Freedom Line Blog

While Congress debates a bailout for Puerto Rico, a different – but related – debate rages among legislators in the Commonwealth over Governor Garcia Padilla’s final budget proposal for the Puerto Rican Government.

The proposal has been met with justified criticism, as noted in part by Puerto Rican publication El Vocero, that should come as no surprise. The Governor’s proposal, which includes nearly $1 billion in increased expenditures for a Commonwealth that otherwise claims it “cannot pay” its debts, is a veritable goodie basket for Garcia Padilla allies.

Of the $973 million in increased expenditures, some $522 million would be diverted into the Garcia Padilla Administration’s new slush fund, something called the Financial Advisory Authority and Fiscal Agent of Puerto Rico (FAAFA). FAAFA will assume the role of the Governor’s old slush fund, the long-unregulated and now insolvent Government Development Bank.

Also included in the budget is $91 million for an unprecedented discretionary fund, an extra $215 million to bail out bankrupt municipalities, and an increase of $69 million for the “professional services” of the very expensive consultants and lobbyists.

All of this spending comes despite the fact that, for the first time, the budget makes no appropriation for the payment of principal and interest on payments to general obligation debt.  That’s a clear violation of Puerto Rico’s Constitution, which affords explicit priority over all other government expenses to the savers who invested in those bonds.

We’ve long warned that, given the cover of the legal stay and cramdown mechanisms included in the Congressional PROMESA legislation, it’s inevitable that Puerto Rico would default on the money it owes to bondholders, walk away from negotiations, and begin to frantically divert its resources to friends and allies on the island.

Now, in plain terms, the Governor has promised to do precisely that.  While the Governor fills the coffers of his new slush fund and lines the pockets of his army of consultants and Big Labor cronies, the Puerto Rican people, the municipal lending market and America’s seniors and savers will pay the price.

The question is whether Congressional conservatives are watching and ready to act accordingly.

A Governing.com blog post by finance writer Liz Farmer includes a little history lesson for conservative governors looking to swap income tax cuts for higher sales taxes.  In order to avoid a massive drop-off in tax revenue in such a scenario, states would be obliged to not only increase their sales tax rate, but expand it beyond goods to include services as well.

But an example from Florida’s recent past gives reason to pause:

Expanding the sales base to include services would address both of those issues. However, getting that idea past the powerful lobbies that advocate for the affected industries is another question. In 1987, the Florida Legislature enacted an expanded sales tax on services like including advertising, legal, accounting and construction services. The move was met with enormous outcry. Major corporations like Coca-Cola and Procter & Gamble canceled or reduced their advertising in the state to protest the tax while business groups canceled at least 60 conventions they had booked in the state. The tax lasted just six months until it was repealed and the legislature instead voted to raise the sales tax from 5 percent to 6 percent, a rate that is still in effect today.

It’s worth noting that a tax expert quoted in the blog confirms that income taxes are the most destructive tax because they create a disincentive to build wealth.  However, as the experience in Florida shows, a workable sales tax runs the risk of becoming quickly unpopular once consumers start seeing the true cost of government on every commercial transaction.

Assuming some states do enact the income-for-sales-tax swap, maybe the sticker shock will prompt another round of reform; one that perhaps lets third-party vendors compete for government contracts to deliver services at a fraction of what it costs to fund a bureaucracy.

Bloomberg shows that for all the Democrats’ talk about a Republican war on women, it’s the self-proclaimed ‘party of women’ that must explain how unless its gubernatorial candidate in New Hampshire wins in November, Democrats will have no female governor anywhere in the United States.

Meanwhile, Republicans have New Mexico’s Susana Martinez, Arizona’s Jan Brewer, Oklahoma’s Mary Fallin, and South Carolina’s Nikki Haley.

Here’s another example of conservative reality beating liberal rhetoric.

If former GOP House Rep. Tom Tancredo can overcome his current 5 point gap to become Colorado’s next governor, we’ll all need to brush up on the principles and policy preferences of his new political home: the American Constitution Party.

As would be imagined, the ACP is in-line with Tancredo’s stance on border security, and regulating the number of immigrants.  The party also seemingly provides a home for Christian libertarians.  If Tancredo pulls off the biggest surprise of the 2010 midterm elections it will be fascinating to see whether the ACP can get any of its platform through Colorado’s soon-to-be Republican legislature.

Oh, the sub-plots this election cycle!

It’s hard to believe that Florida Governor Charlie Crist is on the precipice of being a one term chief executive with only a new wife to show for it.  Haled as the difference maker for John McCain’s struggling presidential campaign, he single-handedly decided which Republican candidate would win the 2008 GOP Florida primary.  Yes, he was that popular in a state where he now trails his Republican challenger for the open Senate seat, Marco Rubio, by 20 points.

Aside from doing little more in office than unwind many of Jeb Bush’s conservative accomplishments, Crist is likely to leave office in November without having ever fully concentrated on being the most powerful politician in a crucial swing state.  In stark contrast to New Jersey’s recently elected governor, Chris Christie, whose budget balancing is a model for skillful public policy in action, Crist will be remembered as a politician who couldn’t be satisfied with his current job.  Very soon, Florida voters will relieve him of the burden.

Republican New Jersey Governor Chris Christie has earned high praise from conservatives by making good so far on his promise to clean up the state’s fiscal debacle using established conservative principles.  Christie inherited a $2.2 billion deficit this year and a projected $10.7 billion deficit for next year (over 1/3 of the total budget size), but has managed to cut $13 billion in spending in just eight weeks.  In so doing, he has naturally enraged the usual leftist entitlement class and unionized public employees.

Notably, however, Governor Christie has attracted some support from state Senate President Stephen Sweeney, who is a Democrat and leader of a local private-sector union.  The reason?  Perhaps Mr. Sweeney has recognized that the same public-sector unions whose exorbitant wages and benefits busted New Jersey’s budget also eat into the wages and livelihoods of private-sector union members who pay taxes to subsidize those public sector employees.

Now that the number of public-sector union members exceeds the number of private -sector union members, could we be witnessing the first signs of an intra-labor deathmatch?  This could be interesting…

One of the curious things about business people turned political candidates is how much they retain the language of commerce, yet shuck its practice.  The best example is of self-funded multi-millionaires (or billionaires) spending gobs of their own money at an unsustainable clip while excoriating career politicians for being fiscally irresponsible.  Although you can’t run a government exactly like a business, the notion that spending should match revenue is perhaps the one financial concept that applies to any endeavor not operating on the barter system.

All of which makes a Republican candidacy like Meg Whitman’s for California governor so paradoxical.  Like her political mentor, Mitt Romney, Whitman is loaning her campaign tens of millions of dollars from her personal wealth to fund her run.  The money is going to support a top-notch staff, endless media buys in California, and a slick website.  It is not, apparently, attracting an equal amount of financial contributions from people with a different bank account.  So, in order to make it to the June primary, Whitman will have to cut herself another check.

That approach won’t fly as governor.  One of the chief criticisms of Whitman’s campaign narrative is that she can’t fire underperforming bureaucrats and politicians in Sacramento the way she did as CEO of Ebay.  Now, it looks like her candidacy can’t muster enough popular support to prop up her big spending ways.  Californians already have a political class accustomed to spending money without regard to sustainability.  It is a lesson with consequences they don’t need to learn from a governmental rookie.