representative Daniel T. Cooper, South Carolina
Chair, Fiscal Affairs and Government Operations (FAGO) Committee
|RE:||Report of Activities of the Fiscal Affairs and Government Operations (FAGO) Committee at the 63rd Annual Meeting of the Southern Legislative Conference in Winston-Salem, North Carolina, August 15-19, 2009|
The SLC Fiscal Affairs & Government Operations Committee convened on Sunday, August 16, for a legislative plenary luncheon and Monday, August 17, for a business session during the 63rd SLC Annual Meeting. The following is a summary of the speaker presentations and Committee activities from each of these programs. An attendance list is attached.
Legislative Plenary Luncheon, August 16
I. Generating Economic Development during Times of Extreme Fiscal Stress
M. Ray Perryman, Ph.D., President, The Perryman Group, Texas
In a fiscal environment where states face an increasing number of enormous challenges alongside dwindling sources of revenue, this presentation focused on how state policymakers can effectively and efficiently harness scarce resources to generate sound economic development.
Dr. Perryman’s Presentation
Dr. Perryman commended the SLC on inviting him to talk on the measures states should initiate to create sound economic development in the aftermath of the current recession as opposed to how the national economy ended up in the mess currently sweeping the country. He indicated that he had been studying and advising communities, states and companies on economic development for nearly three decades, and his goal has consistently been to advise these entities on strategies to maximize opportunities and potential to enhance long-term growth for individuals, families and entire communities.
One way to think of economic development is to conceptualize it as “a market for prosperity.” There were companies that were interested in establishing or expanding their current operations by generating economic activity, a group he listed as “suppliers.” Then, there were communities, states and even countries, a group he listed as the “demanders,” i.e., those that provided the demand for the goods and services provided by the suppliers. These two groups had to bargain and negotiate to come up with a price for these goods and services.
Dr. Perryman noted that it was “always a seller’s market” because there were fewer economic development projects relative to the number of communities, states and countries that wanted to attract them. In fact, competition was very intense since there were thousands of communities across the country with aggressive economic development strategies that sought to secure the potential projects that surfaced. In a recessionary period, the level of competition was even more intense since there are a dwindling number of available projects. Given that credit availability and bank lending had tightened up considerably, companies that needed capital were stymied in their expansion plans while, given the anemic economic climate, companies that had capital were “sitting on the sidelines.”
Policymakers needed to focus less on “what to do now” and focus more on “what to do when the economy starts ticking again.” When the recovery occurs, it will generate a great deal of momentum given that projects that were slated to begin in 2008 and early 2009 had been postponed or sidelined. Consequently, it was imperative that communities and states are well positioned to accommodate this pent-up demand for goods and services that will inevitably come with the recovery.
According to Dr. Perryman, the most controversial aspect of economic development involved the incentives provided to corporations by state and local governments. He added that there were plenty of arguments both for and against the provision of incentives though that as much as they are opposed, “in the real world, you need them.” However, incentives should not be the single most important element of a state or local government’s economic development strategy; what was more important, was that “you have a place where people want to relocate.” This entails good schools; sound infrastructure; a regulatory climate that both protects and safeguards citizens but is still proactive in finding solutions; streamlined and efficient rules and regulations; and a tax environment that is fair, equitable and predictable. Cultural attractions also were important in corporate decisions regarding location and expansion. He stressed that “you cannot give away enough incentives to attract a company to a location that does not have these elements. In this regard, the South had fared better than other regions of the country because “the South was a good place to be” with all the attributes listed earlier.
In closing, Dr. Perryman emphasized that states should focus on the long-term benefits flowing from investing in education, infrastructure, workforce development and, in general, creating an environment that companies were interested in investing and locating their operations. He also stressed that localities and states should focus on enterprises that have a particular comparative advantage and not pursue a broad range of projects. Economic incentives are just a tipping point in persuading a company to either relocate or expand, but it is more critical for policymakers to pursue long-term advantages.
II. Economic Turbulence and State Investment Strategies
Janet Cowell, State Treasurer, North Carolina
During a period of tremendous economic and market volatility, state policymakers face substantial hurdles in ensuring the viability of the state’s pension fund investments, short-term cash investments and supplemental retirement funds. This presentation provided insights on some of the strategies devised by North Carolina’s principal fiscal advisor.
Treasurer Cowell’s Presentation
Treasurer Cowell noted that a discussion of investments remained one of the most controversial topics in recent times given the incredible market volatility experienced in the last year or so. Like North Carolina, every state lost billions of dollars in their investment portfolios and, while the state median loss was about 25 percent, North Carolina lost about 20 percent of a $17 billion portfolio in 2008. Treasurer Cowell indicated that the focus of her remarks would be public pension plans since they were a majority of her state’s investment portfolio.
Treasurer Cowell surmised that the severe market losses of 2008 would continue to impact state finances for the next five to 10 years. Given that most states operate defined benefit (DB) plans, i.e., a contractual obligation between the state and the employee, this will entail states being forced to experience higher pension-related costs. States follow the three-legged stool approach in terms of funding their pension plans: (1) Employee contributions; (2) Employer or state contributions; and (3) Investment earnings. In recent decades, states have increasingly been able to fund their pension plans “on the cheap.” Specifically, between 1982 and 2008, almost 60 percent of plan funding requirements came from investments with about 15 percent originating with employees and the remainder originating from the employers or states. While Treasurer Cowell noted that the 2008 market crash did not result in the state having to absorb the entire loss in a single year given that the payments will be amortized over a number of years, it still requires that both employees and states will have to face higher contribution rates in the next five to eight years. The fact that states have been increasing benefits to retirees in recent decades also will result in additional costs to states.
In terms of the private sector pensions, Treasurer Cowell noted that while so many private corporations moved away from DB plans to the defined contribution (DC) plans in recent years, the fact that these DC plans flourished during the booming stock market created a false reality. The crashing market and evaporating DC portfolios created a great deal of consternation among these private portfolio owners, even resulting in calls for the “financial bail-out” of these private plans.
Given all these setbacks, Treasurer Cowell posed the question as to what states can do to bolster their pension funds. She listed several options, including (1) increasing employer or state contributions by funneling in more tax-payer dollars; (2) changing or reducing the benefits provided to employees, though this measure does not bring immediate sizable gains since benefit reductions can only be assigned to employees hired in the future; (3) raising the employee contribution, though in North Carolina, where employees pay 6 percent, a higher percentage than the employer contribution, this would be tougher; and (4) “investing” your way out of the difficulties. Treasurer Cowell maintained that the latter strategy was not feasible, citing that the 20 percent loss experienced in 2008 by North Carolina when combined with the 7 percent the state was supposed to generate for the year, totaled a loss nearing a third of the portfolio. Consequently, states would have to implement a strategy that included elements of all the approaches listed above to enhance the fiscal position of their pension plans.
In terms of investment strategies, Treasurer Cowell noted that each state had its own unique approach which ranged from conservative to aggressive. North Carolina had one of the more conservative strategies in the nation, with the requirement that the fund secure a 7.25 percent return annually. South Carolina’s was 8 percent, while some states had a 9 percent requirement, she noted. North Carolina’s investment guidelines entailed that the state’s portfolio could maintain a greater exposure to bonds and reduced exposure to more esoteric financial instruments. She cited the Texas Teachers Plan and the South Carolina plan as having more aggressive investment strategies. In addition, Virginia’s plan had been privatized with their investment teams largely removed from the political arena. In fact, in Virginia, bonus payments to staff and flexibility in investment all were the purview of the privatized operation which required a higher target rate of return for overall investments. She noted that requiring a lower target rate of return from investments entailed that the state would have to provide additional taxpayer funded contributions to offset the funds that might have come from the higher reliance on investment income.
In closing, Treasurer Cowell recommended that it was imperative that the entire nation begin a discussion on its retirement architecture given that every element in the system—private pension plans, public pension plans, Social Security, personal savings—all faced tremendous challenges. Given that we are an aging population, Treasurer Cowell indicated that the sooner we initiated this conversation and then initiated remedial measures to comprehensively deal with the challenges, the better it would be for the nation’s economic and financial security.
Business Session, August 17
I. Mortgage and Housing Meltdown: How Did We End Up Here and North Carolina’s Response
John Allison, former CEO and President of BB&T Bank and current Chairman of the BB&T Board, North Carolina
Senator Dan Blue, North Carolina
The collapse of the housing and construction sectors and the meltdown in the mortgage markets rank high among the contributory factors to our current economic malaise. This session honed in on the origins of the housing and mortgage crises sweeping the entire country based on Mr. Allison’s perspective along with details from Senator Blue on North Carolina’s efforts to mitigate the impact of this crisis.
Mr. Allison’s Presentation
According to Mr. Allison, government policies are the primary cause for the present economic crisis that has been sweeping the country. Deflation in residential real estate prices led to tremendous liquidity problems in Mr. Allison’s perspective laying the foundation for the significant recession that continues to plague the economy. While there were other important contributory factors, they were less fundamental in creating the “perfect storm” of unfortunate economic events.
Mr. Allison elaborated that there was an estimated $800 billion overinvestment in residential real estate as a result of too many big houses in the wrong places that caused this overinvestment when the nation should have been saving more along with investing more in technology, manufacturing capacity, agriculture and education. This overinvestment occurred as a result of government policies “since only government can make a mistake of this magnitude. Specifically, he listed the Federal Reserve Bank with its significant mismanagement of monetary policy given its unlimited capacity to take on more federal debt, print money and create inflation.
He also cited the Federal Deposit Insurance Corporation (FDIC) as another government entity that contributed to the current economic freefall with its lack of market discipline and authorizing an exorbitant number of start-up banks. He also noted that specific government policies contributed to increasing home ownership to rates above the natural market rate and the activities of government-sponsored enterprises such as Freddie Mac and Fannie Mae. Another contributory factor cited by Mr. Allison was the government’s new mark-to-market accounting rule. Ultimately, Mr. Allison, noted, residential real estate values are determined by the cost of reproduction, affordability and the cost to rent; from their peaks, residential real estate prices need to fall 30 percent to become affordable.
As a result of the economic fall triggered by the collapse in the residential real estate market and subsequent government actions, Mr. Allison stated that more than $500 billion in capital in the financial services industry was destroyed. Given that these financial intermediaries were leveraged 10 to 1, he estimated that some $5 trillion in liquidity was lost but after factoring in the capital that was replaced, the actual loss of liquidity was about $3 trillion.
He noted the damaging effects on the economy played by misregulation and not by deregulation. According to Mr. Allison regulatory costs were at an all-time high with the Sarbanes-Oxley legislation and the Patriot Act along with an irrational belief in models such as Wachovia Bank’s ‘Best Practices” model and the BASEL/European model. The end result of this wave of onerous regulations, Mr. Allison documented, was “a huge misdirection of management energy.”
In Mr. Allison’s opinion, market corrections are not all bad and he stressed that the world is a better place with Countrywide and Washington Mutual (WaMu) out of business given their proclivity to misallocate capital. Yet, he noted that all panics are bad and that he considered the unnecessary and inappropriate actions of Federal Reserve along with the actions of the Treasury, President and Congress as amounting to panic. He listed the $700 billion assigned to bail out the economy as a scary amount along with citing the inconsistencies in government actions, i.e., bailing out Citi and AIG while allowing Bear Stearns and Lehman to disintegrate. The quotient of unpredictability in these government actions, he added, creates panics which, in turn, negatively affects even the best run financial companies. He also stated that healthy financial institutions like BB&T were hurt by the bailout of certain financial institutions.
In concluding his remarks, Mr. Allison listed a series of short-term, long-term and philosophical cures for the economy. Elaborating on the short-term cures, Mr. Allison noted the following as important:
In the long-term, Mr. Allison recommended that government policies should focus on encouraging the following:
At a philosophical level, Mr. Allison promoted the following concepts: Altruism; Pragmatism; Eliminating the Free Lunch Mentality; Personal Responsibility; Life, Liberty, and the Pursuit of Happiness; Demand and Reward Rationality; and Self-Discipline. He opined that the pursuit of each individual’s long term rational self-interest in the context of the ‘Trader Principle’ (as espoused in Ayn Rand 1957 classic, Atlas Shrugged) will create win/win relationships.
Senator Blue’s Presentation
According to Senator Blue, North Carolina has been focused on providing relief to homeowners under stress many years before the onset of the current economic crisis. Specifically, in 1999, North Carolina led the nation by enacting laws prohibiting predatory residential mortgage lending. He noted that this legislation modified the kinds and amounts of fees which may be charged to a borrower by a lender in connection with a home loan. In addition, the act placed restrictions on high-cost home loans, i.e., loans that meet one or more of three thresholds relating to interest rate, the total amount charged as points and fees, and prepayment penalties. Senator Blue added that these high-cost home loans are subject to certain term restrictions, all measures designed to create very high disincentives to those interested in making such loans.
In light of the ongoing mortgage and housing meltdown, the North Carolina General Assembly continues to be proactive and enacted a number of new laws during the past three sessions, further expanding on the landmark Anti-Predatory Lending Act of 1999. In 2007, he stated, North Carolina enacted the Identify Loan Originator on Deed of Trust (HB 313) and Residential Mortgage Fraud Act (HB 817), with the latter creating a new Article in the criminal law establishing the crime of residential mortgage fraud. The state also enacted additional provisions, including Foreclosure/Landlord Tenant Laws (HB 947), Protect Homeowners/Reduce Foreclosure (HB 1374) and Protect Consumers - Covered Loans Act (HB 1817), all designed to protect homeowners.
In 2008, the state enacted the Regulate Mortgage Servicers Act (HB 2463) to require the licensure and regulation of mortgage servicers by the Commissioner of Banks in a manner similar to that currently applied to mortgage brokers and mortgage bankers. Furthermore, in 2008, North Carolina enacted further provisions to safeguard homeowners, including the Earlier Notification of Mortgage Servicer Fee (HB 2188) and the Emergency Foreclosure Reduction Program (HB 2623). The latter program, Senator Blue indicated, establishes a system by which mortgage servicers are required to identify certain subprime loans that are in jeopardy of foreclosure and alert the state’s Commissioner of Banks and the Administrative Office of the Courts. He added that the Commissioner of Banks uses this information to assist the parties avoid foreclosure and that the Commissioner also is authorized to extend the foreclosure process once, for up to 30 days in an appropriate case.
The General Assembly continued action on the deteriorating mortgage and housing situation in 2009. Specifically, he indicated the state introduced provisions related to Mortgage/Rate Spread & High-Cost Loans (HB 1222), which amends the rate spread and high-cost home loan statutes to update the definition of rate spread home loan and to clarify the definition of points and fees in connection with high-cost home loans. Then, he added, the S.A.F.E. Mortgage Licensing Act (HB 1523) provides for the licensing of residential loan originators, as well as mortgage brokers, mortgage bankers, and mortgage servicers through the Nationwide Mortgage Licensing System and Registry, and for the supervision and enforcement of the law by the state’s Commissioner of Banks.
In conclusion, Senator Blue reported that in its first six months of operation, based on information provided by the state’s Commissioner of Banks, the 2008 Emergency Foreclosure Reduction Program produced the following results:
II. Comparative Data Report Presentations on Revenues and Education
Kim Arnall, Assistant Director - Fiscal Division, Bureau of Legislative Research, Arkansas
Hank Hager, Legislative Counsel – Senate Committee on Education, West Virginia
The Comparative Data Reports have been a hallmark of the FAGO Committee’s work for a number of decades now. These reports are prepared annually by select SLC states' fiscal research departments. Because the reports track a multitude of revenue sources and appropriations levels in Southern states, they provide a useful tool to legislators and legislative staff alike as they determine their own state spending and performance measurement tools.
Mr. Arnall’s Presentation: Comparative Revenues 2003 through 2007 and Revenue Forecasts Report
Mr. Arnall indicated that the SLC region had the lowest total state taxation revenue average per capita and per $1,000 of personal income in comparison to the three other regions of The Council of State Governments. The best source of state revenue for a majority of the SLC states (11) was the income tax with the sales and gross receipts tax being the best source of revenue for the remaining five states. In a review of SLC states in the category of motor fuel tax revenues per $1,000 of personal income for all 50 states, Mr. Arnall stated that West Virginia ranked the highest (2) and Virginia ranked the lowest (40).
Mr. Hager’s Presentation: 2008 K-12 Education Comparative Data Report
Mr. Hager noted that the 2008 K-12 Education Comparative Data Report comprised two parts: Part 1 was a compilation of education-related data derived from a number of independent sources, while Part 2 was a compilation of data derived from a survey of the SLC states. The information presented by Mr. Hager included the fact that a scan of the average teacher salaries revealed that Maryland ($56,927) was the SLC state with the highest amount, with Georgia ranking second ($49,836). While the U.S. average was $51,009, the two SLC states at the lower end of the scale were Mississippi ($40,182) and West Virginia ($40,534). He also stated that in terms of K-12 expenditures, Texas $46.5 billion was the highest in the SLC, while West Virginia’s $2.9 billion was the lowest.
III. Policy Positions
There was a single policy position submitted by Representative Bob Damron, Kentucky, before the entire Committee. The policy position recommended preserving the preeminence of state-regulated insurance systems alongside alerting and educating state officials about the continuing efforts to preempt state regulatory authority with a movement toward an optional federal charter. Since there was no opposition to the policy position, it was adopted and referred to the SLC Policy Positions Committee for consideration.
IV. Election of Officers
The Nominating Committee, comprising Senator Ted Little, Alabama, Senate President Pro Tem Charles Colgan, Virginia, and Representative Julia C. Howard, North Carolina, chaired by Senator Little, deliberated on the names submitted for Committee chair and vice chair for 2009-2010. Consequently, Representative Daniel T. Cooper, South Carolina, was nominated for a second term as chair of the Committee, and Representative Jim Fannin, Louisiana, was nominated for a second term as vice chair of the Committee as well. The nominations were moved and seconded, and Representative Cooper, and Representative Fannin were elected by acclamation.
V. Southern Legislative Conference 64th Annual Meeting, Charleston, South Carolina
The SLC will meet for the 64th Annual Meeting in Charleston, South Carolina, July 31 - August 4, 2010. In keeping with the wishes of the SLC presiding officers, please note that meeting notification does not authorize travel.
SLC Staff Contact
If you have any questions regarding this report or the 2009 SLC Annual Meeting, please contact Mr. Sujit CanagaRetna in the Atlanta office at (404) 633-1866 or email@example.com.
Southern Legislative Conference 63rd Annual Meeting
Fiscal Affairs and Government Operations Committee
August 15-19, 2009
Winston-Salem, North Carolina
(List reflects those attendees whose names appeared on the sign-in sheet)
Senator Ted Little
Senator Bill Pritchard
Senator Jerry Taylor
Representative Barry Hyde
Kevin Anderson, Bureau of Legislative Research
Kim Arnall, Bureau of Legislative Research
Buddy Johnson, House of Representatives
Elizabeth Shores, Arkansas State University
Estella Smith, Bureau of Legislative Research
Representative Elly Dobbs
Representative Jerry Keen
Sujit CanagaRetna, Southern Legislative Conference
Judith Costello, Canadian Consulate General’s Office
Mikko Lindberg, Southern Legislative Conference
Heather Moody, Senate Research Office
Representative Robert C. Damron
Representative C.B. Embry, Jr.
Representative Melvin B. Henley
Representative Tom Riner
Mikel Chavers, The Council of State Governments
Sam Crawford, Magistrates and Commissioners Association
Mike Robinson, The Council of State Governments
Representative Jim Fannin
Representative Jean M. Doerge
Senator Hillman Frazier
Senator Sampson Jackson II
Representative Willie Bailey
Representative Greg Holloway
Peggy Martin, House Legislative Staff
Senator Dan Blue
Representative Harold Brubaker
Representative William A. Current, Sr.
Representative Pryor Gibson
Representative Julia C. Howard
Representative Bill McGee
Representative Ruth Samuelson
John Allison, BB&T Bank
Durwood Laughinghouse, Norfolk Southern Corporation
Jerry Spegman, Robert Woods Johnson Foundation
Representative Carl L. Anderson
Representative Gilda Cobb-Hunter
Representative Daniel T. Cooper
Representative P. Michael "Mike" Forrester
Representative Nelson L. Hardwick
Representative J. Roland Smith
Representative W. Brian White
Representative C. David Umphlett, Jr.
Don Hottel, House of Representatives
Beverly Smith, House Ways and Means Committee Staff
Senator Dewayne Bunch
Senator Ophelia Ford
Senator Bo Watson
Roark Brown, Office of Legislative Budget Analysis
Annette Crutchfield, Office of Legislative Budget Analysis
Representative John Otto
Representative Patrick M. Rose
Cindy Ellison, Legislative Council
Joe Morris, Office of Senator Jeff Wentworth
Senate President Pro Tempore Charles Colgan
Senator Fred Quayle
Delegate Richard Iaquinta
Delegate Danny Wells
Aaron Allred, Legislative Services
Hank Hager, Senate Legislative Services
Jim Brown, Capital One