Monday, January 6, 2014

GS Memo - Budget Preview


MEMO


FROM: Government Strategies
SUBJECT: Budget Preview
DATE: January 2, 2014


The Kentucky General Assembly will convene on January 7th for the 2014 legislative session.  Every even-numbered year, the legislature meets for 60 days with the primary goal of putting together and passing a state budget.  The budget will dictate most everything else that is considered and the outcome will define the success of this legislative session.  If you've followed the Kentucky legislature, then you know it's been some time since the General Assembly has gone into a budget session with anything other than a looming deficit and anticipated cuts.  This year will be no different.  State economists aren't predicting any significant revenue growth based on Kentucky's economic recovery – which is occurring but at a very slow pace.  Thus creating an appetite for other sources of more state revenues. However, the realities of current political dynamics and the looming 2014 legislative elections will make it difficult for legislators to consider either new taxes or expanded gaming.  State agencies will likely have to absorb additional cuts.  


Budget Numbers


While Kentucky has noticed an upswing in revenues over the past couple years, we are experiencing economic recovery at a noticeably slow pace.  Year to date, we've seen roughly a 2.4 percent increase in revenues, but much of that can be attributed to a revenue package passed earlier this year, to help pay for pension reforms.  Even the modest amount of revenue that can be considered new and not yet earmarked – around $130 Million – isn't enough to cover pension liabilities, childcare subsidies, increases in employee health insurance, and many other obligations.


The administration in the last several months has started outlining the fiscal situation and the challenges that policy makers will face as they begin their work in January.  Governor Beshear recently said that he will not include additional revenue in the budget he introduces in January.  His plan will include prioritizing increased funding for elementary and secondary education.  Budget officials have indicated that state agency cuts are likely, and without new revenue included in the Governor's plan it's almost a forgone conclusion.  Many state government agencies have experienced 13 budget cuts in the past 7 years.


The Consensus Forecasting Group met before Christmas to set the revenue estimates that the Governor and Legislature will base the 2014-16 biennial budget.  The CFG is a group of nonpartisan economist from across the Commonwealth appointed to estimate revenues and the overall KY economy.  The group's official estimates are lower that what they had anticipated in an October meeting, however they do show some growth each year.  They estimate 2.6 percent growth in both FY 2015 and FY 2016, with declines in the cigarette tax revenue both years, and declines in the corporate income tax revenue and coal severance tax revenue in FY16.


Process


Governor Beshear will set the budget process in motion when he introduces his budget during the Budget Address on January 21st.  From there, the bill will be introduced in the House and House Leadership and the Appropriations and Revenue committee will go to work putting together a product that reflects the priorities of their members.  The House A&R committee is divided into Budget Review Subcommittees, with most subcommittees taking testimony from government agencies making their case for funding.  The House generally takes six weeks to work through this process and then the bill will go to the Senate, where they will review what the Governor and House have included and then make their own changes.  The rubber will meet the road in the final days of the session when leadership in both the House and Senate will meet in a conference committee to hammer out differences and negotiate a final document.


New Revenue Options and Dynamics


Tax reform and gaming are the two items most mentioned when looking at ways to increase state revenues.  Both have been discussed at length, most recently with a Blue Ribbon Commission on Tax Reform last year, and this year a new effort by gaming proponents to push for a constitutional amendment to expand gaming in Kentucky. One other option – and perhaps the most likely of all – would be a bond issue to fund a number of projects statewide. This could address some capital needs while also giving legislators projects to take back home, as they run for re-election in November.   All are viable options and could have some legs, however there will be interesting political dynamics at play this session which will certainly impact efforts at new revenue.


Democrats hold the majority in the House with 54 members to the 46 Republican members.  A recent special election win in Western Kentucky pushed the number of Republicans to 46 – the highest number ever in the Kentucky House.  All one hundred members are up for re-election in November and with such tight margins you have to expect that every single issue will be looked at through the lens of how the November elections will be impacted.


Past revenue raising measures have been successful with agreements between both parties to not use the issue in campaigns, but with control of the House at stake it seems hard to think that such middle ground is possible.


The Republicans have solid control in the Senate, 23-14-1.  Half, or 19, members of the Senate will be up in November of 2014.  


Candidates have until the third the week of January to file to run in November, so it will be the beginning of February before we have a clear picture of who has opposition and how this might impact the session.


Bottom Line


- Revenues will grow 2.6% or an estimated $250 million per year of the next biennium. However, only $130 million is available for policy makers to consider spending because of obligations related to funding state pensions.


- Before the policy makers consider spending the $130 million, they will be presented with many needs to consider funding including Medicaid, restoring K-12 education funding, and restoring child care subsidies, among others. In essence, more obligations than revenues.


- With the need for new revenues clear and the potential mechanisms, either tax reform or expanded gaming, fully vetted, it would seem that the policy makers would want to move in that direction. However, the political realities of the 2014 legislative elections with the control of the House of Representatives hanging in the balance may make it difficult for either party or chamber to support either revenue generating method.


- Door number 3 is likely a combination of budget cuts to support increased education funding and bonds for capital construction projects that will give legislators something to take home in an election year.  

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