The news out of the free-spending, over-indulged, southern-tier European countries just keeps getting increasingly calamitous. It seems that our Spanish compadres have, between Sunday afternoon bullfighting festivals and Saturday evening rounds of sangria, been studiously following the teachings of Understanding the Balance Sheet for Dummies: The Goldman Sachs Edition.
Spain is one of the most decentralized countries in Europe. It is administratively divided into 17 autonomous regions, themselves comprised of 50 provinces that are further partitioned into municipalities. While the central government has been struggling to implement fiscal austerity measures and withstand massive civil protests in reaction, the provinces and municipalities have been busy concealing a dirty secret.
Not only have the regional governments collectively breached their centrally imposed budget targets, but it was discovered that the Catalonia province had, for some time, stopped paying many of its bills. Certain municipalities were over two years in arrears on some of their obligations. Obviously, the Chicago Tribune is widely read amongst the Catalans.
The "discovery" came amid the aftermath of last November's regional election in Catalonia, where the ruling Socialist Party was ousted by the CIU Party, which ran on a platform of autonomous tax collection. Catalonia is one of the country's wealthiest regions with an economy the size of Portugal, and claims it sends more money to the central government than it receives. Similar tensions are high in other regions as well.
All of Spain's municipalities and 13 of its 17 autonomous regions held elections yesterday, and the opposition Conservatives routed the ruling Socialists in their biggest defeat in 30 years. During last week's run-up to the election, evidence surfaced from companies that do business with all three branches of government that shows a pattern of widespread, unrecorded debt, and pressure from government agencies to keep billing off the books. And the fear is that as the new regional and municipal governments assume office, other bookkeeping shenanigans will come to light, further pressuring the central government. Stay tuned.
Similar Song Across the Pond
One of the central questions playing out in Spain is an important one: to what degree, if at all, should local governments be subsidizing the federal government's redistribution of municipal taxes to their detriment? A report last Friday out of Fitch Ratings reveals a similar battle line being drawn between U.S. states and their cities.
The report focuses on the rising incidence of "intergovernmental downloading." Not to be confused with interagency software swapping, intergovernmental downloading occurs when the financial burden for a service is shifted from a higher to a lower level of government without an accompanying funding source. In effect, this raises a city's cost of operations, and can become a tax increase and/or service cut in disguise.
As the economic malaise in the U.S. grinds on, states are left with fewer and fewer areas to cut spending and close budget gaps, and aid to cities is an obvious target. Taxes such as income, excise, use, and fuel are paid by local residents and sent to the state treasury, and cities are loudly decrying any cut in the amount returned to their communities. It is easy to imagine cities and municipalities revolting against state legislatures and demanding to keep a greater share of this tax revenue.
With many poorer districts relying heavily on state subsidies and transfer payments to fund education, any cutbacks in support could further polarize the disparity in public service quality between counties and drive out residents seeking better schools and services. In turn, the tax base shrinks and a downward spiral of civic decay ensues. This is the feared "declining city" cycle that has taken hold in some U.S. cities.
The Fitch report also raises concerns about the ability of a growing number of cities to repay their bonds and maintain access to credit markets at affordable rates should states continue to cut aid to cities. The pressure on the municipal bond market is likely to increase as a result. This is another area we continue to monitor.
A variation on this theme of government friction comes from Casey Research Washington correspondent Donald Grove, who brought the following article to our attention. One of our recurring narratives in this space is that the primary mission of every government appendage seems to be nothing other than the expansion of its size and the stretch of its meddling. The following hare-raising tale is Exhibit A.
Family Facing $4 Million in Fines for Selling Bunnies
By Bob McCarty
About six years ago, the Dollarhites wanted to teach their teenage son responsibility and the value of the dollar. So they rescued a pair of rabbits and, before long, things were literally hopping on the three-acre homestead 30 miles south of Springfield, MO, and Dollarvalue Rabbitry was launched as more of a hobby than a business.
At first, some of the bunnies were raised and sold for their meat. Later, they determined it was more profitable to sell live bunnies at four weeks old than to feed bunnies for 12 weeks and then sell them as meat.
During the summer of 2009, the Dollarhites bought the rabbitry from their son who had grown tired of managing it. Things kept growing, however, and the Dollarhite's landed a pair of big accounts in 2009.
A well-known Branson theme park, Silver Dollar City, asked the Dollarhites to provide four-week-old bunnies each week to their petting zoo May through September. When the bunnies turned six weeks old, they were sold to park visitors. The local branch of a national pet store chain, Petland, purchased rabbits from the Dollarhites as well.
By the year's end, the Dollarhites had moved approximately 440 rabbits and grossed about $4,600.
Then some unexpected matters began demanding their attention.
In the fall of 2009, a female inspector from the U.S. Department of Agriculture showed up at the front door of the family home, wanting to do a "spot inspection" of their rabbitry. She said she had come across Dollarhite Rabbitry invoices while inspecting the petting zoo at Silver Dollar City.
"She did not tell us that we were in violation of any laws, rules, anything whatsoever," John said, explaining that the inspector said she just wanted to see what type of operation they had. Having nothing to hide or any reason to fear they were doing anything wrong, the Dollarhites allowed the inspection to proceed.
John's wife Judy took the inspector to the back of their property where the rabbits were raised. There, the inspector began running the width of her finger across the cage and told the Dollarhites they would need to replace the cage, because it was a quarter-inch too small and did not meet federal regulations.
Such a requirement came as a shock to the Dollarhites, because they had just invested in new cages to ensure the bunnies had a healthy amount of space to develop, John explained.
Not only was the cage too small, according to the inspector, but she noted a small rust spot on a feeder and cited it as being out of compliance. When the Dollarhites told the inspector that rabbit urine causes the cages to rust and that they worked hard to keep the rabbits cages in top shape, she told them it didn't matter. The rust spot would count as an infraction.
The inspection ended with the inspector telling Judy that the rabbits looked healthy and well cared for.
After the inspection, the Dollarhites didn't hear from the USDA again until January 2010 when they received a phone call from a Kansas City-based investigator from the USDA's Animal and Plant Health Inspection Service.
"He called us and said, 'I need to have a meeting with you and your wife,'" John recalled. He asked the investigator about the purpose of the meeting.
"Well, it's because you're selling rabbits and you've exceeded more than $500 dollars in a year," John said, "and I went, 'Okay, what does that have to do with anything?'"
John said the investigator refused to discuss details over the phone and made it clear that rejecting his request for a meeting would be a costly error in judgment.
When Judy asked if they should have an attorney present, the investigator responded, saying, "Well, that might be a good thing."
John found an attorney who is also a farmer. They met for the first time a couple of days later - at the same time both met the APHIS investigator at John's home.
"The first thing (the investigator) said was 'My name is so and so, I've been in the USDA for 30-plus years, and I've never lost a case,'" John recalled, continuing. "He said, 'I'm not here to debate the law, interpret the law, or discuss the law, I'm here just to do an investigation.'"
John said the investigator went on to explain that he would ask questions, write a report based on the answers, and send that report to his superiors at the USDA regional office in Colorado Springs, Colo. John was told to contact the regional office if he had not heard anything in six weeks.
Eight weeks passed, and John decided to call Colorado Springs. He was given the number to a USDA office in the nation's capitol. He called the new number, and the lady he reached there was blunt, John said.
"She said, 'Well, Mr. Dollarhite, I've got the report on my desk, and I'm just gonna tell you that, once I review it, it's our intent to prosecute you to the maximum that we can' and that 'we will make an example out of you.'"
When John once again tried to determine which law he and his wife had violated, he said the USDA lady replied, "We'll forward you everything."
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