U.S. leads in manufacturing...artificial crises

The Washington Post cheers House Republicans' "novel plan" to suspend the artificially-created debt ceiling crisis and re-create it this summer.

House Republicans are advancing a novel plan to suspend enforcement of the federal debt limit through May 18, a move that would lift the threat of a government default and relieve the air of crisis that has surrounded their budget battle with President Obama.

The measure — set for a vote Wednesday in the House — would not resolve the dispute over how to control the national debt. But after the traumatic “fiscal cliff” episode at the end of last year, it would buy policymakers a little breathing room to continue the argument without another economy-rattling deadline just around the corner.

As the Post points out, we needn't worry about a lack of artificial crises. Suspending the debt ceiling fight clears the deck for a possible government shut-down if a new budget isn't set and for mindless across-the-board sequester cuts if an alternative debt reduction deal isn't reached.

Meanwhile, Bloomberg reports that this is no way to run an economy.

If Congress focused more on manufacturing bipartisan solutions than artificial crises, we might all be doing better. Don't manufacture a crisis of your own by holding your breath.

Financing Charlotte's stadium upgrade

Source: http://sayanythingblog.com/entry/36577/

Carolina Panthers' owner, Jerry Richardson, has his hand out asking the city of Charlotte to fork over $125 million to renovate and upgrade Bank of America Stadium. Regrettably (for the citizens of Charlotte who would have to foot the bill), members of the Charlotte City Council have expressed a willingness to help, and the Council has discussed an extra 1 percent ($24 million annual or $32 per resident) tax on food and beverages to cover the cost.

There is another financing option that could save Charlotte taxpayers and shift the most of the costs to the actual beneficiaries--issue $125 million in city-guaranteed bonds with an agreement that the stadium owners will pay back the bonds.

A very public thank you

Thank you to the state of North Carolina for providing me with an opportunity to pursue the vocation that I love, for providing my oldest son the opportunity to pursue a high-quality college education, and for funding the school teachers that taught and inspired both of my sons.

Thank you to Guilford County for providing school buildings, school books, teachers, and staff that also helped my children to develop.

Thank you to Greensboro for keeping my house safe and my neighborhood clean.

Thank you to the state of Virginia for providing me with a college education and with mentors who helped set my on the path toward my career. Thank you to the states of Virginia and New Jersey for most of my elementary and secondary education.

Thank you to the United States for employing my father for many, many years and giving my family not only prosperity but also an opportunity to travel throughout the Far East and Pacific. Thank you also for funding the terrific overseas Department of Defense schools that my sisters, brother and I attended. Thank you for your faith and support of many of my research projects. Thank you for making my parents' retirement easier, especially during a time when the economy and their savings were crashing. Finally, thank you for the military cemetery where my parents now rest.

These blessings did not just magically appear but came out of the toil and occasional good fortune of some neighbors I know and many more neighbors I don't. Thank you all.

U.S. awash in debt? Hardly

In last Wednesday's debate, former Massachusetts Gov. Mitt Romney railed against the level of U.S. debt.

I think it's, frankly, not moral for my generation to keep spending massively more than we take in, knowing those burdens are going to be passed on to the next generation and they're going to be paying the interest and the principal all their lives.

And the amount of debt we're adding, at a trillion a year, is simply not moral.

He went on to propose a "test" for cutting programs, including Obamacare (which actually saves money but nevermind) and the subsidy for PBS.

Is the program so critical it's worth borrowing money from China to pay for it? And if not, I'll get rid of it.

Well, under Gov. Romney's criteria, Big Bird and Obamacare should be safe.

An analysis by Bloomberg shows that total U.S. indebtedness, as a share of the economy, has declined sharply since the start of President Obama's administration.

U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.

Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private- sector borrowing is down by $4 trillion to $40.2 trillion.

While it's true that federal government borrowing has increased over the Obama presidency, state, local, and private borrowing have fallen much, much more.

As a practical matter, the next generation seems much more likely to be concerned about its total amount of debt service and not the entity--bank, Wall Street investor, or Chinese sovereign wealth fund--to which that debt is owed. A dollar taken out the next generation's pocket to service federal debts is the same as a dollar taken out to service school bond debts, housing debts, college borrowing, road construction, etc. A dollar of debt is a dollar of debt.

By the yardstick of what the next generation will owe, the Obama administration has been far more moral than the profligate Bush administration, which not only increased the total amount of indebtedness but did so in the context of a calamitous bubble that brought the economy to its knees (i.e., reduced our ability to pay).

And in terms of Gov. Romney's China syndrome, Americans are in a far better position to pay off their own debts and less reliant on the Chinese than they were four years ago.

Indeed, no less an authority than Fox News reported in September, "China has actually decreased its holdings of U.S. debt over the past year, dropping from $1.31 trillion in June 2011 to $1.16 trillion a year later."

You would think that someone with Gov. Romney's business experience would know how to add things. Maybe he should ask Big Bird.

Yes, out-of-work millionaires should collect unemployment benefits

Bloomberg reports on a Congressional Research Service (CRS) study about millionaires who collected unemployment insurance (UI) benefits in 2009.

Almost 2,400 people who received unemployment insurance in 2009 lived in households with annual incomes of $1 million or more, according to the Congressional Research Service.

The report was released after about 1.1 million people exhausted their jobless benefits during the second quarter of 2012, when more than 4.6 million filed initial unemployment claims. Eliminating those payments to high earners is one idea being considered as U.S. lawmakers struggle to curb a projected $1.1 trillion deficit for the fiscal year that ended Sept. 30, with the nationwide jobless rate at 8.1 percent.

“Sending millionaires unemployment checks is a case study in out-of-control spending,” U.S. Senator Tom Coburn, an Oklahoma Republican, said in an e-mail. “Providing welfare to the wealthy undermines the program for those who need it most while burdening future generations with senseless debt.”

The Bloomberg article and CRS report note that approximately $20 million could be saved in federal contributions to UI over the next decade if benefits to millionaires were blocked from receiving UI benefits.

$20 million in savings sounds great, but that wouldn't be the bottom impact on the federal budget. In order to recoup that money, the federal or state governments would have to check income sources of UI recipients. That checking would cost money--quite possibly more money than goes out in UI benefits.

The CRS believes that the least costly approach would be to collect the payments through the income tax system. A 100 percent tax could be placed on UI benefits for households with incomes above one million dollars. Although cost-effective, this approach is far from costless. Tax forms would become more complicated making them harder to complete and harder to check.

Any other system to prevent millionaires from getting benefits is likely to be far more costly and less effective. The state agencies that administer the UI system only have access to some income information. Besides having to conduct additional checks against the available information, the agencies would have to make guesses about whether a household's total income worked out to one million dollars. The checks would be especially difficult for married couple households and for households that receive unearned income. Any such system would also likely impose additional reporting burdens on the broader set of unemployed households.

In the end, a policy of trying to keep benefits from going to a handful of millionaire households is likely to cost the treasury more than it saves. If the goal really is to reduce the burden on future generations, we should keep sending out those checks.

NC House gives a lesson in fungibility

Most introductory economics classes teach students about fungibility--the simple insight is that money is money. If you give people money for one purpose, they can easily spend it for another.

I usually teach this with an example of a grandparent's gift to a student to buy books. Suppose that a student has $1,000 in her budget at the start of the semester, which she has to allocate between books and her other expenses (Starbucks, new shoes, pizza, etc.). The student's grandmother sends $100 to be used exclusively for books. Will the student's book expenditures go up by $100? Probably not. If the student was already going to spend some money to buy books, she can use her grandmother's gift to offset those expenditures, and use the freed up money to buy other things. The student can abide by the letter of her grandmother's wishes by spending the $100 on books, but the student might go against the spirit of those wishes by increasing her overall book spending by less than $100 (or perhaps not increasing her book spending at all). At the end of the day, $1,000 in unrestricted money plus $100 in restricted money leads to choices that are similar to or the same as $1,100 in unrestricted money--$1,100 is $1,100.

The North Carolina House of Representative is offering a much better (and bitter) lesson than my dry classroom example. The Charlotte Observer reports that the House is proposing to play a similar shell game with money that the state will be receiving from the large legal settlement with mortgage companies and that was supposed to go to help homeowners hurt by mortgage shenanigans.

The North Carolina House budget, which was approved Wednesday, could use nearly $23 million from a blockbuster legal settlement with the nation’s largest mortgage servicers to plug budget gaps, joining dozens of states in redirecting money intended to help struggling homeowners.

Though law enforcement and housing advocates will still receive the millions directed to them in the settlement, the House budget also encourages state agencies to use settlement dollars to make up for cuts in other places.

In total, about one-third of the money sent to the North Carolina state government could be used to fill holes in the $20.3 billion budget introduced Tuesday.

So how does the House's shell game work? Consider the NC Housing Finance Agency. Under the terms of the settlement with the mortgage companies, $30.6 million in settlement funds was to go to this agency to help pay for counselors and legal representation to help struggling homeowners avoid foreclosure. Under the House plan, North Carolina would technically keep its end of the bargain, adding $30.6 million to the agency's budget. However, the House has also proposed cutting $4.3 million from another part of the agency's budget and using that money for other purposes. The net result is that only $26.3 million is actually added to the budget.

Another $2.9 million was supposed to boost the ability of the State Bureau of Investigation to investigate financial crimes. However, through the magic of fungibility, the $2.9 million that is added to that part of the SBI's budget will be offset with an equal-sized cut, and the freed-up money will be used to cover a new earmarked crime lab in Henderson County. The net result will be no additional capability to go after the criminals who prey on homeowners.

Effectively, the House is proposing to tax the funds that are slated to help homeowners. Of the $49 million in restricted funds that were supposed to help homeowners, the House would claw back $7.5 million or about 15 percent of the take. And that amount is on top of $16 million that was already going to general purposes in the state budget.

The House's message to homeowners? You've been helped quite enough, thank you.

Compound errors

The local conservative weekly, the Rhinoceros Times, has an article about runaway public spending in Guilford County.

Now that the 2011-2012 Guilford County budget process is in full swing, with the county manager's proposed budget on the table and the budget ball in the county commissioners' court, it's interesting, and even kind of fun and nostalgic, to look back 10 years and see how things compare.

One look at Guilford County's budget for fiscal 2000-2001 and it quickly becomes evident that, while 10 years wasn't that long ago in some respects, when it comes to county budgets it was light years ago and a galaxy far, far away.

One way the 2000-2001 budget seems very distant from today is in the number of dollars shelled out. Just a decade ago, Guilford County was being run on a much smaller budget: The 2000-2001 budget totaled $397.5 million. That compares with a proposed county budget of $582.3 for 2011-2012 – a 46 percent increase in the county's budget in just 10 years.

The population of the county only went up 16 percent from 2000 to 2010, from 421,048 to 488,406.

Joe Guarino piles on

Spending increases in these areas outpaced population growth and inflation combined.

When county commissioners wring their hands and represent that they cannot conceive of ways to achieve spending cuts sufficient to avoid a tax increase, they are not being honest with us.

The fact is that we have had solid liberal Democratic leadership of the county for a long time, with all the fiscal profligacy that entails.

The figures that the Rhino and Joe put forward look like a big increase, but they aren't when you also account general price growth.

Over the last 10 years (from March 2001 to March 2011), overall price inflation as measured by the Consumer Price Index went up by 26.9 percent.

The combination more than accounts for the growth in spending.

In 2000-1, the county was spending $944 per resident. In 2011-12, it is proposing to spend the equivalent of $939 per resident, based on 2000-1 dollars.

Far from letting spending run away, the county has kept its spending slightly below the combined rates of population and price growth.

Guilford County is facing a tough budget situation. However, the crunch has been caused by falling revenues, not exploding costs. Property values have fallen, depleting the county's largest source of revenue. The state and federal governments will also be transferring less money to the county next year.

In inflation- and population-adjusted terms, Guilford County has kept its expenditures frozen.

Half-million dollar mistake

Paperwork problems in North Carolina's Medicaid program from 2004 and 2007 will cost the state $541,000 in lower federal reimbursements in the coming years. The News & Observer reports

The state owes the federal government more than $541,000 for improperly reporting how much it paid for birth control drugs under the Medicaid program.

According to a federal audit of the Medicaid family planning program, the state underreported how much it had received in drug company rebates. The federal government pays most of the state's Medicaid costs, and because the rebates were reported inaccurately, the federal government paid too much.

The state Department of Health and Human Services acknowledged that it made mistakes. In a December letter, DHHS secretary Lanier Cansler agreed to the repayment and said the problem uncovered in the audit would be fixed.

While half a million might appear to be small change in a $20 billion state budget, the amount works out to as many as 12 entry-level teachers.

Regrettably, these problems are all too common in state and local governments where individual employees have few if any incentives to actually collect money that is owed to them.

Fiscal day of reckoning

An outcome that once seemed unimaginable for the U.S. is now receiving some serious discussion--a fiscal crisis and a sudden loss of investor confidence. The CBO has written a policy brief, "Federal Debt and the Risk of a Fiscal Crisis," that describes some dire possible consequences if the U.S. does not get its public budget under control.

The CBO writes about initial manageable consequences, such as rising interest payments that would add to the pressures on public budgets, debt servicing that would also crowd out of other productive activities, and a debt level that reduces our ability to respond to subsequent economic shocks or other emergencies.

However, the CBO goes on to warn

Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply.

Without some changes in policy, the outlook isn't good. The CBO describes how under existing laws the public debt burden in the U.S. is forecast to remain high but manageable (debt will grow but so will the economy, leaving the effective debt burden to increase relatively slowly). However, many of those existing laws, such as caps on physician reimbursements under Medicare and the expiration of all of the Bush-era tax cuts, are likely to change. Under an alternative scenario, debt could grow much faster and possibly to unsustainable levels, triggering a crisis.

Sadly, neither Democrats nor Republicans are seriously addressing the issue. Democrats continue to add short-term budget boosts, like the current $26 billion aid package for states and local governments, that claim to be debt-neutral in the long run but which rely on budgetary gimmicks (for example, the aid package relies on a future change in food stamp benefits that Democrats will try to undo). Republicans don't even make this pretense, advocating unapologetically for a continuation of the unaffordable tax giveaways to the wealthy.

The policy changes needed to address the growing debt won't be easy or painless. However, relatively modest fixes can be implemented if we act sooner rather than later.

NC Lege wants to incentivize big-business tax cheats

The NC legislature is considering a change in the state's tax system that is projected to cost the state $100 million in business tax payments that are legitimately owed.

The state Senate and the business lobby want to take away a big stick that the state's tax collector says it needs to punish big businesses that dodge their taxes.

The issue is up for debate in budget negotiations under way between the state House and Senate. The Senate's version includes a provision that would prevent the N.C. Department of Revenue from assessing a penalty on businesses it thinks are hiding income. The provision is not included in the House's version.

N.C. Department of Revenue Secretary Ken Lay, who is under pressure to maximize the state's collections in the aftermath of a deep recession, says he needs the ability to assess penalties to force companies to be honest. Without the penalties, the revenue department thinks it would miss $100 million in taxes it would otherwise collect. The state faces an $800 million revenue shortfall.

The current policy penalizes substantial under-reporting of business income--it only applies to businesses that under-report their income by 25 percent or more. The policy provides an incentive, albeit an incomplete one, for multi-state businesses to report their NC income. If a company is found to under-report, it must pay the tax that is legitimately owed and a penalty.

The new policy would remove that penalty. In so doing, multi-state companies would have strong incentives to hide their NC income in sham out-of-state operations. If the NC tax authorities fail to detect these maneuvers, the companies escape their tax obligations. If the authorities do uncover the shenanigans, the companies would only be on the hook for the amount that was originally owed plus interest.

The results are easily predicted. More companies will attempt to hide income, and enforcement will become both more costly and less effective. Tax cheats get a tremendous break, leaving the rest of us to either pay more or make due with fewer state services.

The NewsObserver article states that

Supporters of the idea say the revenue department is overstepping its authority and unfairly punishing business. The penalties punish a well-intentioned company that had no way of knowing the department would disagree with its tax return years later, they say.

Howzat?

The revenue department is hardly "overstepping its authority" by investigating tax returns and following state policies in assessing penalties.

It also seems unlikely that "a well-intentioned company" would be punished, as the current penalty doesn't apply unless there is substantial under-reporting.

As for not knowing, the companies have the same responsibility that the rest of us do to follow the law and compute their taxes correctly.

North Carolina faces enough problems with its antiquated tax system and with anticipated budget shortfalls over the next few years. The legislature shouldn't compound that problems by encouraging multi-state businesses to hide their incomes.

Tax rate of 9.2 percent? Not really

Ed Cone and Allen Johnson have posted about a USA Today story about historically low tax burdens.

Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found.

Some political conservatives such as "Tea Party" activists have criticized federal spending as being out of control. While spending is up, taxes have fallen to exceptionally low levels.

Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis (BEA) reports. That rate is far below the historic average of 12% for the past half-century. The overall tax burden hit bottom in December at 8.8% of income before rising slightly in the first three months of 2010.

The USA Today analysis is interesting but misses a lot of tax payments and other payments to the government.

USA Today obtains its tax percentage by dividing "personal current taxes" paid to different levels of government ($1.1025 trillion in 2009) by "personal income" ($12.0261 trillion in 2009). The calculation, however, misses much (most actually) of what governments takes in.

In 2009, the Bureau of Economic Analysis (the source for the USA Today analysis) estimated that governments took in $3.745 trillion. Of this, $2.4282 trillion came from tax receipts, $0.972 trillion came from social insurance payments, and the rest was either direct revenue for services or returns on government assets.

Government tax receipts included the $1.1025 trillion in personal taxes but also $0.2895 trillion for corporate income taxes, $1.0234 trillion directly assessed on production or imports, and a small amount from foreigners. So, right away, USA Today is missing about $1.3 trillion in taxes that are paid by businesses.

The social insurance payments also are effectively taxes, so you can add another $0.972 trillion to the tax bite. Altogether, USA Today is missing more than two-thirds of what Americans pay in taxes and mandatory contributions.

When you look at total tax payments as a share of the economy (i.e., ignore mandatory contributions), the USA Today conclusion that we are taxed less than in 1950 still holds. The share of national income going to personal taxes is lower, the share going to production and import taxes is about the same, and the share going to corporate income taxes is down sharply.

However, when you include mandatory contributions to social insurance, the tax burden is several percentage points higher in 2009 than in 1950.

Taxes and mandatory contributions as a proportion of the economy are down substantially from their levels in 2008, which raises the question, why weren't the Tea Partiers complaining about taxes then? It wouldn't have anything to do with the change to a Democratic administration, would it?

And of course, the area where payments to the government have held steady go to government programs--Social Security and Medicare--that Tea Partiers hold as sancrosanct.

Turning the corner on the deficit?

A return to economic growth and possibly to employment growth is causing the deficit to improve sooner than government officials had thought. The Washington Post reports

The federal deficit is running significantly lower than it did last year, with the budget gap for the first half of fiscal 2010 down 8 percent over the same period a year ago, senior Obama administration officials said Monday.

The officials attributed the results to higher tax revenue and to lower spending than projected on bailing out the financial system. If the trend continues for the rest of the year, it would mean the annual deficit would be $1.3 trillion -- about $300 billion less than the administration's projection two months ago for 2010.

Even with the improvements, the projected deficit remains jawdroppingly large and only slightly below last year's figure. Also, the better figures only apply to a few months. The trends would need to continue for the FY 2010 deficit to actually fall.

In addition, the improvements don't much affect the long-term picture, which shows deficits starting to climb again after 2014 when shortfalls in Medicare and Social Security begin to add significant pressure to the budget.

Still, the improvements are, well, improvements. They give the government some breathing space as it moves from a strongly stimulative fiscal position to a more neutral position.

Amphitheater proliferation

Did someone in the Triad clip a 2-for-1 coupon for amphitheaters?

At the end of October, the Greensboro City Council discovered that a $95,000 amphitheater was being constructed on land next to the Greensboro Coliseum complex.

However, already in the planning stages was the Triad Park Amphitheater. Now, the Forsyth and Guilford County commissioners have given the WAR Memorial Foundation permission to raise money for the Triad Park Amphitheater and an accompanying "Carolina Field of Honor."

As if two amphitheaters aren't too many already, the new WAR Memorial Foundation project risks not only being confused with the Coliseum Complex project, which is being built next to somewhat crumbly War Memorial Auditorium (which itself is located along War Memorial Drive) but also being confused with the decidedly crumbly War Memorial Stadium.

Haven't our war veterans experienced enough of this type of incoherent "planning?" Let's honor them by restoring the memorials that have already been erected to first-class status.

NC confirms double-dipping

The Program Evaluation Division (PED) of the NC General Assembly has now investigated the double-dipping in the NC wetland mitigation programs.

The PED describes in detail how credits for the same 46 acres of preserved land were purchased twice by the state--once as wetlands credits for the Department of Transportation and then later as nutrient offset credits for the Department of Environment and Natural Resources (DENR).

The PED determined that of the $911,000 that the DENR spent on the "new" nutrient offset credits, $698,372 paid for credits on land that had already been preserved. The PED also determined that another 18 acres remains available for further double-dipping.

Besides the double-dipping itself, one of the most appalling items in the report was a statement by a DENR Assistant Secretary, who wrote that

Approval of the EBX buffer/nutrient offset bank did not impose additional costs on taxpayers. The ability to use nutrient offset credits from an established stream and wetland restoration site made those credits less expensive.

By such logic are dead parrots and the Brooklyn Bridge sold.

The Assistant Secretary seems not to realize that that expenditure bought absolutely no additional environmental benefits to the taxpayers of North Carolina. The money was completely wasted; it has evaporated; it protects nothing, and it can't be used to protect anything. The state would have been better off if the DENR had taken 698,372 dollar bills, shredded them, and then used resulting fluff to insulate its headquarters or to stuff the Assistant Secretary's empty head.

The only positive from the report was that the DENR has issued a moratorium on most future "double" transactions and has drafted rules to prohibit this in the future.

Freshman, can you spare a dime?

Pittsburgh considers a 1 percent tax on student tuitions to fund the city's retirement system.

The mayor of Pittsburgh calls it the “Fair Share Tax.” But to officials at the city’s 10 colleges and universities and many of their 100,000 students, it is anything but.

On Wednesday, the City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees. Final Council action will be on Monday.

In principle, a tax on students is fair. While students contribute to the economy of a city and pay some taxes directly (sales taxes) and indirectly (property taxes through their landlords), they also require services. An average annual tax of $162 doesn't seem unreasonable for those services.

Of course, the students did not contribute to the retirement shortfall, so tying the increase to retirement funding is an economic head scratcher (a political explanation is that the mayor and city council are pandering to older voters at the expense of younger non-voters). Ultimately, however, the revenue is fungible (increased payments to the retirement system reduce other budgetary pressures).

Fungibility also applies to the colleges and universities. The likely alternative to a tuition tax would be "voluntary" payments by the institutions to the city. Some of the costs of those payments would be passed on to the students in the form of higher net tuition.

Students elsewhere who think that they are avoiding this "tax" should think again. Many institutions have arrangements with their local communities to make payments in lieu of taxes. Seen or unseen, these costs enter students' tuition bills.

Less fair in the tax proposal is the distribution of the tax burden across institutions. Students pay only a portion of the costs of their educations through tuition. Institutions receive funding from federal, state, and private sources. The effective tax burden will be highest for institutions that are the most tuition dependent. It will be relatively low for institutions that receive large portions of their revenue from the state or from endowment support.

If Pittsburgh goes through with this, look for other cities to follow its example.

Money for Nothing

Mark Knopfler had it wrong. EBX didn't have to learn to play the guitar or learn to play them drums. All it had to do was write a proposal, and it got its "money for nothing."

The News Observer has a follow-up story this morning that suggests that there isn't much urgency in the state government to address the double-payments problem.

Officials with the Department of Environment and Natural Resources have characterized the payment as the result of a regulatory loophole that they now want to close. But they also acknowledge that they support double payments in some cases when a restoration project enhances streams and the land alongside them. These projects are built by the state and by private companies.

EBX officials say the company should be entitled to the $911,000 because the state has supported double payments on the other restoration projects...

Chrissy Pearson, Perdue's communications director, said that the governor has been aware of the double-dipping concerns and told her Budget Reform and Accountability Commission to tackle the issue earlier this year.

"She told me quite bluntly that this process doesn't make sense to her and she does want some answers as to whether the groups involved in this type of work are working as efficiently and effectively as possible," Pearson said.

We can speed this along for the governor. The answers are "no" and "no."

Pollution mitigation projects often yield benefits that extend beyond the affected site. Although intended to address one type of pollution, they can sometimes address several. Economists refer to these extra benefits as positive externalities, or spillovers (especially apt for projects to reduce stream pollution). The externalities make the project all the more valuable from a social perspective.

The presence of externalities could explain why the state might prioritize one project over another. It might also explain why the state might be willing to pay more initially.

However, the state's responsibility is to get these benefits at the lowest possible cost. It should drive the best bargain possible initially. And under no circumstances, should it pay a second (or third or fourth) time for work that has already been performed.

Any "regulatory loophole" that allows double payments should be closed. In the meantime, no new double-payments contracts should be written, and existing contracts should be reviewed to see if the state can terminate them.

Double the costs but with none of the benefits of the other leading brand

The Raleigh News Observer reports that the North Carolina Department of Environment and Natural Resources is paying a Maryland company, EBX, nearly $1 million for pollution mitigation work that the company had already done and for which it had already been paid $1.8 million.

This year, state environmental officials agreed to pay a Maryland company nearly $1 million for its work to help rid the Neuse River Basin of tons of nitrogen, which pollutes drinking water.

Here's the catch for North Carolina taxpayers: The state Department of Transportation paid $1.8 million for the same work several years ago. Yet the new deal appears to be legal.

The state Department of Environment and Natural Resources entered into a $911,000 contract with EBX to remove more than 100,000 pounds of nitrogen during the next 30 years from the Neuse basin, the water source for many communities in the region, and to restore a Neuse tributary.

EBX won the contract with a bid lower than its competitors. The other contractors soon realized why: EBX was claiming the nitrogen reductions from two sites created several years earlier in Johnston and Wayne counties. The two sites were part of $11 million in contracts from the N.C. Department of Transportation in 2000 and 2002 to replace wetlands and streams destroyed for road projects.

The $911,000 would not create a new wetland or a patch of vegetation to absorb nitrogen runoff, which has been linked to fish kills and algae blooms in one of the nation's most endangered rivers. EBX would collect the money for administrative work and for continued monitoring at its existing sites.

We should all be so lucky to get paid twice for the same work.

EBX might not quite be making double the money, but it is making a mint.

Maybe EBX can claim these swamps, er, I mean wetlands, as carbon offsets and collect even more money.

Risking the state retirement system

The News Observer reports on a new in-state investment pool for the state retirement system.

State Treasurer Janet Cowell is starting a $250 million equity fund to invest in North Carolina companies with two goals in mind: make money for the state pension fund and create jobs in North Carolina.

Cowell's office is scheduled next week to announce the investment firm that will manage the fund.

The legislature this year passed a law, at Cowell's request, giving her more flexibility in managing pension fund investments so she could establish the Innovation Fund. The fund is set up to invest up to $250 million in companies that have "significant operations in North Carolina," according to the request for proposals from investment firms.

Before posting further, I should disclose that I am currently enrolled in the state pension system, so I've got a dog in this particular fight. However, anyone who is a North Carolina taxpayer also has a stake.

At first glance, the proposal looks great. Investments inside North Carolina offer a potential two-fer in that the retirement system could reap the investment returns, while the investments themselves add to the state's economy and tax base.

However, a closer examination reveals serious downsides.

The primary goals of the pension fund manager should be to maximize the fund's returns while minimizing risks associated with those returns. Prudent fund management provides security to current and future retirees who depend on the fund. It also reduces costs to taxpayers who are ultimately on the hook for the obligations of the fund.

Absent this special fund, nothing prevents the Treasurer from investing in North Carolina companies and projects--so long as they meet the retirement system's other objectives. If an investment, inside or outside North Carolina, can yield a competitive return, the Treasurer should be on it.

However, by setting a firm dollar amount of $250 million, the state is indicating that the Treasurer wouldn't have found this many worthwhile in-state projects through its normal procedures. This suggests that the state is going to invest in at least some in state projects with returns that are less than competitive. Either the policy is pointless ($250 million would have been invested anyway) or it results in over-investing.

Besides possibly failing to maximize its returns, the state is also going against the other principle of sound investment, which is to diversify risks. The retirement system is funded through individual deductions, taxpayer contributions, and investment returns. In times when the state economy hits a bad patch (and what are the chances of that ever happening?), the revenues available from taxpayers dry up. However, the investment returns available elsewhere might not decline or at least not decline by as much. By investing more within the state, the retirement fund ties its returns more closely to the state economy, reducing the opportunities for diversification and increasing risks and volatility. A fund manager should want these revenue streams to be less correlated, not more correlated.

A cautionary example of the dangers of correlated risks is an employee whose stock is entirely or mostly invested in the company that she works for. If the company goes bust, the worker not only lose her job but also her investment. Ask a former employee of Enron whether he or she is happy that so much of the employees' retirement funds was tied up with that company.

The policy also sends a bad message to other states, which might also be encouraged to concentrate their investments at home. If additional states pursue these types of approaches, the funds available to North Carolina companies from other states could be reduced.

Finally, the approach is ripe for abuse. North Carolina elects its Treasurer. Companies and workers who might directly benefit from the retirement system's investments would have the opportunity to contribute to the Treasurer's election. The Treasurer should face political pressure to make the best investments; however, she should not be beholden to particular groups.

My hope is that this is indeed a pointless policy and that the Treasurer is just trying to get good P.R. for investments that she would have made anyway. Unfortunately, her description of this plan doesn't sound that way.