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.
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.
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.