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A Mississippi Business Journal Q&A

State budget reform tops agenda for Tate Reeves

Tate Reeves, in his first term as state treasurer, has a plan — five budget reforms, to be specific — that he believes will revolutionize the state budget process.

The Mississippi Business Journal chatted with Reeves, a former Trustmark investment officer and Millsaps College alum who was elected to the state office in 2003, about those budget reform proposals, the benefits of college savings plans, concerns about the state’s credit rating, how he determined agency budget cuts and the status of Mississippi’s Disaster Assistance Trust Fund.

Mississippi Business Journal: Tell us about your budget reform proposals.

Tate Reeves: Our budget process was built for a different era. It encourages good people to make bad choices. It is based on the premise that state government should curry favor first and be responsible last.
I have offered five budget reforms that can move our state government into the 21st century and out of the back rooms dominated by old-time politics.

First, we need scientific revenue estimating that is based on sound economics. Today, we base our state budget on revenue estimates that are fabricated by the same politicians who are handing out the goodies. They have an incentive to exaggerate the size of the pie because they’re handing out the slices.
We should recompose our revenue estimating board to have a majority of private sector business leaders and a minority of politicians. And their revenue estimates should have the force of law; the Legislature should be bound to balance the budget within our realistic means.

Second, we need to enshrine Gov. Fordice’s rainy day fund into our state’s constitution. It’s just common sense that we should set aside a contingency fund for unexpected economic downturns. Every business does it. Every family does. School districts do it. Every responsible state government does it. Ours should, too. No more should the people spending the money have the ability to override the taxpayer protection of a rainy day fund.

Third, we need to stop paying for recurring expenses with non-recurring revenue. The habit of using one-time windfalls to pay for ongoing needs sets up time bombs for future budgets. It masks the true nature of our spending habits and it jeopardizes our credit rating.

Fourth, we need to raise the standard for a so-called critical needs request. Today, virtually every state agency comes before the legislative budget committee in the middle of the year with long wish lists under the premise of calling them “critical needs” even if they don’t deserve that title at all. We should require that every agency head bringing a critical needs request provide an accompanying suggestion of an offsetting cut elsewhere in the budget. This constant reminder that the budget is a zero sum process will be a tremendous incentive for restraint and responsibility.

Fifth, in many years, we have over 100 appropriations bills, with at least 20 or 25 of them significant. The bills are considered separately, with none of the constructive pressure of real budgeting. We can solve this by moving toward a process that allows only one comprehensive appropriations bill. That way, for every dollar that goes out, there’s got to be a dollar going in.

If we will move toward these five common-sense budgeting reforms, we will bring our state into the 21st century — getting better decisions on the front end so we don’t have to pick from numerous bad choices on the back end.

MBJ: Tell us about the status and benefits of the state’s college savings plans.

TR: Our college savings plans are designed to make a college education accessible to more Mississippians by making college more affordable. These plans put college within reach.

The State of Mississippi operates two Section 529 college savings plans, MPACT and MACS. The purpose of both plans is to encourage more Mississippians to plan ahead and save for their children’s and grandchildren’s college educations.
Economic development and opportunity for the people of Mississippi depend on providing our young people with a quality education. In today’s economy, higher education is a vital part of a quality education. Wages for college graduates are about 60% higher than for those with just a high school diploma. Someone with a master’s degree has twice the earning power of a high school graduate.

The MPACT Program started in 1997. MPACT allows families to purchase future tuition hours for children 18 and younger. MPACT guarantees full payment of tuition and mandatory fees at any public college in the State of Mississippi, no matter how much the cost of tuition rises between the time of contract purchase and the time the child attends college. Benefits can also be used at private or out-of-state schools, but payments to such schools are based on average tuition and fee costs at Mississippi’s public institutions in the year of attendance. MPACT does not cover books, transportation, room and board or other college costs. Either the purchaser or the beneficiary must be a resident of Mississippi at the time of purchase. MPACT is backed by the full faith and credit of the State of Mississippi. MPACT has an annual enrollment period from September 1 through November 30.

The MACS Program started in 2001. MACS allows Mississippi families to save for all qualified Section 529 higher education expenses, undergraduate and graduate level, including tuition, fees, books, room and board and off-campus living expenses. There is no state residency requirement. Contributions and their associated investment earnings can be distributed to cover qualified expenses. The College Savings Plans Board hired TIAA-CREF Tuition Financing Inc. to manage the MACS Program. There is no guarantee by the MACS Program that any specific educational cost will be fully covered, and MACS is not backed by the full faith and credit of the State of Mississippi. Enrollment in MACS is open year-round.

Both MPACT and MACS qualify as Section 529 Plans under IRS rules. Therefore, investment earnings included in qualified withdrawals are exempt from federal income tax. Both plans also offer exceptional state tax benefits.

MBJ: As Mississippi and other states are facing difficult economic times, investment sector analysts are taking a closer look at the fiscal condition of state budgets. What actions are we taking to keep the budget balanced and how are the financial markets evaluating Mississippi now?

TR: When we took office last January, our state had a $700-million budget gap. During the legislative session, the Legislature, with strong support from Gov. Barbour, reduced that gap by nearly $300 million. We have reduced our debt burden by $110 million in the past eight months, and we have become more pro-active in managing our debt portfolio. Economic data shows very promising economic trends.
In the last two months, Gov. Barbour and I, with cooperation from the Mississippi Development Authority, the Division of Medicaid, the Department of Finance and Administration and the Legislative Budget Office, met with all three major rating agencies to tell our story of our positive economic trends and our move toward structural budget balance.

MBJ: In April, you cautioned state lawmakers against loading up on too much debt and jeopardizing the state’s credit rating. What’s the outlook now?

TR: Credit reports in March from three bond rating agencies sounded alarm bells about Mississippi’s long-standing “AA” bond rating. Each highlighted the need for Mississippi to get its budget in order by quitting the practice of using one-time money to fund reoccurring expenses, and not spending money we don’t have. They were also concerned about the dramatic increase of bond indebtedness the state has taken on over the past decade.
Mississippi has enjoyed an “AA” bond rating for almost three decades. I believe we need to pay attention to the warning signs in order to avoid a downgrade in the state’s credit rating.

In 1992, our state ranked 30th in tax-supported debt as a percentage of total personal income. By 2002, we had climbed to sixth. This is one list where we want to be at the bottom, not the top. In 1992, each person’s share of the state debt was $240. Now it has grown to $1,207 for every man, woman and child in Mississippi.
All that having been said, the outlook is getting better. Since January, we have reduced our overall debt burden by $110 million. In the current fiscal year, our structural budget imbalance has been reduced from $709 million to a little over $400 million.

From an economic standpoint, we are experiencing strong trends in employment, personal income growth and output. This has led to strong revenue numbers for the state since January. We still have a long way to go, but the trends are pointing toward significant progress.
Making sure we continue on the path toward eliminating the structural budget imbalance is critical for the upcoming legislative session.

MBJ: With Hurricane Ivan brushing the Gulf Coast, we were reminded of a critical component of financial operations. What contingencies for disaster and recovery does the state budget hold?

TR: State law provides a Disaster Assistance Trust Fund to which up to $1 million may be transferred from the rainy day fund each year.
Under former Gov. Fordice’s leadership, the legislature enacted the 98% rule, whereby only 98% of anticipated revenues could be appropriated in the budgeting process. This created a 2% set aside, which was maintained in a rainy day fund that could be used for catastrophic events.
Unfortunately, the legislature has overridden the statutory requirement in recent years. Consequently, there are very few provisions in the current budget for such events.
The possibility of these events is the exact reason why one of my budget reform proposals is to make it more difficult to override the 98% rule. Families and businesses save for a rainy day. State government should, too.

MBJ: For fiscal year 2004, you made $24.8 million in budget contingency cuts to keep state government accounts balanced. Of approximately 300 special funds available, 89 were chosen for reductions. How did you make that determination, and what do you foresee for FY05?

TR: I prioritized from the beginning. Instead of cutting across the board, I worked to be a watchdog for the best interest of the taxpayers. I cut fat where possible, lessened the burden on critical services and did not cut anything vital to public safety, education or job creation.
After I narrowed the field of possible cuts, I contacted the relevant agency heads and directors to identify the best places to trim funds. It would have been better if this process had been done on the front end so agencies could have planned for it, but under current law, it was necessary to bring the budget into balance. We can’t spend money we don’t have.

Contact MBJ contributing writer Lynne W. Jeter at lwjeter@yahoo.com.

About Lynne W. Jeter

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