Cutting the Economy to Ribbons

Rick Perry says a no-new-taxes budget is good for business in Texas – but is it?
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Posted May 11, 2011 by GAYLE REAVES in News

Gov. Rick Perry’s press releases have been practically bursting with pride lately, as a Texas Legislature with a heavy Republican majority has passed bill after bill dear to his heart and political aspirations –– especially the budget bills passed by the House and Senate that address the state’s planet-swallowing $27 billion budget without raising taxes.


COVER-IMAGE“I look forward to signing a fiscally responsible, no-new-taxes state budget in the next few weeks that funds Texas schools, border security, and healthcare priorities, while protecting Texas job creation,” Perry said last week after the Senate passed its version of the budget. That same day he touted a survey in CEO Magazine naming Texas as the “best state for business” for the seventh year in a row, “a testament to our successful model for job creation and economic prosperity.”

A few days earlier, he’d filed an opinion piece on politico.com, bragging about the “tremendous impact” being made by Republican governors around the country in balancing budgets without tax hikes and “fearlessly implementing policies to promote job creation.”

Back in Texas, however, fear rather than fearlessness is a better description of how a broad range of groups is reacting to the Republican budget proposals that would cut $16 billion to $21 billion from what’s needed to continue the state’s current level of public services. The House version would accomplish that by cutting public school funding to a level below what’s required by the state’s own policies, dramatically reducing financial aid to college students, and dealing a breathtaking cut of about 33 percent in nursing home Medicaid reimbursements. (Various Democrats and analysts have put together proposals that mixed milder funding cuts with savings in other areas and increases in certain narrowly targeted taxes, such as a surcharge on sugary soft drinks. None of those proposals have gone anywhere.)

Group after group –– teachers, doctors, hospital administrators, children’s advocates, senior citizens’ advocates –– has made the trip to Austin in recent months to protest the budget proposals. Not surprisingly, much of that opposition has focused on the substantial human toll that the cuts would represent.

But what about the effect of such cuts on the economy? Perry’s take, consistently, has been that raising taxes would hurt businesses and individuals and could derail the state’s economic recovery –– and denying that deep budget cuts could also take a toll.

FEATURE_1Not surprisingly, the likely victims of the budget cuts think that vaporizing their jobs and vital services isn’t a wise move. But increasingly, economists and business leaders are also predicting that the kinds of cuts in education, healthcare, and other areas being envisioned in Austin could seriously injure the Texas economy.

“These are uncharted waters,” said Dallas economist Bernard Weinstein. “I’ve been watching state and local government finances for 50 years, and I’ve never seen a situation like this.”

Last week the Texas Senate, on a party-line vote, approved a budget that cuts $11 billion from current spending levels –– extremely painful except when compared with the House version, which cuts $23 billion. Senate budget writers had included the use of $3 billion from the state’s Rainy Day Fund but couldn’t get their colleagues to agree to that on the floor.

“We’re taking a huge step back today,” State Sen. Wendy Davis of Fort Worth said after voting against the Senate version. She pointed out that it would cut $4 billion from public education, cost thousands of jobs across the state, increase classroom sizes, and permanently reduce education funding. The reductions, she told Reuters, “cut into the heart of our future.”

Now House and Senate conferees must come up with a version that both houses will support –– a process that might or might not be finished by the time the current session ends on May 30.

The Legislative Budget Board in March predicted that the House budget bill could cost the state as many as 335,000 jobs over the next two years. The analysis compares what the jobs picture will look like if the legislature cuts $23 billion from the budget, versus if the state continued its current level of spending, which would be almost impossible.

The job losses wouldn’t  be be confined simply to government agencies –– about 45 percent would come from the private sector. If the House version of the budget were to be adopted by House-Senate conferees, experts in various industries have predicted that the layoffs of teachers and other school employees that are already happening will be repeated in many industries.

Hundreds of nursing homes could very likely close, for instance, destabilizing that industry across the state. Agencies that provide home health services likely would go out of business as well. The Children’s Health Insurance Program faces deep cuts. Hospitals would take about a $780 million hit; many would have to cut their staffs, and, industry representatives said, a few might have to close. Businesses that in turn are related to those industries could be affected as well.

Perry pooh-poohed the report, telling reporters that he has “lost faith” in the Legislative Budget Board’s abilities. And groups like the Texas Taxpayers Research Association charge that the board’s job loss figures really show the effect of the economic downturn, not the actions of state budgeters.

Scott McCown, executive director of the Center for Public Policy Priorities,  a respected source of studies on laws and policies that affect low- to moderate-income groups, disagreed. The job losses, he said in a letter to House leaders, will be the fault, not of recession, but of legislators’ response to the downturn.

“If it is raining, but you refuse to open your umbrella, you get soaked not because of the weather but because you refused to open your umbrella,” he said. He noted predictions that the budget cuts could push the state’s unemployment rate to more than 10 percent.


Economist and futurist Ravi Batra, who, like Weinstein, teaches at Southern Methodist University, agreed that unemployment rates will be going up in the public sector.

The projected loss of 335,000 jobs in 2012 “could be very significant,” he said. “Employment could keep going down for four quarters. Certainly it will add one percent to the rate of unemployment.”

Weinstein said a loss of 335,000 jobs “would have a very serious negative impact.” By comparison, he said, the highest number of jobs ever created in Texas in a year was 300,000.

FEATURE_2“It’s pretty simple to understand,” he said. “People who work in government receive paychecks and spend that money on everything that people in the private sector spend it on.” And the removal of that income from the economy has an impact.

Just about every school district and municipality in the state “is talking about layoffs or pay cuts,” he said. “It’s going to be a drag on the economy.”

Weinstein cautioned that, “You just can’t say ‘We don’t have money and don’t want to raise taxes’ without following that statement with another sentence: ‘And that is going to have a negative economic impact on the state.’ ”

In 2002, when she was only in her 50s, Samm Smith suffered a stroke that left her with memory problems and severe neuropathy in her legs, feet, and hands. A few years ago, her sister Jonnie Worth helped move Smith from New Mexico to North Texas so she could help take care of her. Since then, Smith has been diagnosed as bipolar, and last fall she had two hip replacements after doctors discovered that her hip joints were deteriorating. She uses a walker and a wheelchair and can no longer remember to take the medicines on time that help her get through the day.

Financially, she said, “I’ve taken care of myself since I was 17,” including through working in the film industry and as an accountant. “I used to have a mind like a steel trap.”

But now she lives in an apartment project in the Lake Worth area where the other residents, like Smith, are on fixed incomes. Because she gets disability payments from Social Security, she’s not poor enough to qualify in Texas for Medicaid –– and she’s worried about hanging onto her apartment in the future, because her income barely covers the rent. One meal daily from Meals on Wheels provides most of what she eats. She watches her money so closely that recently, “I had to cut back on the paper towels and lightbulbs that I buy,” she said. What makes her life livable is her caregiver, who comes in 22 hours a week.

FEATURE_3Now Smith is afraid she may lose that critical help, due to budget cutbacks. “If I didn’t have her, I couldn’t survive in this apartment,” Smith said.

“It’s scary,” said Worth, who is also in her 60s and has a full-time job. “I can’t quit my job to take care of her.”

If she lost her home health services, Smith said, “I guess I’d have to be put away in some government-sponsored home.”

That’s another part of the bad news for Smith and others in similar predicaments: If state support for community-based services for the elderly and disabled is cut, thousands of those folks would end up in nursing homes. Except that, also due to the cuts now being considered, hundreds of nursing homes around the state could also go out of business.

The House version of the budget “is truly frightening,” said Trey Berndt, AARP Texas’ associate director for advocacy. The House bill would cut Medicaid reimbursement rates for nursing homes by about 33 percent and reimbursement for home health services by about 25 percent. Under the Senate version of the bill, the cuts would be much smaller –– only about 3 percent.

“I’ve been doing budget work for 20 years, and I’ve never seen it like this,” Berndt said. “Provider rate cuts in the single digits are tough even in bad years. But this would put some people out of business and cause a huge disruption in the industry.

“Not many businesses could handle a third cut in their revenues and not be destabilized,” he continued. “And we’re not talking about a long, drawn-out process.”

Berndt and others said a major part of that economic impact would be felt in small towns and rural areas. “Hospitals and nursing homes are strong employers in rural Texas,” he said.

Tim Graves, president of the Texas Health Care Association that represents nursing homes, said Medicaid reimbursement is the largest revenue source for almost all nursing homes, “and you can’t cut it that much and expect things to rock along.” What’s more, he said, cuts in Medicare rates being considered in Congress would put the nursing home industry in a “double squeeze.”

He said that in about 550 nursing homes in Texas, Medicaid patients represent 70 percent or more of their residents.

“I think several hundred of those could not continue to operate” if the House’s drastic cuts are implemented, he said. Texas’ reimbursement rates already rank 49th in the country –– and for more than a decade, the legislature hasn’t provided enough money to meet even Texas’ standards for reimbursement, he said.

Those 550 homes, Graves said, employ about 65,000 people and care for about 42,000 residents.


The Courtyards at Fort Worth is one of those nursing homes where Medicaid patients make up about 70 percent of the population. Administrator Lezlie Michael said that if the 33 percent reimbursement cut were to stand, “We run the risk of actually having to close down.”

That would take a business with an annual budget of about $2 million, with more than 200 employees, out of the local economy –– not to mention forcing residents of the 180-bed facility to find new homes.

For nursing homes, any kind of compromise that, say, splits the difference between the House and Senate versions could still be fatal, she said. A 15 percent cut, for instance, “would still be huge,” she said.

FEATURE_4And if her facility shut down, where would those patients go, since presumably many other homes might also have to close? “That’s the question of the day,” she said. “I really want to ask the governor that.”

In most nursing homes, there are some residents who no longer have family members whose homes they might be moved to.

What she would do if those kinds of patients had to be relocated, Michael said, “is a bridge I haven’t crossed in my thinking. What do I do? Take them to a homeless shelter? A hospital? And who pays? That’s very detrimental to our economy.”

John Guest, president and CEO of the Teaching Hospitals of Texas, said the House’s proposed cuts in reimbursement rates to hospitals will create cost shifts, and that some of those costs are going to be shifted to health insurance companies, “who will negotiate for higher insurance rates.”

And some financially strapped hospitals, he said, might decide to eliminate a service as basic as delivering babies.

Guest said that about half of the babies born in Texas are born to parents who qualify for Medicaid. If a hospital is going to lose serious money on half of its obstetrics cases, he said, “they may look very seriously at [deleting] their OB/GYN service. That will happen in some places.”

The cuts to school and university funding are perhaps the part of the budget crisis that has received the most coverage, especially since, even before state budget cuts, school districts around Texas are in financial crisis.

The Texas State Teachers Association has called for “angry parents to rise up in protest” against the budget cuts, and many have. Carolyn Boyle of Austin, the head of the bipartisan Texas Parent PAC, promised that her group will hold legislators accountable when they face re-election.

“We are organized and we are watching,” she wrote in an opinion piece in the Austin American Statesman.

“The Senate budget may not be as severe as the House version,” TSTA President Rita Haecker said in a press release, “but don’t be misled. The Senate plan is awful. Neither alternative fully funds school finance formulas nor keeps up with anticipated enrollment growth, and that’s the first time that has happened since 1984-85.”

State Rep. Mike Villarreal, a San Antonio Democrat, noted that even the Senate budget would eliminate grants for pre-kindergarten programs and science labs and make college more expensive by cutting student grant money. Villareal put together a detailed alternative to the Republican budget proposals, outlining a combination of budget cuts, Rainy Day Fund use, taxes or tax hikes on things like soft drinks and cigarettes, and suspension of a tax exemption awarded to the gas drilling industry.

Weinstein, the Dallas economist, said the layoffs of so many teachers represents “a tremendous loss in human capital.

“When you start firing teachers, where do they go?” he said, since almost no school district in Texas or anywhere else is adding teachers these days.

He talked about the irony of Perry “wanting us to be the leader in all these emerging technologies, and yet we’re 44th in education spending.”

Through the years, business leaders of all kinds have noted the importance of a good education system to the Texas economy, including, Weinstein noted, Ross Perot. The Dallas businessman (and presidential candidate) headed a study commission whose recommendations led to a special legislative session in 1984 that boosted spending on the state’s public schools and teachers.

After a lot of hard work, Texas had climbed much higher in the rankings of per-pupil spending, the economist said, but last year the state was back to 44th. “After these cuts, I don’t know what it will look like,” he said.

A report released this week by the Children’s Defense Fund of Texas gathered the comments of business leaders from around the state opposing the budget cuts that most affect children. The Metro 8 Chambers of Commerce, for instance, representing businesses in Texas’ eight largest cities, oppose any reduction in medical provider reimbursements.

“We want the state to maximize our federal matching funds” on things like children’s health insurance, said a Houston car dealer quoted in the report. “Those are our dollars, and we want them back here investing in our future workforce.”

Many critics of the budget proposals believe legislators actually get that.

Legislators surely understand, for instance, what a 33 percent cut in reimbursement rates would do to nursing homes and their communities and why decent healthcare is good for business.

“I don’t think a single member of the House really wanted to pass that budget,” said Tim Graves of the nursing home association.

So why did they? The answer is what it almost always is in the legislature: politics.

“There is no doubt in my mind that if it were a secret ballot, [House members] would have voted down the House budget,” said McCown, of the Center for Public Policy Priorities. “If it were a secret ballot, they would have embraced the Senate budget or more.

“The problem is,” he continued, “House members were frightened by the far right and the power of the Tea Party caucus and they … shriveled.”

Tea Party influence is generally acknowledged as the reason neither budget bill dips into the Rainy Day Fund, which has about $9 billion available now and is staying healthy these days thanks to replenishment by oil and gas severance taxes.

From their leaders on down, McCown said, the House members who voted for the budget have “not shown the courage that Texans expect of our leaders.”

McCown said the process, in coming days, of writing a budget that will be accepted on both sides of the capitol is going to be a lot harder than a lot of people realize. And public education funding, he said, may be the hardest nut of all to crack.

The negotiations could run long enough to necessitate a special session –– but only, he pointed out, “if you assume that the Senate conferees are going to stand firm. They could shrivel up, too.”

 

Veteran Texas journalist Dave McNeely contributed to this report.


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