Budget Update - CFG Meeting

Budget Update - CFG Meeting

The Consensus Forecasting Group (CFG) met this afternoon to revise the official revenue estimate for Fiscal Year (FY) 2020. The group of nonpartisan economists were asked to revise the estimates in today's special meeting due to the impact the COVID-19 pandemic is having on state revenues. It is highly unusual for the CFG to meet outside of what state law requires and the group can only provide revised official estimates at the request of the Legislative Research Commission or the Office of the State Budget Director.

The CFG members were presented with two scenarios - control and pessimistic models. Both the control and pessimistic forecasts assume that the pandemic peaks in the fourth quarter of FY20 and also assumes an identical fiscal and monetary policy response. 

After several hours of discussion and debate, the CFG chose to adopt the pessimistic forecasts for both the General Fund and Road Fund. Under these revisions, the General Fund is estimated to be 4% below the official enacted budget, while the Road Fund shortfall will be 10.4% based on today's actions. 

The 4% shortfall in the General Fund reflects a decrease of $456.7 Million and the 10.4% shortfall in the Road Fund reflects $161.8 Million less than expected.

Kentucky law allows the Governor to implement budget reduction orders for shortfalls less than 5%. For shortfalls over that, legislative action is required. With these new official estimates, the Governor will be able to adjust spending in the General Fund. It has been reported that state agencies have already been asked to provide information on the impacts of a 12.5% cut to close out the fiscal year June 30. The Road Fund, however, will require legislative action which could trigger a special session. We will update you as additional information is made available.

Documents from today's meeting can be accessed HERE.

Today's actions only impact the remaining days of FY 20, which will end on June 30th. It is likely that revisions to FY 21 will also be needed, but at this time that request has not been issued. 

2020 Election Preview

2020 Election Preview

Legislative elections take place this year, with all 100 House seats and half (19) of Senate seats up for re-election in November. The COVID-19 pandemic has required many changes, including how and when Kentuckians will cast their vote in the primary election. Originally scheduled for May 19, the primary election will now be held on June 23. Given the primary is just over a month away we wanted to provide a preview of the races and some additional dynamics impacting them. We have prepared this multi-tabbed spreadsheet, which is also attached, based on records from the Secretary of State's office as of May 13, which provides a listing of the candidate filings for the primary and general elections.  

Senate 

- The Senate is controlled by GOP 28-9 with 1 vacancy (Sen. Harris) heading into this election cycle.

- The Senate spreadsheet shows that of 19 Senate seats up for election in November, 5 are uncontested (3 Dem & 2 GOP). Of the remaining 14 contested seats they are currently controlled (4 Dem & 10 GOP). 

- 3 GOP incumbents face Libertarian party candidates (Meredith, Westerfield, and West) and Sen. Reggie Thomas (D-Fayette) faces a write-in candidate.  

- Looking at the Senate primary races, 6 seats will have contested primaries. In 2 of those races the winner will hold the seat, because there is no challenger in the general election.

- Two incumbents have primary challengers, Sen. Albert Robinson (R-Laurel) and Sen. Rick Girdler (R-Pulaski). In Sen. Girdler's race, the winner takes all as there is no general election challenger. 

- There is one special election being held on primary day to replace Sen. Ernie Harris (R-Oldham) who retired on April 15. The winner of the special election will serve Harris' unexpired term, until 2022. Democrats nominated Kathy Berg, a physician who Sen. Harris beat in November 2018. Republicans nominated Bill Ferko, an executive and local GOP activist. The winner of the June 23 special election will take the seat, which has been held by Republicans for more than 20 years.   

House 

- The House is controlled by GOP 62-38 heading into this election cycle.

- The House spreadsheet shows 100 House seats are up for election in November, 23 are uncontested (11 Dem & 12 GOP). Of the remaining 77 contested seats they are currently controlled (27 Dem & 50 GOP).

- Looking at the House primary races, 28 seats will have contested primaries with two of the seats having contested primaries for both parties bringing the total number of House primary races to 30. In 12 of those races the winner will hold the seat, because there is no challenger in the general election.

- 11 Incumbents have primary challengers: 3 Democrats - Miller, Burch, Kulkarni & 8 GOP - Rudy, Webber, McCoy, Upchurch, Osborne, Brenda, Yates, & R. Huff. 8 of these primary races featuring incumbents will be winner take all elections as there are no general election challengers.

- 9 of the 11 GOP incumbents with a primary challenger serve in Leadership or as a Committee Chair, including Speaker Osborne, Majority Floor Leader Rudy, and Majority Whip McCoy. 

Supreme Court

- Kentucky has one Supreme Court seat on the ballot this election cycle. It is currently held by Justice Sam Wright and the district is located in Eastern Kentucky.

- Justice Wright is running for re-election and has drawn two challengers. State Representative Chris Harris (D-Pikeville) is leaving the legislature to run for this seat. Judge Bob Conley from the northeastern part of the state has also filed to run.  

- This is a nonpartisan race, and since there are three candidates, the top two vote getters in the primary will advance to the general election in November.  

Additional Dynamics

Due to COVID-19, Governor Andy Beshear and Secretary of State Michael Adams by executive order have approved and are encouraging the use of mail-in ballots through an expanded absentee program. The State Board of Elections will mail a postcard to every voter informing them of their options. Voters will have to request an actual mail-in ballot. Counties will not staff normal polling precincts but will offer the option for in-person ballots both before and on Election Day at a smaller number of locations. 

It's not clear what impact all of these changes will have on voter turnout although when implemented in other states, there is some evidence of an increase in first-time voters and voters who do not usually participate in primary elections. The pandemic may have a significant impact on the primary election due to the lack of in-person fundraisers and the change in voting procedures. 

KY Budget Outlook

Budget Outlook

The conclusion of the 2020 legislative session would, under normal circumstances, be followed by the interim session beginning in June and running through November. During the interim, legislative committees meet jointly every month and discuss issues that are likely to be addressed during the next session of the General Assembly. Many questions remain regarding the upcoming interim session, as the state continues to deal with the COVID-19 pandemic. We expect, though, that the current budget crisis is likely to dominate conversations leading up to the 2021 Session.

The 2020 Kentucky General Assembly passed a one-year budget for this upcoming biennium, using pessimistic revenue estimates to form the spending plan for Fiscal Year 21. The second year of the biennium, Fiscal Year 22, will be considered and passed during the 2021 Session. Policymakers warned then that an economic downturn is inevitable and that even the pessimistic revenue estimates will be far greater than what's likely to be realized.

Since the session ended, the Office of the State Budget Director released the Quarterly Economic and Revenue Report for the third quarter of Fiscal Year 2020. General Fund revenue growth was 3.9 percent through the first three quarters, but a significant drop in state revenues is likely in the fourth quarter given the COVID-19 pandemic. This will likely be the first annual General Fund decline since 2010. 

FY 2020 Revenue Shortfall

The Quarterly Report includes two unofficial revenue projection scenarios based on the timing of various milestones related to COVID-19. 

General Fund

The report projects a revenue shortfall of $319 to $496 million which is a 3.8 to 4.7 percent revenue shortfall compared to the official estimate. Approximate breakdowns include roughly a $200 million shortfall in sales tax collections, a minimal shortfall in property taxes, and business taxes are projected to be short by $108 to $143 million in FY 20.

Road Fund

State officials expect a shortfall in the Road Fund as well, with revenues around $116 to $195 million less than what was previously estimated. This reflects a 7.5 to 12.5 percent shortfall compared to the official estimate. The motor fuels tax could be short approximately 8 to 13 percent based on the scenario adopted and the motor vehicle usage tax could see a shortfall of between 10 and 15 percent.

Legislative & Political Dynamics

Note that Kentucky law (KRS 48.130) requires legislative action for shortfalls over 5 percent. The Consensus Forecasting Group (CFG), a group of nonpartisan economists that is required by statute to forecast revenues, will be meeting in the coming weeks to discuss revising the official estimates in light of the COVID-19 pandemic. Any legislative activity needed will be based on official estimates by the CFG.

The General Assembly may want to be a part of the budget reduction action in order that their priorities can be reflected in what programs or projects might be cut in order to balance the budget. However, the Governor is only required to call them into session to deal with the budget shortfall if it is over 5 percent, as stated above. All eyes will be on the upcoming CFG meeting and the actual receipts coming out of the Office of the State Budget Director to see if the statutory requirement is triggered. 

The unknown or intangibles that are hard to predict include an infusion of federal funds or the consideration of new revenue to prop up the state's finances, if there is a lingering effect from the COVID-19 pandemic. Federal funding for state assistance seems more likely than a couple of weeks ago but is far from certain. New revenue through taxes could be a difficult sell while unemployment numbers continue to rise and many Kentuckians struggle financially. However, if the CFG forecasts show lasting effects from the pandemic it may be necessary to make either significant budget cuts in 2021 or look at new revenue. 

We will continue to monitor the Commonwealth's budget situation and update you as more information becomes available. Please reach out if you have specific questions or concerns.