Governor Mark Sanford's 2005 State of the State Address
Mr. Speaker, Mr. President, Ladies and Gentleman of the General Assembly, Constitutional Officers and my fellow South Carolinians:
It's an honor to be with you tonight to deliver my view of the state of our state, and if I were to boil it down, I would boil it down to a situation that is improving, but one in which we are not yet out of the woods.
The fact that our state economy and budget have been in the woods over the past few years is well known. And whether we agreed or not on each step taken to bring us through this financial storm is irrelevant to the larger fact that each of you in this chamber deserves a degree of credit for your part in bringing us through this storm.
It is my hope that that we will walk away from this experience and take steps over the next year to avoid repeating what we have just been through. Toward that end, tonight I will lay out why I believe our economy is still at risk, and why I believe it is essential we carefully prioritize what we spend – and, in fact, limit what we spend – so that we can begin to get our state finances in order. I'll then walk through five steps, two in great detail, that I think are key to strengthening our economy and raising incomes. In each choice I lay out, I think tonight is a time for choosing.
Reforms, versus the way things have always been. Spend whatever comes in, or limit our spending so that we can first pay back money borrowed in rough times. Bold steps built around changes in things that help us compete, or just more money at the problem. There are many categories of our state government that need further reform beyond the five I will discuss tonight: higher education, highway funding, domestic violence and adoption policy are just a few. But I believe this list of five requires our most immediate effort this year. I'll readily admit I don't have all the answers, no one does, but these five propositions have proven to be answers in other states, so I think they are worthy of your action.
I do know if we work together not as Republicans and Democrats, but as South Carolinians, we can make a real difference in more than the budget and the economy – but actually in people's lives. In each of the choices I'll outline, I ask that we take the road less traveled in politics, and make changes and reforms in the way things have been done for too long in our state.
Let's first look at our economy, and I think if you look beyond our borders to the national and international landscape, there are substantial threats looming that necessitate change. One, we're at war.
I don't know how the situation in Iraq sorts itself out, but I do know the war spreads a gray cloud over what happens next in any economy until it is settled. Wars are expensive, both to the soldier and the taxpayer. On the taxpayer front, we're now spending $6 billion per month in Iraq, this state's budget for the entire year, and for the soldiers in the field, the costs are far greater. Twenty-nine South Carolinians have now been killed in the fighting overseas.
I've asked Staff Sgt. Charles K. Boone to join us for the State of the State. He returned from Iraq in December and was awarded the Purple Heart for the injuries he sustained as he was fired upon while pulling fellow soldiers from a burning vehicle that had been hit in their convoy. I ask that he stand and be recognized for his valor and that you applaud his service, along with the service of every soldier, sailor, airman and marine.
Two, our federal government seems to have lost its ability to simply set priorities. The federal deficit was $422 billion this year. Add to that, the United States' current account deficit is on its way to more than $650 billion this year – about six percent of the country's GDP and that's relevant because a five percent reading for any third-world nation normally is enough to trigger an IMF intervention.
Our net international debt is approaching 300 percent of annual exports. Again relevant because countries like Brazil and Argentina saw their net indebtedness rise to only slightly more, around 400 percent of their national exports, at the height of their financial crisis.
As a consequence of all of this, we're seeing a dollar that's on increasingly shaky ground. Those are just the current events facing our national economy. More disturbing, frankly, are the longer trends. Robert Samuelson of the Washington Post recently wrote a fascinating column talking about four long-term trends, all of which negatively impact the driver of our national economy, consumer spending. His points were the following: One, the economy is bound to lose the stimulus of rising consumer debt.
Household debt, which ranges from home mortgages to credit cards, now totals about $10 trillion, or roughly 115 percent of personal income. In 1945, debt was about 20 percent of disposable income. For six decades consumer debt and spending have risen faster than income. Debt, as we all know, can't permanently rise faster than income, and given their age, baby boomers must at some point soon begin to repay mortgages and save for retirement, which will mean less consumer spending.
Second, the benefits of defeating double-digit inflation are fading.
In 1979, inflation peaked at 13 percent. Now it's 1 to 3 percent, depending on the measure. The steep decline led to big drops in interest rates and big increases in stock prices. Stocks are now 12 times higher than their 1982 level, and with that some people felt wealthier and spent – others were able to borrow and spend – but mortgage rates can't fall again from 15 percent, which means once again, lower consumer spending. Third, the welfare state, what I call government transfer payments, at the federal level is growing costlier. It's been covered in the past by defense shrinking as a share of the federal budget, but now as baby boomers retire and we look at higher defense spending based on global engagements, paying for future benefits will require higher taxes, bigger budget deficits or deeper cuts in other programs, all of which could hurt economic growth and consumer spending.
Four, the global trading system has become less cohesive, and, in many ways, more threatening.
Let me just make this point: the end of the Cold War – and the addition of the former Soviet Union, India and China into the trading system – has effectively doubled the global labor force from 1.5 billion to 3 billion. Ask any textile worker in the Upstate about this, and they'll tell you it's not at all an abstract concept.
This is not a commentary on global trading, but it is a commentary on the fact that there are four major economic pressures, each of which will likely slow consumer spending in the future, and that could produce a dramatic drag on the state's economy. All of these things point to the need to put our financial house in order rather than fall to the political temptation to spend every new dollar that comes into Columbia.
I can't emphasize enough how important I think it is we start paying back money borrowed from trust funds before we add new and additional spending. For this reason we proposed that new spending not increase at a faster rate than inflation and the growth of our population, and this allows us in our budget to pay back about $200 million of the $400 million owed to trust funds.
I'd ask you do the same because it is a time for choosing, and if we don't choose to hold this line on spending our government in South Carolina will be growing faster than the people who pay for government.
Walter Edgar's book on the history of South Carolina chronicles the many times that South Carolina has been caught up in events much larger than our state and, in every instance, whether through war, hurricane, fire or the boll weevil, we've survived. We're a hearty lot, and we'll survive these challenges I just outlined, but the question of the night is not can we survive, but how do we thrive?
The underlying precept of this administration has been that to prosper and to thrive economically and academically, things have to change. That has to be our path. What I am encouraged to say is that we have most certainly begun that process because many of you in this room are pushing for change. I could name a lot of you, whether a Democrat like Herb Kirsh or Republicans like Gary Smith or Rex Rice – but the point is thank you. At times it's been painful, at times it entailed steps much smaller than many of us would have liked, but we've definitely begun that process.
Whether it's through commerce reform, campaign finance reform, the debate on bobtailing, DMV restructuring, change of Senate rules, eliminating pass-throughs in spending, pork and barrel on spending, paying back the $155 million deficit or our new budget approach – we've begun.
But the question is how do we get to a place ten years from now where we're thriving, given the fact that globalization and the Internet are here, and we're directly competing with 1.2 billion Chinese and 1 billion people in India?
Michael Porter, the competitiveness guru from Harvard, thinks the answer, quite simply, is to get more competitive.
Whether in war, whether in sports, whether in business, or in our case in government, you thrive, you do well, by honing your competitive advantages.
On this front, let me walk though the five things I alluded to a few moments ago, some of which are familiar themes that I've talked about for the last couple of years, because I think they're crucial to our state's ability to compete in the global market.
One, we've got to look at our tax load, and always ask the fundamental question, how can we lighten it?
That central question is tied to two basic principles. One – do you believe individuals in South Carolina are better at spending their own money than we are in the political process? Fundamentally, I do. Two – do you believe that the private sector can allocate capital better than the government? Once again, fundamentally, I do.
Now, given the jobs and income picture in our state, it's important we focus on tax changes that would have the greatest impact in creating jobs. That's what the income tax cut we have proposed is all about, and I want to thank Bobby Harrell and David Wilkins, along with the entire Ways and Means Committee, for so quickly moving this bill this year. I also thank everyone in the House who was a part of passing it last year.
I'd also thank every Senator who voted for this proposal last year. For the two Republican Senators who didn't vote for it, or Democratic Senators and new Senators uncertain about their vote, I'd ask you to think about how competitive the world has become on tax rates and how it is not a party, but an economic competitiveness, issue. Did you know, for example, that there is effectively no capital gains tax in China? Did you know the flat tax on earned income in Moscow, the former capitol of Soviet communism, right now is around 13 percent? Or that in Slovakia, a little country about the size of our state and formerly trapped behind the Iron Curtain, they've seen $10 billion of direct investment since 1999, and that they agree it's in part because of their flat tax of 19 percent?
I believe if pieces of the former Soviet Union can be competitive on taxes, we can in South Carolina as well. And so I would ask you to pass the income tax bill that will soon be before you in the Senate. It's an installment on larger tax changes still necessary to make us more competitive.
When talking about new jobs in South Carolina, obviously our Department of Commerce has a role and they've done a remarkable job. With 25 percent less in expenditure and personnel, they've gone from $1.2 billion of investment last year to $2.6 billion of investment this year. We need more in government to emulate their efforts of doing more with less. Higher productivity and added value are the essence of competitiveness. Here is how the income tax cut would help job creation in our state:
1. With small business – Most of the jobs created in our state come from small businesses, yet we penalize those small businesses in what they pay in taxes – and tax large corporations at a lower rate. Corporations pay 5 percent; the little business struggling to make it pays 7 percent. This doesn't make sense to me and our proposal effectively equalizes the rates. I wish we could bring the rate from 7 to 5 percent immediately, but this compromise is a great start that mirrors what the Democratic Governor of New Mexico recently signed, and would help move us toward the kind of job start and employment numbers you see in the states more competitive than we are in income tax. The bottom line is we want to see more little businesses make it. The entrepreneur with a dream, the lady who puts a second mortgage on the house to start the business that had to wait until after the kids finished school, the fellow covered in grease still repairing lawn mowers at half past seven on Friday – these are all economic heroes and they deserve our help.
2. With Retirees – One of the mega trends in American society is the retirement of 60 million baby boomers. Whether we do well or poorly in attracting them here is tied to how attractive we are as a state on many fronts, including our taxes. This is a huge economic engine in McCormick County, up at the edge of the mountains, at Santee and along the coast – and we need to grow it.
3. With management teams – Bob Faith is tired of fighting with one arm behind his back to attract corporate offices to our state. We do well in attracting distribution or manufacturing facilities, but we have to go to the next level and attract the home office. That is one of those decisions that is based not just on how it affects the corporation, but on how it affects the wallets of senior management. Once again, our income tax here is keeping us from being competitive.
And so it is again a time for choosing, between a tax system that holds us back and a tax system that allows us to better compete with the rest of the world.
Second, we must become more competitive in education. I believe passionately in education. I believe passionately in public education, and I'd say 'Thank You' to every teacher, principal and administrator out there trying to make a difference in a young person's life. If you send someone out into the 21st century workforce without a first rate education you are literally doing the equivalent of sending them into battle without a gun. You cannot thrive, you cannot prosper, without a grade 'A' education in today's world – particularly since, as I just mentioned, 1.5 billion new entrants have come into the workforce in the last twenty years.
Part of the solution lies in funding, but I think a bigger part of the solution lies in marketbased reforms to the system itself.
First, on the funding front, I think that this administration has done a good job of trying to provide more resources to public education and in working to try and make sure more money gets down to where it will make the biggest difference – with teachers and in the classroom.
In fact, in the two budgets enacted before this administration took office, the total education budget in this state increased by $11 million dollars – an average of just $5.5 million dollars per year. In the two budgets since our administration took office, the total education budget in this state has increased by over $230 million dollars. Credit for that also belongs to Republican budget writers in the House and Senate. This year my budget proposes adding another $100 million dollars to K-12, and all told, the BEA estimates that education funding in our state will top $9,800 dollars per student in the 2005 budget, $9,800 dollars – that's up from about $4,000 twenty years ago and $7,800 just five years ago.
But we have to compliment that funding increase with reform. Some of those reforms you've already begun – for example when you passed the landmark accountability measures of a few years ago. More reform is key, though, because our current system often works against the efforts of a lot of great teachers and doesn't get money to some of the places where it is most needed.
We ultimately have to answer this question: if you live in a world of transformative change, wherein you literally are competing with the likes of China and India in a way that we never have before, can you afford incremental change in something as important as education? As we all know, our founding fathers were very deliberate in setting up a political system that could only move in incremental steps. Any legislatively-wrought change in education will be incremental – though we are in a world that has literally been turned upside down with globalization and the Internet. In fact, politics are very unlikely to change certain long-rooted traditions of our educational past.
I'll give you an example. There was a budget study a few years ago that showed that we could save $20 million dollars if we simply raised the minimum school district size to 2,500 students. We've in fact proposed doing this in our executive budget. In many parts of rural South Carolina, the school district lines go back the 1950s, with the black school district and the white school district. But in those very same parts of South Carolina do you know how much chance there is of changing those districts? About zero. Similarly, we proposed in our budget the Democratic leadership position to require teachers who receive National Board Certification and the $7,500 raise with it to teach in critical need areas or subjects, and yet I have my doubts either one of those ideas will make it through the political process. That's why I continue to believe that what politics won't change, market forces can change.
This is the reason that I'm so interested in this notion of school choice. Said more simply, "If we keep on doing what we've been doing, were going to keep on getting what we've been getting."
I won't chronicle all of the challenges in our educational system, we know they're there – but then again do we? It strikes me that to most people the numbers are abstract, but do we know what they mean in human terms? For instance, we are 49th in the nation in the percentage of kids that don't make their way through high school. One-half of all the kids transiting our educational system don't make it. That, one student at a time, in human terms, is a disaster. There are good people in our state, and I don't think that if people really comprehended the faces behind these numbers that they would accept any system that perpetuated this kind of outcome.
It is with these numbers in mind that I believe in borrowing ideas that work, and that is what got me interested in the notion of educational freedom. In every state that offered more choices to parents, performance went up. Greater latitude to teachers and principals also seemed to yield better results.
Let me give you a little more detail on one of those places. In Milwaukee, there has been a transformative impact as a result of school choice in the lives of poor and overwhelmingly black kids in the inner city of Milwaukee. I don't know why we wouldn't want to bring that success story to South Carolina.
In Milwaukee, several things happened. One, public schools got better.
There are approximately 100,000 students in the Milwaukee public school district, and up to 15 percent are allowed to participate in the school choice program. On a per student basis, the choice program receives only half the funding that traditional public schools receive. For every child who attends, more money is available for students in the traditional public school. Acceptance is simply by lottery to any child whose family's income is below 175 percent of the poverty level. Because of overwhelming demand, it has grown from 337 students in 7 schools in 1990, to the full cap of approximately 15,000 students in 130 schools today.
As the choice program has grown, public schools have done better. Not surprisingly, first, because there was competition, and second, the kids for whom the public school system was working stayed and the kids for whom it wasn't working left to attend one of the many school choice options. That left more time for the teachers in existing public schools to concentrate on the remaining students.
The big point here is that public schools, existing public schools, actually got better. All this makes common sense to me because adopting choice in Milwaukee or South Carolina is fundamentally a question about whether you believe in the free market enterprise system. In the history of man, I don't know of a product that has not been made better when subjected to the forces of competition.
Can you imagine accepting the notion that you could only buy Dell computers and Ford cars? Or your gas at one station? Or your clothes at one store? That farmers could only drive John Deere tractors? Every one of those markets are made better because there is competition.
Two, schools in the choice program are smaller and generally have a high degree of discipline. For instance, they overwhelmingly wear uniforms.
Lets be clear about this – buildings don't teach, teachers teach. And so, in these small schools of about 100 kids, they often times improvise in warehouse flex space, an office park or a church building – in all kinds of settings. And while there is less focus on the building, there is more focus on making sure that dollars are spent in the classroom.
The Bill and Melinda Gates Foundation has recognized the direct correlation between small school size, or neighborhood schools, and academic performance. For that reason, they have allocated $2.2 billion to their small school initiative. In Milwaukee, market forces have created what we're trying to create legislatively. Ronnie Townsend and Joel Lourie's Neighborhood Schools Bill, which we signed into law last year, is all about what the market has already done in Milwaukee. The Teacher Protection Act was also all about greater discipline in the classroom – discipline that already exists in these small school settings in Milwaukee.
Three, education dollars went further.
This is the intent of our SMART funding bill and the backpacking proposal included in our executive budget – to give local principals and local teachers more discretion on how they spend the money. It happens every day in 137 schools across Milwaukee. Four, dropout rates fell.
One of the biggest things we can do to improve economic conditions in South Carolina is to have more people graduate from high school.
At the common sense level, what works for one child may not work for another. One thing Jenny and I have seen with our four boys is how different they are from day one, despite the fact that they come from the same nest and same home setting. They're remarkably different, and I think it's important that we recognize that level of diversity within our educational system.
Fifth and finally, people were empowered.
While I'm attracted to this idea because I believe in the market's ability to improve a product and lower the price of that product, probably the more powerful reason to embrace Put Parents In Charge, and this larger notion of school choice, is tied to the fact that it is truly a progressive idea.
The heart of the old Democratic Party was built on the progressive concept of bringing options and opportunities to people who didn't have them. For that reason, the Democratic mayor of Milwaukee, John Norquist, embraced the idea. It's for that reason that Anthony Williams, the Democratic mayor of the District of Columbia, has embraced this idea. It's for that reason that Professor Howard Fuller, the former superintendent of the Milwaukee educational system, not only embraced the idea but has created the Black Alliance for Educational Options, because he believes educational choices bring with them the chance to transform people's lives.
I personally saw those lives being transformed when I was at the Marva Collins School in Milwaukee. Ninety-six percent of all the students are minorities. Seventy-three percent of them come from single-parent households. As I mentioned earlier, a lottery determines admission, so it is pure chance – others call it grace – but, for families who make it into that school, tears of joy are shed because they know the implications. Can you imagine tears being shed because you got into the public school in Allendale or Marion?
This is a gut-check vote and indeed a time for choosing, I believe, on the degree to which we care about not only making changes so that our state can compete on the international playing field, but, more importantly, about making changes that can transform people's lives.
For the state, and for the sake of these kids' lives, I ask for this bill's passage. Third, we must be more competitive in structuring our government.
High cost government serves no one's purposes and makes us less attractive for private investment. We cannot go on spending money as we do and be competitive. We cannot go on with our current structure and be competitive.
We cannot go on with the lack of accountability inherent in our structure of government and be competitive.
To each of you here in the legislative chamber, I would just make two points. One – you know our proposal – to simply allow voters the chance to give their opinion on their government's structure, better integrating our public healthcare delivery system and much of the administrative oversight now handled by forty-nine other governors – I ask you not water the proposal down so that it is restructuring in name only. Quite literally, the chance to better the services of government and lower the cost of government is in your hands. It is indeed a time for choosing because no issue this year speaks more clearly to our willingness to confront or ignore the changing needs of our state.
Before I leave this subject, I do thank Glenn McConnell for the way he has consistently spoken out in support of what we have proposed. In the same vein, I want to commend Yancey McGill and Kent Williams for the way they demonstrated courage in the debate on Senate Rules. People like Greg Gregory and Greg Ryberg have as well shown a real willingness to lead on the subject of restructuring, and I simply ask you join them. And I want to add one other thought.
We need to take steps to reform the state retirement system. During the last administration it was recklessly added to with no serious look at the financial ramifications, and, as a consequence, its indebtedness has spiraled by a staggering 2,000 percent to $4.4 billion over the last five years. At present it is simply a ticking time bomb for state retirees, and if we stay on our present course the cost of living adjustments they had counted on won't be there. Your Comptroller General, Richard Eckstrom, deserves great credit for the way he has highlighted this problem. We have proposed a number of solutions in our budget – and we need to take action this year – but a big part of the solution I believe is in moving new employees from a defined benefit plan to a defined contribution plan.
Fourth, our present legal system is neither fair nor efficient. It needs real reform. Those small business folks I was talking about just a little while ago tell me they can't be competitive and create new jobs unless changes are made. Folks at the hospital where Jenny had all four of our boys tell me the same thing. I believe it is time to follow the other twenty-six states that have modified their legal systems over the last few years, or get ready for a lot of U-Haul trailers headed down I-85 or I-95 with jobs and investment bound for some other state that would have come here if we had changed things.
Once again, it is a time for choosing – between a legal system that hurts small businesses and their chances of competing – and changes that have already been made by half the states in this country.
Finally, there is one more choice before us tonight. Do we enhance the quality of life in South Carolina? I believe quality of life is the last key in our state's ability to compete and thrive.
Richard Florida recently wrote a book called The Creative Class and its premise was that new wealth creation in the 21st century will not come from production, given the relatively inexpensive nature of production from the Far East and third-world countries, instead it will come from the creative process of redesign, marketing and actual invention of a product. This group, which he calls the creative class, is mobile and will gravitate toward areas that have a high-quality lifestyle, which is obviously comprised of many things but let me highlight a few:
1. How do you look and feel as a state? Elizabeth Hagood, chairwoman of the DHEC board, and Mike McShane, chairman of the DNR board, both deserve credit for the way they constantly remind me that quality of life is worthy of continued focus here in South Carolina.
The Vought-Alenia management team ultimately chose Charleston over Mobile and other places around the country because there was a better quality of life. Retirees in many cases come to South Carolina because we don't look like South Florida. So on this front it's worth highlighting a few of the things that happened this year that will make a difference in our ability to compete in this arena.
First, we had a real win this year with the Conservation Bank; you fully funded it and deserve credit for doing so – thank you for that.
We also had a big win on quality of life with the Bonneau Ferry acquisition, and I want to thank former Senator Hollings, DNR director John Frampton, John Luke and the extended "Westvaco family," and Father Kline and his team at Mepkin Abbey for all they did to advance conservation in South Carolina.
2. Another part of quality of life in South Carolina is law enforcement. It is a building block to any functioning society. It's for this reason we proposed adding 425 new law enforcement officers in our budget this year. We have had a law enforcement deficit over the last couple of years, and I'd ask you help alleviate it in the House and Senate budgets.
I also want to say thank you to that same law enforcement community, the emergency response team, folks at the Highway department and the Guard for all they did as we dealt with what seemed like a hurricane a week for five weeks this past fall – and more recently the situation in Graniteville.
3. To be competitive in keeping creative people, you don't run over them on the road. Far too many people are killed in South Carolina by drunk drivers. Our .08 legislation needs to be fixed, and I think there is a real conflict when people in this chamber make money as lawyers as a result of the current system – and then stymie efforts to strengthen .08 legislation. I know JoAnn Gilham and Mothers Against Drunk Driving join the law enforcement community in asking you to change it.
4. Moving our health care system toward more prevention, rather than simply the treatment of illnesses, is key to being competitive. I ask you fund the new prevention grant, cervical and breast cancer screening and cancer research requests we placed in our budget.
5. Next I'd say I can't emphasize enough the importance of each one of us taking steps to become more active. Lifestyle – not money – could add years and quality to every one of our lives. We rank 47th nationwide in overall health while ranking 11th in public health care spending per capita. Nearly 25 percent of South Carolinians are classified as obese. We rank 12th in the nation in number of adults without physical activity.
It was with these statistics in mind that I proposed a Family Fitness Challenge last year to raise awareness on the importance of every one of us being just a bit more active. In this chamber last year, I proposed kicking it off by riding a bike across the state with whoever would join us. We will match that with another bike ride, some rafting on the Chattooga with my friends at Wildwater and a road race here or there this year because I'll go as many places as time permits to join South Carolinians willing to invest the energy into making a difference in their health.
On all these activities Jenny and the boys are with me. The boys don't know better and usually think it is kind of fun, Jenny does – and whether riding a bike across the state or working on a budget – she is there as my best friend and supporter. It is something I need in this role, and I'd ask you join me in thanking her for her real commitment to our state. Finally, while on the subject of thank you's let me just end with a couple more.
I want to thank Bobby Harrell, Hugh Leatherman, David Wilkins and Glenn McConnell for their work to pass the Fiscal Discipline Act. I think it was absolutely key to paying back the $155 million deficit that I think was unconstitutionally borrowed. Two, I want to thank those same folks, and Republican and Democratic members of the related committees, for the $100 million in savings adopted from last year's executive budget. I sent a longer list this year!
In fact, our budget represents a different approach to budgeting in South Carolina government that is built on what Michael Porter has encouraged, moving resources from low-growth sectors to high-growth sectors. It is yet another step toward becoming more competitive.
My final thought for the night on this notion of our state being more competitive, whether a financial storm comes our way or not, would be that if you get the chance read Russ Crosson's book, A Life Well Spent. It was given to me by Pat McKinney, a longtime friend, and it talks about the lasting difference each of us could make if we invested more time and energy in those closest to us. In that regard, going back to some of the things we used to be better at as South Carolinians might just be the sixth key in our ability to compete effectively in the 21st century. Taking your son to his Cub Scout meeting or your wife to dinner, visiting your grandparents for Sunday church or going to your daughter's soccer game can set things in motion and fix problems no government program will ever be able to fix.