Sunday, August 29, 2004

She's On Their Case!

"Plan Won't Fix Budget, Analyst Says" - LA Times

Doubts raised over governor's ideas for huge savings" SF Chronicle

California's nonpartisan Legislative Analyst has now weighed in with an initial assessment of the California Performance Review. Professor Tax is reassured to see that the Legislative Analyst was not taken in by the Review's promise of $32 billion in savings from reorganizing state government. Instead, she found (p. 6):

"Savings Overstated. In many instances, the CPR was conservative in scoring savings from its individual proposals—acknowledging that actual savings, while likely, simply could not be estimated. However, in other instances, the CPR scored savings that are uncertain or overstated. This is especially the case with regard to many of the proposals with the largest identified savings."

What diplomats they must be over in the Legislative Analysts' shop! Professor Tax called Recommendation GG 07, to gain $8.2 billion in Federal funds by centralizing grant-seeking under the Governor, "creative accounting, Hollywood style" and "the imaginary product of irrelevant numbers and distorted quotes". The Legislative Analyst says the same thing, but so much more politely (p. 43):

"However, it is not clear how the CPR proposal would enhance California’s chances of modifying federal formulas. Without significant changes to federal law, which also could have negative fiscal implications for other states, the level of assumed revenues is unlikely to materialize."

Professor Tax was concerned that Recommendation ETV 11, changing the kindergarten start date, could save money only by creating a "lost battalion" class of kids, 3/4ths the size of classes before and after, who would trudge through the grades like a pig in a python, only in reverse. What an ugly metaphor! The Legislative Analyst used gentler phrasing in referring to the "difficult logistical issues" that would result (p. 23):

"Research on the merits of changing the kindergarten entry date, however, is more mixed than suggested by the report. In addition, the report excludes any discussion of the impact of the date change on school districts and on families. The CPR’s proposal presents difficult logistical issues for districts, and magnifies the fiscal issues districts face from declining student enrollment."

The Legislative Analyst's assessment of the way the Special Effects team morphs DMV reform into a $1 billion car tax increase is also spot on (p. 37):

"Our review suggests that the one-time VLF revenue windfall is likely to be about $1 billion rather than $1.3 billion. Regardless, it would appear that the proposed transfer of all VLF windfall revenues to the General Fund would require a constitutional change. This is because VLF revenues are constitutionally designated for distribution to local governments. Also, the VLF windfall that would result from the proposal’s implementation could be construed as a one-time tax increase, since in the first year of the plan’s implementation about $1 billion more would be collected from state motorists than would otherwise be the case."

What a relief! The Legislative Analyst has exploded the mythic claims of savings that were in the Performance Review. Future comments by Professor Tax -- and yes, he has a few more observations -- will focus on aspects of the Review that by their nature are off-limits to the objective, nonpartisan folks in the Analyst's office.

Friday, August 27, 2004

Sacramento’s Urban Legends

Remember the story about the lady who tried to dry her poodle in the microwave? Or the claim that the Income Tax isn’t lawful because Ohio isn’t really a state? These are classic "Urban Legends", modern folklore that circulates by word of mouth and post of blog, apparently plausible tales that seem to emerge from some collective modern subconscious. Such false beliefs are usually harmless enough, except when politicians try to use them to win support from a gullible public.

A case in point is Recommendation GG #44, one of the 279 proposals contained in the California Performance Review recently sponsored by Governor Schwarzenegger. The prosaic recommendation that California’s various state agencies increase their use of the internet for doing business with each other is scored as saving $100,000,000.00 over five years, at a cost of only $1,300,000 -- a 75 to 1 payoff. 300 "Document handlers" -- a term the Review uses interchangeably with "administrative and information workers" will be reassigned or let go from the State payroll.

It's nice to be hi-tech, but one wonders how the Review concluded that "integrated document management" will produce the organizational equivalent of the free lunch? Was there a specific analysis of how state government departments now operate, and an evaluation of the financial and personnel costs of change? Of course not. The Review relies on sales brochures from small, privately held companies that are trying to promote themselves for jobs as consultants. These glossy claims are prefaced with disclaimers, such as:

"The information provided herein is provided for informational purposes only and is not intended or offered as a guarantee or warranty of any kind."

The Performance Review takes an Urban Legend approach to financial analysis. Recommendation GG #44 alone contains at least three examples. The first one gives us a rare peek at an Urban Legend being born. The Performance Review says that State offices have been moving documents to an Adobe Acrobat electronic format, and then claims:

"While this is an improvement over the paper format, further efficiencies using modern electronic document management systems and software would result in:

  • A 75 percent reduction in time spent locating and retrieving documents;
  • A 75 percent reduction in time spent filing ;
  • A 50 percent reduction in copying costs;
  • A 75 percent reduction in off-site storage costs;
  • A 75 percent reduction in on-site storage costs;
  • A 50 percent reduction in overnight shipping expenses; and
  • A 50 percent reduction in filing supply expenses.[6]"

Wow! All those numbers. But why only "50%" and "75%" reductions? Why not 55% or 62.3%? Let’s see where those numbers come from:

"Note [6] "Return on Investment" Sandy Schiele and Betsy Delfosse, http://www.openarchive.com/ http://www.openarchive.com/articles_home.htm (last visited May 5, 2004)."

OK, this is sales literature. Sandy Schiele is in charge of sales for Open Archive Systems, Inc., a privately held New Hampshire company, and Betsy DelFosse is the contact person for press releases. But where did OAS get the figures?

"By adding together document handling costs and storage expenses, you generate a realistic estimate for your document expenses today. Using this data, the following chart illustrates how to compare your current document handling methods with a document management system. Measuring the effectiveness of a document management solution requires that you realistically think about the departments it will impact as well as the number of employees and the value of their time. The values below are just suggestions.

  • Reduction in time spent locating and retrieving documents 75%
  • Reduction in time spent filing 75%
  • Reduction in copying 50%
  • Reduction in off-site storage costs 75%
  • Reduction in on-site storage costs 75%
  • Reduction in overnight shipping expenses 50%
  • Reduction in filing supply expenses 50%

Now, multiply these percentages by the calculations in the first section. This will give you an idea of the monthly savings your company will realize by implementing a more efficient document management solution."

"The values below are just suggestions." That means the numbers aren’t real. They are being made up for the sake of example. But the Performance Review says "further efficiencies would result in" these particular savings. Through the magic of stupidity the hypothetical becomes the real. Thus the apocryphal turns into Gospel.

So that's how it works. Numbers that were originally pulled out of thin air will no doubt to be quoted by future generations of consultants touting the benefits of electronic document management. "The California Performance Review found there was a 75% reduction in time spent filing..."

It’s like that old joke about the former Soviet Union. Did you know that back in 1987, an investigation revealed that 57.2% of all statistics in Uzbekistan were falsified?

Monday, August 23, 2004

Terminator 2: Special Effects Magic at the DMV

Amazing. It’s just amazing. After two weeks the media is still taking the State Performance Review seriously. Perhaps the sound-bite journalists are scared by the size of Volume 4, the 2,500 page body of the Review with its 279 government issues and over 1,200 recommendations. "If it’s that big", the reporters think, "it must be true. And if it’s true, then what’s the point of reading it?"

Recommendation GG #36 sounds like a sure winner. "Implement Biennial Vehicle Registration for Efficiency and Lowered Costs" We can get rid of those horrible lines at the Department of Motor Vehicles if Californians can register their cars for two years at a time, instead of every year. Cut the paperwork in half! Instead of registering 24 million cars every year, register 12 million but make the registrations last twice as long. Sheer genius! And what’s more, the Performance Review says this will save the state’s General Fund $1,259,000,000 over five years. Why didn’t someone think of this before?

But look a little more closely. This just another camera trick from the special effects crew. Those guys know how to morph a fading bodybuilder into a liquid metal Terminator android, so making a tax increase for California drivers look like DMV reform is easy work. If you have the right software, you can even do it at home on your PC.

For those who are interested, here’s how the trick works: Look first at the fiscal effects table in the Report. See how all of the $1.259 billion savings happens in just one year, 2006-07? That’s a sign it’s probably a 1-shot timing gimmick. Then lift the lid of the key explanation paragraph, the one that says:

"The conversion to biennial renewal is envisioned to take place over a two-year period to achieve proper workload leveling and a reduction in transactions. New vehicle transactions, vehicles registering for the first time in California and renewals on which smog certification is due would be subject to biennial registration the first year. The remaining vehicles would be proportionately converted the following year."

Pretend that this paragraph is a little toy mechanical box, with a slot marked "DMV", a switch labeled "biennial registration", and a tiny screen showing "$$$ collected". The instruction booklet for your DMV Registration Toy explains that "biennial registration" means "paying two years taxes up front." Now turn on the toy, get some cars and gradually feed them through the "DMV" slot. You don’t need a California-size fleet of 24 million vehicles to play with, because it works the same with only two. Let’s call them R2 and D2.

At first the screen above the DMV slot shows both R2 and D2 registering each year and paying $100 each, for a total of $200 per year in registration fees. But watch what happens when you turn the "biennial registration" switch. R2 pays $200 in the changeover year, while D2 keeps on paying $100 under the old system. Total for DMV: $300. The next year R2 is already paid up and owes nothing more, but now it’s D2’s turn to be "proportionately converted" and pay the $200. From that point on, each pays $200 in alternate years. When the switch was turned, the DMV got an extra $100, and afterwards kept on getting the same $200 as before.

Of course, R2 and D2 are the losers in this tax speedup. (Hint: there’s no tax refund in the year they are sent off to the junkyard.) And once you start biennial registration, you can’t stop. (The DMV loses $100 if you turn the "biennial" switch back to the "Off" position.) Now close the lid on the registration toy so the batteries won’t run down, multiply by 24 million vehicles and their owners, and there’s the $1.259 billion.

The Review admits that this hidden increase in the car tax may pinch a bit:

"The average renewal customer pays the department $110 for annual registration, and will owe $220 under a biennial program. The lowest priced registrations will increase from $40 to $80. These are manageable figures for most customers, but may be difficult for low-income persons."

The Review carefully avoids suggesting any way to assist them.

Won’t this hurt businesses that own a lot of vehicles? Well, trucks over five tons or hauling interstate will be exempt, so they won’t bear this "unacceptable financial burden". What about auto rental companies? "Not to worry", says the Review, "we’ll just let them stick it to the customers":

"To mitigate these concerns for rental car companies as an example, legislation could reinstate the ability of these businesses to pass on VLF costs to customers as a line item in rental contracts, a provision of law that expired several years ago. With the reinstatement of this so-called "pass-through" device, a single line-item on rental contracts will increase by only a few dollars for customers."

So what did you expect?
From a Terminator?

Tuesday, August 17, 2004

As Sam Goldwyn Once Said: "Include Me Out."

Performance Review Recommendation ETV #18:

"Repeal the Law of Supply and Demand"

Der Gövernor’s January budget proposed to cut $411 million out of general fund support for California’s public universities by reducing research and academic support, increasing student-faculty ratios, and making other “unallocated reductions” (a polite way of saying: “It’s your problem, buddy, not mine.”) The legislature trimmed back the cuts, but the colleges are still being bled for $244 million in savings, and student fees have been jacked up by 14% to 25%, with more increases slated over the next two years. The only consolation that California’s universities got from Der Gövernor is an unenforceable "compact", with promises to "prevent further erosion of support for higher education in California” for two years, and then, maybe – if the State “returns to a position of fiscal health based on moderate economic growth” – provide “some recovery of vital needs for UC and CSU, such as the ability to provide competitive salaries, and to address several years of underfunding of core programs.” As they say in Hollywood: “An oral contract isn’t worth the paper it’s printed on”.

Yoda (the hench-person who guided the State Performance Review) wants to help. “Help Universities, but cost the State any money not.” And since Schwartzie is politician enough to know that the first folks to squeeze are those who can’t vote against you, the Review gives us recommendation ETV #18, to raise $1 billion for higher education with a 45% increase in tuition charges for students who aren’t California residents. Cut to the chase:

"Increasing the 2005-2006 non-resident surcharge by 45 percent above 2003-2004 rates will raise undergraduate non-resident full-time tuition to approximately $26,000 per academic year at UC, $15,000 per academic year at CSU and $6,480 per year at the Community Colleges. The table reflects the 20 percent non-resident fee increases at UC and CSU proposed in the Governor's Budget. Additionally there is a seven percent annual increase in fees beginning in FY 2006-2007."

Hey, great idea! Maybe they should try it in Hollywood. Just raise the price of movie tickets by 45% -- and watch the audience disappear.

As Sam Goldwyn Once Said:

"If people don't want to go see a movie, there's nothing you can do to stop them."

Won’t students do the same, look for other, cheaper schools, and vote with their feet? "Worry don’t.” says Billy Yoda's ETV #18:

“Increasing non-resident tuition is unlikely to decrease non-resident enrollment. In a 2003 tuition study, Rizzo and Ehrenberg found that,"out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels charged by institutions."[12] Viehland's 1989 study described non-residents as only moderately price sensitive.[13]”

This should be reassuring, but we've already seen that Yoda has trouble with those darn footnotes, and we're starting to recognize the signs that Yoda's little helper elves have been misquoting or tinkering with the evidence. We'd better look at the source.

"[12] National Bureau of Economic Research, "Resident and Nonresident Tuition and Enrollment at Flagship State Universities" Working Paper 9516 by Michael J. Rizzo and Ronald G. Ehrenberg (Cambridge, Massachusetts, February 2003), p. i (abstract).”

Oh, it's an "abstract" = one-paragraph summary. It seems that in Yodaland nobody reads actual documents, only summaries. Like Sam Goldwyn, Yoda "read part of it all the way through." Cut to the NBER website:

"We address the determinants of resident and nonresident tuition and enrollment at public universities. A key explanatory variable is the share of out-of-state students enrolled under reciprocity agreements. We find that public universities use out-of-state enrollments primarily to augment student quality, not to make up for losses in state appropriations. In the main out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels charged by institutions. Finally, we find no evidence that public universities increase their in-state or out-of-state tuition levels in response to increased federal or state financial aid for students.”

Now, does that summary statement: “In the main out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels” mean that price makes no difference? What does the working paper really say? (It costs $5 at NBER, but is available for free elsewhere.) The study focused on 91 “flagship”State universities (8 in the UC system, none in the CSU, no junior colleges), noting that the UC schools get fewer out-of-state students than average -- less than 10%. Had Yoda's little elves read the paper, they might have found that between 1979 and 1998“the University of California schools reduced their nonresident enrollment shares by more than half”, while "public higher education institutions in California and Texas are among those that increased tuition at the fastest rates”, and that “the largest out-of-state tuition levels and tuition increases occurred at Michigan, the Virginia schools, North Carolina schools and the California schools."(pp. 9-11)

One can imagine the farsighted eyes of the diminutive Jedi glazing over at the professors’ careful attempts “to correct for the biases that result from the violation of the orthogonality conditions necessary for OLS to be unbiased”. How his little green forehead would have wrinkled on reading that:

"The out-of-state tuition and the share of nonresident students enrolled at an institution are similarly assumed to result from the interaction of out-of-state students’ demand for seats at the institution and the institution’s willingness to supply such seats, the latter constrained by the political process in the state.”(p. 19)
“The final equation is the nonresident enrollment share equation. The dependent variable is specified as the logarithm of the odds-ratio of the share of first-time freshmen that are nonresidents to allow the error term to be normally distributed. This equation is specified very similarly to the out-of-state tuition equation, with the logarithm of real out of-state tuition (TUITO) included as an explanatory variable.”(p. 23)
“Taken as a whole, the entire vector of variables aside from the sources of student financial aid are strong predictors (across-institutions) of nonresident enrollment share differences. The results seem to indicate that nonresident students are used both for the purposes of generating revenues and to augment institutional quality.”(p . 30)

And how upsetting to find that Rizzo and Ehrenberg conclude, contrary to ETV #18: “The major insight that we draw is that these public institutions do not appear to use nonresident enrollments to supplement or replace revenues (as is the a priori belief of many observers), rather it appears that they enroll nonresidents to improve institutional quality, or to serve other interests.” (p. 39)

Looks like Yoda only read the NBER summary. Looks like Yoda, to a conclusion, unsupported by the evidence, jumped. And since Yoda’s other footnote, [13] Dennis Viehland, "Nonresident Enrollment Demand in Public Higher Education" (Ph.D. diss., University of Arizona, 1989) refers to an unpublished, tho prizewinning Ph.D thesis, we really have no idea what “only moderately price-sensitive” meant back in Arizona in the 1980’s – except it probably doesn’t mean “zero price-sensitivity” for California in 2005 A.D.

Charismatic celebrity leaders don’t like bad news, and they hate it when folks contradict them. To quote Sam Goldwyn: "I don't want yes men around me. I want everyone to tell the truth, even if it costs them their jobs." That’s probably why der Governor’s Performance Review ignored other research showing that hiking non-resident tuition can cause enrollment losses that may negate the gain from the higher fees. Professors Noorbakhsh and Culp studied what happened to the Penn State system, where:

“Nonresident tuition increased an average of 19.6% per year between the 1991–1992 and 1993–1994 academic years. Subsequent to these changes, the State System experienced an approx. 40% decrease in the number of nonresident students attending System universities.” 21 Economics of Education Review 277, 280 (2002)

They calculated: “In Table 1, the estimated elasticity coefficient of nonresident demand with respect to changes in nonresident tuition is equal to -1.15.” (p. 282)

And they concluded that the out-of-state tuition hikes backfired:
“Disparity between resident and nonresident tuition in the Pennsylvania State System of Higher Education was used during the period 1991–1996 in an effort to shield state taxpayers from the burden of subsidizing the cost of nonresident student education and to guarantee access to resident students. Nonresident tuition was raised dramatically by the Board of Governors despite a clear warning about the price sensitivity of nonresident demand. In a report to the Board of Governors, Moyer and Keller (1989) cited Morgan (1983) and cautioned that ‘states can expect significant reductions in nonresident enrollments if they raise nonresident tuition rates relative to competitive tuition rates in surrounding states.’ This is exactly what appears to have happened."

At a net cost to Pennsylvania taxpayers:“the majority of the costs associated with providing educational services are fixed costs. These costs will be born by the institution whether enrollments decline or not.... Declines in nonresident enrollments actually shifted more of the burden of the fixed cost to state taxpayers and resident students.”

Professors Curs and Singall came to a similar conclusion when they analyzed non-resident tuition policy at the University of Oregon. They found:

"The UO price is the only significant price variable in the enrollment model. The marginal effect indicates that a 1% increase in price yields a 0.23% and 0.62% decrease in the respective probability of in-state and out-of-state applicants enrolling at the UO. Thus, consistent with the findings for the application model, out-of-state enrollees appear to be relatively more price sensitive than their in-state counterparts, which likely indicates that they have relatively more alternatives. The own-price elasticity from the combined model is 0.28 for the average enrollee and, unlike the application model, is in between the separate elasticity estimates for in-state and out-of-state enrollees. Although the enrollment results support prior work that enrollees are relatively unresponsive to price changes, the application and enrollment results jointly indicate that the own-price elasticity is greater than one for potential students." 21 Economics of Education Review 111, 117 (2002)

"Our individual elasticity estimates for UO applicants range between -1.0 and -1.5, which are three to five times greater than the price elasticity found for UO enrollees. This finding is important because the vast majority of demand studies focus on enrollment and may find an inelastic price response because the majority of the price effect on college choice occurs early in the process when students have made fewer emotional and financial commitments. Our price elasticity estimates for applicants are also four to six times larger than the few prior application elasticity estimates. However, these studies use the gross price that does not account for financial aid, which prior enrollment demand studies have found tend to yield smaller price elasticities." id. at 122 [references omitted]

So there we have it. Recommendation ETV #18 might raise more money, or it might drive away so many students that it hurts the Universities financially -- and weakens the quality of the students who enroll. Money isn't the only reason to recruit out-of-state. After all, diversity doesn't stop at the State Line. ETV #18 isn't a financing plan, but a fantasy -- an attempt to avoid thinking seriously about the costs and benefits of higher education in California.

"Cut! Where's the script? Who the hell wrote this crap?"

As Sam Goldwyn said: "Our comedies are not to be laughed at."

Monday, August 16, 2004

Episode Five: The Kindergarten Cop Strikes Back

When we last left them, Gövernor Schwarz and his sidekick Lone Star Yoda had cooked up a claimed $8 billion dollar savings for California's State Performance Review. They came up with this figure for their Federal Grant recommendation by selectively reading only the odd numbered sentences in a recent State Audit Board report and then multiplying together two large, irrelevant numbers.

What's the motivation? For der Göv, it seems to be vanity -- the well-known inability of any celebrity to admit to ever having done anything wrong. Gövernor Schwarz trashed the state's finances on his first day in office with an order that froze the car tax at 1/3rd its historic level. Popular, yes, but irresponsible. In order to cover up this $ 4 billion a year fiscal blunder, the Gov's Performance Review report now pretends to have found potential savings of $32,000,000,000.00 from reforming the state bureaucracy. Would that it were so! But we've already seen that one-fourth of the promised savings are a mirage, a special effects trick. Could it be that the other benefits promised in the Review are just more illusions created by Hollywood-style accounting? Now, as Episode Five begins, Schwarz and Yoda claim to have found billions of dollars hidden in California's kindergartens. Watch closely!

The Performance Review says it offers $4.1 billion in savings from education reforms. There are many sensible suggestions among the 33 recommendations, because many participating state employees took the Review at face value, rather than seeing it as a platform for more display of der Gövernor's enormous vanity. Most of the good ideas, however, don’t generate big bucks – the sums are either modest or “CBE” – “Can’t Be Estimated.” It turns out that two of the 33 recommendations account for 90% of the supposed savings: $2.7 billion from changing the enrollment date for kindergarten and $1.0 billion from a 45% hike in public college tuition for out-of-state students. Are these numbers real or are they more movie magic?

Four-year olds aren't very mature. Certainly not mature enough for the rigors of kindergarten. So the Review proposes to enhance their success by changing the enrollment date for kindergarten. The rules now let children start Kindergarten in the Fall as long as they will turn five years old by December 2nd. Let’s move the cut off to September 2nd, says Yoda's Report – meaning that kids born in September, October and November of year 2000 won’t begin kindergarten in Fall, 2005, but will have to wait until school starts a year later, in Fall 2006.

Yoda doesn’t say what the kids will do in the meantime or who will look after them, except for a vague suggestion that someone or other might give parents “advanced notice of the change in entry date and allow them adequate time to obtain childcare.” But so what? Think of how much money we’ll save, as long as we've got a place to sit when the music stops. Punting three months worth of kids -- maybe 90,000, maybe 115,000 -- over into next year means a 25% reduction in kindergarten enrollment for Fall ’05 and Spring ’06. There are
23,299.4 kindergarten teachers in California, so 25% fewer kids means about 6,000 layoffs -– and when support costs are added in, the total General Fund savings is $450 million, plus $210 million more for other education funds. Help the kids and save a bagful of money – what’s the matter with that? Sure, the pointy-headed professors over in the College of Education may argue that there may be benefits from an early start and dangers if parents can't afford day care or nursery school while waiting. But who listens to the quibbling of pedantic pedagogues?

Think, tho what happens *the year after*, when California schools will again face a full 12-month crop of youngsters -- those born between September 2000 and August 2001. Better re-hire those 6,000 teachers -- if we can find them. But don't you see, says Yoda? ("But see, you don't?") Now we’ll have 90,000 fewer first graders. When we rehire Mrs. Ingersol we can fire Ms. DeGaard, so the state will save another $660 million on first grade costs. And so forth and so on, for the next 12+ years, as this cohort of students, this "lost battalion" only 75% the size of the classes before it and after it, trudges its painful way towards graduation. Sort of like a pig in a python, only in reverse.

"Amusing but overly contrived Schwarzenegger vehicle blends elements of comedy, cop thriller, and romance."-- Leonard Maltin

Billy Bob Yoda was a bit coy in portraying this as a plan to help little kids. Actually, kindergarten is optional in California. “Compulsory full time education” (a/k/a "Democracy’s Answer to Fascism") legally begins at age six in this state, and Education Code Sec. 48010 directs that “A child shall be admitted to the first grade of an elementary school during the first month of a school year if the child will have his or her sixth birthday on or before December 2nd of that school year.” So unless Yoda tinkers some more with the education code, the kids born in the 3 lagged months of year 2000 will be drafted into the first grade in fall 2006, with no chance at all to taste the simple pleasures of kindergarten.

“This a complication I did not anticipate is.”

If California decided that changing the kindergarten enrollment date was indeed a good idea, it could be done gradually. It's easy to avoid that 25% lifetime dent in the birth class of 2000. Just adjust the enrollment date more slowly, a month at a time (eg. cutoff on November 2nd in 2005, on October 2nd in 2006, and so forth.) Good policy, perhaps, but it wouldn't produce that $2.7 billion number on the marquee -- to get that figure Yoda and Schwarzie have to play budget timing games with the lives of several hundred thousand kids and their teachers.

Bad Kindergarten cop! Bad! Bad! No rubber donut for you!

Haloscan commenting and trackback have been added to this blog.

Monday, August 09, 2004

The California Performance Review - Episode IV: The Lies of the Jedi

The 2,500 page report from der Gövernor’s State Performance Review claims that its recommendations will save California $32 billion over the next five years, and help the state solve its pressing fiscal crisis without higher taxes. Wow! $32,000,000,000.00! Manna from Heaven! Win Free Money!

Unfortunately, this claim is fraudulent, spurious, sham, bogus and fake. We've seen that the Performance Review reflects a Hollywood movie approach to state government, so let’s look at how the Star Wars special effects department fabricated the number the report uses for the biggest claimed “savings”, one that by itself amounts to $8.2 billion.

"The dark side clouds everything. Impossible to see the future is."

Recommendation GG07 “Maximize Federal Grant Funds” is supposed to benefit the State by $8.2 billion over five years. The problem now, it seems, is that California does not get its fair share of Federal grant money. The proposed solution is aggressive grant seeking under the centralized control of a new special unit in der Gövernor’s office. How do we know that the money is really there? Because, says the report:

“A recent audit conducted by the California Bureau of State Audits found that federal grants received by California in FY 2001-2002 were $5.3 billion less than an allocation based on population share alone.(fn 3) If current population data had been used to compute federal formula grants, California would have received more than $48 billion in federal funds rather than $42.7 billion actually received.”

In der Gövernor’s California, nobody reads footnotes. If they had, they would find that the audit report actually said:

“Overall, California's share of total federal grant awards is slightly less than its 12 percent share of the nation's population (population share). During fiscal year 2001-02, California received $42.7 billion, or 11.8 percent of the total amount of federal grants awarded. We reviewed the 86 grants accounting for 90 percent of total nationwide federal grant awards in fiscal year 2001-02. California's share of 50 of these grants exceeded 12 percent, providing $4.9 billion more than an allocation based on population share alone. California's share of the remaining 36 grants was $5.3 billion less than an allocation based on population share alone. Several factors come into play when the federal government awards federal grants. Some are under the State's control and some are not.”

So the Performance Review team got that $5.3 billion by counting only those cases where California got less than 12%, and ignoring all the grants that gave California more than 12%. (The technical academic word for this sort of half-quote is “dishonest.”) What passes for a special effect is really just kindergarten math: “You got an apple and I got an orange, so my fair share is half of your apple.” And why did some grants fall below the population percentage? Did our former governors fail to shake the Federal money tree hard enough? No, the State Audit Bureau report actually found (p. 11) that at present:

“State agencies are doing a good job of identifying new or expanded grant funding, using the Federal Register to identify new funding possibilities and pursuing other sources of information, such as the Web sites of federal awarding agencies."

So why don’t we get more money? The Audit Bureau report explains that California's share is below its population percentage for:

Other grants, we learn, have been lost because of differences in federal and state policies, lack of state matching funds, or failure to comply with federal guidelines. A shortage of qualified staff to handle the application process is also a problem:

“Finally, the statewide hiring freeze has limited agencies from spending available federal funds on grants staff, and a pending budget cut of 10 percent in personnel costs may further limit federal funds for staff.”

(Fade and segue to Performance Review Recommendation SO43, which is to reduce personnel costs by cutting back on replacing state employees when they retire.)

So who is responsible for the selective quotations and for taking the State Audit Bureau findings out of context? And how did they arrive at that $8.2 billion number?

"Clear your mind must be, if you are to discover the real villains behind this plot".

It seems that der Gövernor brought soft-spoken Billy Hamilton all the way from Texas to be the “Yoda-type character” behind the Performance Review. And being from Texas, Billy-Bob Yoda naturally remembered how much better things are in the Lone Star state when it came time for him to tell Californians what they are doing wrong:

“If federal grants were distributed to the states based on population share alone, an additional $5.3 billion would be received by the state. (fn 24) Texas increased the amount of federal funds it received by 6 percent in FY 2004–2005. (fn 25) If California achieved the same level of increase that Texas has achieved, it would result in an additional $2.6 billion in federal funds once full implementation has occurred.

But footnotes tricky things can be. Twisted and misrepresented, just like the others, these perhaps are? Look closely we should.

"(24) California State Auditor, Bureau of State Audits, "Federal Funds: The State of California Takes Advantage of Available Federal Grants, but Budget Constraints and Other Issues Keep It From Maximizing This Resource," p. 1. Audited numbers obtained from the audit work papers. The $5.3 billion is based on audit work papers C4.1-2.4/1."

But – that’s the same State Audit Bureau report we've seen already. The one with the other numbers that the Performance Review forgot to mention. The one that shows California would *lose* $4.9 billion from the other 50 grant programs if all grants were allocated solely on the basis of population.

"(25) Texas Office of State-Federal Relations, "Texas Federal Priorities 108th Congress, 2nd Session," p. 1. Assumption: Texas increased their federal dollars by 6% in Fiscal Year 2004-2005. The 6% is an increase of total federal dollars allocated to Texas. They went from $37.03 billion in FY 2002-2003 to $39.2 billion in FY 2004-2005. This is an increase of $2.17 billion."

Something is strange here. There's a year missing -- FY 2003-04 should come after '02-03 and before '04-05. Count correctly Yoda cannot. Let's see the original source: “Federal funds are the second largest segment of the Texas state budget, accounting for $39.2 billion, or more than one-third of FY 2004-2005 appropriations. Compared with the FY 2002-2003 biennium, budgeted Federal funds rose by $2.17 billion, an increase of almost 6 percent.” Biennium --little word meaning "two years". Little word saw Yoda not.

The fact that Federal funds in the Texas budget may have increased by 6% from '02-03 to '04-05 doesn't prove very much, and certainly doesn't support Yoda's claim that California can reap a windfall by making der Gövernor into the chief Grant-Stalker. Where's the evidence that the Texas Office of Federal-State Relations was the cause of that 6% increase, or indeed of any increase at all? Of course Texas will get more Federal money in FY '04-05, because the Feds are spending more money – Federal budget data (at p. 22) show total outlays rising from $2,157 billion in FY ’02-03 to $2,318 in ’03-04 (up 7.5%) and project an additional 3.5% increase to $2,399 billion in FY ’04-‘05. Yoda appears to be giving the Texas Office of Federal-State Relations the credit for grant increases that more likely stem from the passage of time and the regular motion of the earth around the sun.

The Performance Review takes that 6% biennial increase in Federal dollars budgeted by Texas and multiplies it by the $42 billion that California now gets in Federal grants to get $2.6 billion. This figure is then arbitrarily allocated over five years, supposedly to reflect the phase-in of the change. The five year total is the $8.2 billion. Just concentrate all the power of state government into the charismatic hands of Gövernor Grant-Stalker and the money will appear as if by magic. Cut! Where's the stunt man? That's show biz -- a meaningless calculation, an irrelevant result, and a dazzlingly huge number appears on the screen. Incredible!

And that's how the Performance Review generates the numbers to support its recommendations. What at first looks like industrial light & magic is really just the usual creative accounting, Hollywood style. Why not claim a savings from multiplying 93,000,000 -- the distance in miles from the earth to the sun -- by 98.6 -- the temperature of a healthy person in degrees farenheit? The result is about the same size, and the method is equally valid.

But government is more than theatre. You can’t shoot retakes to cure botched decisions, and you can’t fix highways with paint and paper mache. The thousands of real people in state offices whose jobs are now on the line are more than a mob of extras paid by the day. How can any responsible public official propose a total revamp of state government when 25% of the asserted savings turns out to be the imaginary product of irrelevant numbers and distorted quotes? There’s only one possible conclusion -- and this recent photograph of Billy Hamilton meeting with Governor Schwarzenegger clinches it:

“The dark side of the Force gone over to Yoda has!”

It's a wrap!

Wednesday, August 04, 2004

The Wrong Box
Welcome Back! Professor Tax has been trapped in a timewarp for the last few months, spending all his time and then some on private tax consulting projects. It's good to have real world experience (and it pays the bills), but now it's time to return to commenting on the public scene.

Governor Schwarzenegger's new State Performance Review is like a Hollywood movie set. Not even a real movie set, more like a Universal Studios Themepark version --an image of an illusion of reality. The Review is a facade, a graphic designer's idea of what a management consultant's report should look like. Many folks in the state bureaucracy worked honestly and hard to come up with specific proposals for improving state operations, but the Review is all about "centralizing", "coordinating" and "consolidating" into something "integrated", "strategic", "performance-based", ''technological" and "meaningful". All under the glorious guidance of Der Leader, whose Prescription for Change, we are told, "is dramatic and farsighted like the new Governor who called for it."

Professor Tax will say more about the details later. For now, just note how the Report proposes to dramatically change the state's organization chart. The current fragmented and disorganized chart shows lots of square boxes with the name of a California agency pasted inside each one. The sleek new chart uses twice as many fonts, and has rounded boxes instead of square ones. There aren't as many boxes, but those that remain are bigger, with several agency names fitted into each box. The new chart is so much easier on the eyes -- even the most farsighted can read it without glasses or contacts. And -- the biggest difference -- while the old chart had a box near the top labeled "Governor" just below a box labeled "People of California", in the new diagram the People have vanished, and the box atop the power pyramid is now occupied by "Governor Arnold Schwarzenegger".

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