Wednesday, January 22, 2014

From the House

Bluffton Today

The first week of session was trying, especially on Ways and Means. Each year, we begin with a forecast from our Board of Economic Advisors (BEA) that gives us a pretty good idea of what we can expect our revenues to be for the foreseeable future. This general number is revised from time to time as we go through the budgeting process. If the number is trending upward, we can look to doing a few more things on our wish list, such as building our reserves or allocating to our infrastructure investment. If it is trending in the other direction, there is sometimes painful belt-tightening. This is the beginning of a very numbers-dense, highly detailed, but utterly essential asset allocation process.

My late brother Tom was a very smart man, and a CPA. He loved numbers, but was used to dealing with folks who didn’t share that affection. He used to say that without some way to organize numbers, it’s likely to become mind-boggling, especially in a large, complex document, like our state budget. So instead of just reciting groups of revenue and different groups of expenditures, for the next two or more columns, we will use a kind of simplified thought diagram to avoid being overwhelmed.

Imagine, if you will, that our state is one big community, something like a big sub-division, with the state government acting like a Property Owners Association (POA). The POA collects dues from the residents and hires the people who keep up the roads, teach the children, police the common areas, and generally administer the things we hold in common. Also, since we are a community among other communities (other states), we have another entity to take care of the roads and bridges that connect the communities to one another, to deal with disputes between the communities, as well as protect us from those outsiders who might wish us ill. This can be thought of as the federal government. We pay dues to them to handle those things beyond the scope of our individual communities.

Our community (South Carolina) has decided that our dues will be mostly in the form of individual income tax, a tax on businesses and corporations, or by charging a surcharge on many of the things we buy, in other words, a sales tax. The BEA tells us that we are probably going to have a little over $7 billion in community income this year. Around 90% of that total is from the aforementioned individual and corporate taxes, and sales taxes. The breakdown is around $3.4 billion individual income tax, $386 million corporate tax, and $2.5 billion in sales tax.

Where it starts to get complicated is when we realize that our income varies from year to year, as we are at the mercy of macroeconomic forces that tend to diminish all our income sources at the same time, as well as increase our expenditures, while we cannot constitutionally run a deficit. Thus, our budgeting is like balancing estimates of estimates. Also, our bills don’t all come due at the end of each month, with some being brought over from previous years and some extending into the out years.

Our best answer to this built-in uncertainty is adequate reserves, whether it is the Capital Reserve Fund, General Reserve Fund, Property Tax Trust Fund, or any number of contingency funds we hold. Like most of you, we try to smooth out this fiscal uncertainty by paying ourselves first. For you, it’s IRAs or 401Ks, for us, reserve funds.

Next week, we take a look at the other side of the ledger.
Finally, please don’t forget the CODA Race4Love on 15 February in Beaufort. Go to for more info. They deserve your support.