Consensus Forecasting Group Mtg - 8/15

Guest post by Rachel Phelps Bayens

The Consensus Forecasting Group (CFG) met for most of yesterday afternoon, reviewing tax receipts and determining which economic models will best forecast Kentucky's revenues for the next several years.  This meeting follows last week's CFG meeting when the group of non-partisan economists met to look at economic trends and national forecasts setting the stage for yesterday's meeting.  At the end of the four hour meeting, the CFG chose to use the "control' scenario for the estimates during this planning process, in both the General Fund and Road Fund. State law required the group to adopt a forecast, although it's only for preliminary planning purposes.  The CFG will reconvene in October and December to put together a more targeted forecast to be used by the Governor and General Assembly in putting together the state's biennial budget during the 2014 legislative session. Here's a break down of the forecast:

General Fund - The Forecast adopted by the CFG yesterday has 2.7% growth in FY 15 and 2.8% in FY 16.  The CFG does show a small decline in FY 14 revenues from the enacted forecast, a difference of 4.5 Million.  Overall, the coal severance tax and cigarette tax appear to be on a declining path with some growth in individual income and corporate taxes.  The sales tax is expected to be flat for the most part.  The primary reason is that sales tax growth is in areas that are currently exempt under Kentucky law, like groceries, utilities, and prescription drugs.

Road Fund - The CFG chose the control forecast for the Road Fund as well.  The primary takeaway though is that the one area of growth in the Road Fund for the past several years - the motor fuels tax - will not continue to increase.  The national forecasts that the CFG uses, predicts fuel prices will moderate, which will prevent the index included in KY law from being triggered.  As one of the staffers said in yesterday's meeting "we are likely not going to get any more pennies" within the period of time the group is forecasting.  In FY 15 the RF is estimated to decline by 3.1% and increase by 0.1% in FY 16.  The CFG also revised their current year (FY 14) estimate to reflect a difference of 28.4 million from the enacted estimate. 

The Office of the State Budget Director will put together a preliminary planning document based on yesterday's actions.  The CFG will have the opportunity to revise these estimates in October and December, if the landscape changes and as more information becomes available.  

Consensus Forecasting Group - 8/7 Meeting

Guest Post by Rachel Phelps

The Consensus Forecasting Group (CFG) met this morning in Frankfort.  The CFG is appointed by the Governor and consists of eight non-partisan economists charged by statute to develop budget forecasts and estimates that the Executive Branch and the General Assembly use to put together the state biennial budget. The group meets in August and October and then again at the end of the year, to meet the obligations of developing final budget estimates on or before the 15th legislative day in January.

Today's meeting consisted of a discussion of economic forecasts and then a review of the General Fund and Road Fund. The CFG also elected a new chair, Frank O'Connor, who replaced long time member and chair Lawrence Lynch.  There's been some turnover on the group, as at least four new members were present at today's meeting.

The Office of the State Budget Director presented to the group using forecasting models from Global Insight. Here are the highlights:

General Fund

• All Global Insight predictions on the Economy and recovery are heavily guarded by multiple caveats and the optimism is offset by uncertainty.
• KY sales and use tax receipts were down in FY13 and that represents the third decline in the previous five fiscal years.  Prior to this recent run, sales tax receipts fell only one time since 1979.
• Staff explained that a possible explanation to the declining sales tax is that the areas of sales that are growing are currently excluded from the tax in KY - not included in our base.  Examples are services, groceries, utilities, and prescription drugs.
• The sharp drop in coal severance tax receipts in FY13 erased all of the recessionary gains and returned the tax to pre-recession levels.  You will remember that coal severance was one of the highlights in terms of tax growth for KY during the recession.  Uncertainty going forward further clouds the outlook for coal.
• The individual and corporate income taxes have grown rapidly during the last three fiscal years.
• The LLET (Limited Liability Entity Tax) has doubled since the first full year of tax collections, after instituted in 08.
• KY is seeing growth in taxes based on income or gross receipts and declines in consumption based taxes.

Road Fund

• Since the gas tax index has been triggered, the Road Fund has grown from $1B per year to almost $1.5B.  
• The Motor Fuel tax has been the only area of growth within the Road Fund.
• With the price of gasoline expected to flatten, staff predicts challenges ahead for the Road Fund and anticipate a difficult time in forecasting for the next several years.

The CFG will reconvene on August 15th, take the data shared today and determine whether they plan to use a pessimistic, controlled, or optimistic outlook. They will discuss estimates at this meeting.