The Louisville Courier Journal is at it again. Kentucky's ever-expanding state budget includes $1.5 billion in new debt and we already have the third-highest debt load of any state.
Given that, the Courier Journal can only imagine squeezing Kentucky taxpayers for more:
"The temptation is to say all's well that ends well and move on, but Kentucky can't move on. The state is trapped in a revenue shortage made worse by the General Assembly's refusal to expand gaming or to raise cigarette taxes."
Forcing politicians to prioritize is the way out of our fiscal doldrums, not digging a deeper hole.
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THINGS TAXPAYERS’ OUGHT TO KNOW!
MAY 12, 2000
Analysis and Review
Ron Carson
From Foresight, Vol. 6, No. 4
published 1999
The likely status of the current and future Kentucky state budget has generated a great deal of public discussion recently. Much of this public debate has derived from Governor Patton indicating, for some time, that the 2000-02 biennial state budget will be “very tight.” This characterization has raised questions in the minds of some as to how this could be, given the robust national and state economies and the existence of large state surpluses in recent years. The purpose of this brief essay is to provide a frame of reference to help answer that question and inform the issue.
Problem: The Numbers Don’t Work
The Budget Outlook.
An already-bleak revenue picture was exacerbated even further when, over the two-month period from August 15 to October 15, the General Fund revenue planning estimates changed in the preliminary forecast
Thus, within 60 days, a cumulative (three-year) revenue change amounting to a negative $123.3 million accrued. Incorporating these new, lower projected revenues, the basic General Fund budget numbers from the state budget office, as of the end of October.
Several points should be noted about these numbers.
First, the Consensus Forecasting Group, a panel of state government and university economists statutorily charged with making the revenue forecast, in its preliminary forecast of October 15developed the numbers displayed on the revenue estimate line, but as can be seen, the downward revision in the current fiscal year (FY 2000) revenue estimate results in a budget imbalance which, if uncorrected, would result in a deficit at fiscal year's end. For this reason, the Patton Administration has recently put all state agencies on notice that they must develop budget cutback contingency plans for possible budget reductions at three levels: 1 percent, 2 percent, and 3 percent.
What are the contributing factors to what, arguably, now appears to be the most difficult state budget since the cutback era of the 1980s?
The Reasons for the Problem
Tax Cuts.
Beginning in calendar year 1995, state government initiated a number of tax cuts that have reduced the General Fund revenue base of the Commonwealth.
By fiscal year 2004, the fully phased-in effect of these various cuts will amount to $282 million, or about 3.6 percent of the General Fund revenue base.
These tax cuts include increasing the income tax’s standard deduction from $650 to $1,700, instituting both private pension and IRA exemptions in the individual income tax, expanding the inheritance tax exemption, reducing the automobile property tax, abolishing major parts of the tax on intangibles (including certain stocks), and creating a tax exemption in the corporate income tax for employee training.
It should be noted, however, that these tax reduction measures substantially understate the loss of available state revenues because they do not include the elimination of the health care “provider tax” on physicians and pharmacists or the reduction in the motor vehicle usage tax.
This is because, in an accounting sense, they are separately accounted for outside the General Fund revenue base.
Nevertheless, there is a substantial and additional adverse impact on the state’s Medicaid budget, estimated to be $15.3 million in fiscal year 2002, resulting from the need for a General Fund appropriation to offset the loss of such “provider tax” revenue.
The Problematic Revenue Base.
The two major General Fund tax sources that are a reflection of the economy, the sales and use tax and the individual income tax, comprise about 75 percent of the General Fund revenue base. Those two taxes grew from fiscal year 1998 to fiscal year 1999 by a combined 5 percent rate, almost 2 full percentage points above the overall General Fund growth rate of 3.1 percent in fiscal year 1999
By contrast, the All Other Revenue category, which encompasses over 60individual taxes and revenue items comprising approximately 25 percent of the General Fund base, actually declined by almost 2 percentage points in fiscal year 1999 as compared to fiscal year 1998.
General Fund Revenue Analysis
Thus, while the Commonwealth’s two major taxes continue to perform well (and actually exceeded their original growth estimates), the “negative growth” drag of the All Other Revenue category has resulted in very sluggish actual General Fund revenue growth of 3.1 percent for fiscal year 1999 and estimated growth of 3.7 percent for fiscal year 2000.
The Continuation Budget:
The Baseline and “Requirements.”
The expenditure side of the state budget related to “continuation appropriations” can be conceptually viewed as having two component parts:
1) the “baseline,” i.e., the cost of continuing currently-budgeted programs and activities assuming no policy changes; and, 2) the additional costs on top of the baseline which include items not in the current spending authorization but which can be considered “required” because of previous policy actions.
The baseline budget calculation parameter being used for the 2000-02 biennium incorporates a forecasted CPI-related growth factor of 2.4 percent per year for all state agencies. Within this 2.4percent growth parameter, all salary adjustments, health insurance and retirement cost increases, and all other fixed costs must be accommodated. The budget “requirements” add-on to the baseline encompasses policies such as meeting the statutorily-established goal of returning a larger percentage of coal severance tax receipts to counties, providing for the maintenance and operation of authorized state and postsecondary education facilities whose construction is underway and which are scheduled to be completed and come on line in the upcoming biennium, providing for the continuing phase-out of the health care provider tax on pharmacists, providing for already-authorized Teachers’ Retirement System benefits, providing for an increase in the state prison population, and providing for increasing percentages of lottery proceeds being earmarked for postsecondary education student financial aid.
Thus, while baseline budget growth can be easily accommodated within projected revenue growth, after accounting for the requirements add-on, projected appropriations substantially exceed currently-projected revenues; i.e., spending more than taxes collected.
How to Bring the Budget into Balance---The Balancing Options.
As with any public budget, there are only three ways to bring the 2000-02 biennial state budget into balance: 1) increase the resource side; 2) reduce the appropriations side; or 3) some combination of both. On the resource side, the state currently has approximately $240 million in its Rainy Day Fund but, of course, this is a reserve of one-time money. Once spent, it is gone and no longer available. Moreover, the existence of this state government “savings account” balance is the principal reason that the national credit rating agencies in New York have recently upgraded the state’s credit rating. On the immediate horizon, the Commonwealth is estimated to receive approximately $120 million in recurring revenue per year from the recent National Tobacco Settlement; however, in the minds of many, a substantial portion of these funds should be programmed to meet long-term needs in the areas of agriculture/rural development, health care, and children’s programs. Additionally, certain “agency funds,” possibly including adjustments of the funding source for certain activities now supported by the Road Fund, could be utilized to help underwrite the General Fund in any balancing plan.
Beyond utilizing this type of funds, however, a new source of continuing General Fund revenue would be needed to balance the budget strictly on the resource side.
On the appropriations (i.e., spending) side of the budget, options include suspending or adjusting, for the upcoming budget period, certain statutorily mandated items, e.g., the 5 percent annual salary increase for state employees, delaying the opening of some new facilities scheduled to come on line, limiting growth in payments the state makes to local school districts, non-profit organizations, and local government units, or limiting the growth in various benefit programs such as Medicaid.
Obviously, options of this nature involve very tough policy choices.
Conclusion
As this essay has attempted to demonstrate, the current budget problem is real. Moreover, it is going to be very difficult to forge an acceptable plan to balance the upcoming state budget in the 2000 Session without confronting very difficult policy choices. However, notwithstanding this immediate fiscal dilemma, the Governor and the General Assembly have recently established a strong partnership on a variety of financial management initiatives, including consensus revenue forecasting and maintaining a structurally-balanced budget and a Rainy Day Fund.
Balancing the 2000-02 biennial state budget will present an enormous challenge to these important financial management principles against the backdrop of what will almost certainly be an environment of budget instability and policy conflict.
In the final analysis, the ultimate balancing plan will almost surely include some amount of additional resources [tax increases] to benefit the General Fund combined with a reduction in projected appropriations [state expenses & expenditures].
Remember. In 1995 recommendations to cut appropriations (expenses) by $1 billion over 5 years. However, not very many tax cuts made by legislature, only those that were politically expedient, but not $1 billion in cuts as recommended.
On tax resource side a number of political expedient recommendations were implemented made by two task force commisisons; i.e., Commission On Quality & Efficiency and Commisison On Tax Policy.
Bill Huff
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