2014 Budget – There’s Always More Need than Money

Last week, the Speaker, Senate President, and Governor announced new revenue figures.  These numbers will be the basis for our work on the budget for the 2014 General Session.   

What do these new figures mean, and how do they impact our budget work?   The bottom line: it’s always better to have more money than to have less, but it’s never enough to meet all of the demands. Especially in this somewhat uncertain economic climate.    

Current Surplus 

We had a surplus at the end of the last fiscal year (FY 2013), which ended on June 30th, 2013.  That surplus is $122.0 M, which we have deposited in the bank.  This is good news.  What it means is that as citizens of the state, we did better economically than our conservative projections, and thus we received more tax revenue than expected.  As a result, our economists have slightly raised their expectations for the current year – by $10 million – giving us $132 million in “one time” money.  

“One time money” means that this is treated as a temporary  windfall – and we cannot depend on a repeat.   Much like a balance in a savings account, if we were to use this money for ongoing needs, we would soon run out and we would end up with more unfunded obligations. The current surplus came almost exclusively from “final payments” – amounts people and corporations pay when they file their taxes.  

Watching the Indicators 

This surplus alone may give the uninitiated a false sense that income tax revenues will be at least as strong in the future.   On the contrary – if you look more closely at the types of payments, it indicates that people merely took profits early.  If that is true, we may actually see future tax payments reduced because they were paid in the current period.  

Monthly collections from withholding are a more reliable indication of underlying economic confidence and growth.  They are not as strong as we expected they would be.   Thus, this year’s surplus is most likely due to selling of capital assets last December in advance of expiring Bush Tax Cuts.   

If we spend this one time money at all we should use it for buildings, equipment, and unfunded liabilities.  If it is to be used for any type of compensation, it should go for bonuses.  And we always have the option of not spending it – we could use it to build up our Rainy Day Fund and other reserves, to help us avoid future tax increases or cuts when times get tough. Doing such has certainly been beneficial in the past.  I believe using this one-time money in other ways would be imprudent. 

Surplus = Education Dollars, not General Fund Money 

Looking at the one time revenue even closer, one can see that the surplus is from income tax money.  By law, income tax automatically goes into the education fund and must be spent to that end.  We may use the sales tax backed General Fund for education, and we have done so for almost every year I can remember, but we cannot use the Education Fund for other programs.   

Two Subtractions at the Very Start 

At the end of June, the General Fund – which is used for things like law enforcement, social welfare, and general government costs – was short about $16.0 M for FY 2013.  Luckily we hadn’t spent as much as we could have in some areas, so our FY 2013 operating budget was not out of balance.  Notwithstanding that – if we don’t immediately cut $16 Million, we’ll start out at least that much short in General Fund for FY 2014.  We don’t plan on cutting that so we’ll  need to fill it in from the previous year’s surplus or new one-time money. 

Additionally, since May, our economists have revised their FY 2014 General Fund forecast down by an additional $9 million – for a total of $25 million.  Since we’ve already budgeted all the revenue we expected in May, we must either reduce state spending or delay projects so that the first $ 25 M in new ongoing FY 2015 revenue covers that loss.  

2014 Session Budget Revenue

Given that background, let’s look at what the new on-going revenue projections mean for the upcoming session.  Our revenue forecasters tell us we’ll have $163 million in new on-going Education Fund revenue and $44 million in new ongoing General Fund collections.  Though these numbers may seem large they subtract fast.  Here’s a list of likely possibilities the legislature may choose to spend that money. 

You can see that the requests will far exceed the amount of money available.  

Certainly there will be some cost savings, too.  For instance, in September the Executive Appropriations Committee heard about lower than expected costs for Medicaid and Public Education.  In both cases, the Governor’s latest budget proposal recommends appropriation reductions to match the lower costs.  For example, while many in the press have reported “$261 million in new money” for education in the Governor’s budget proposal, the new money for education is really $235 million.  These savings can help offset the above cost increases.

The lack of General Fund money does concern me.  This money is typically used for public employee salaries and benefits which will grow due in large part to increasing costs for retirement and health insurance.  I would not be comfortable funding a salary increase for teachers but not public employees, or vice versa.  If the General Fund had the surpluses and the Education Fund did not, we could use General Fund money to balance them out – but that’s not the case here.   The General Fund also pays for things on the list like Medicaid growth and Corrections.  

Structural Deficits 

We can use on-going money for one-time expenses, but if we do the opposite, we create what we call a “structural deficit”.  We will have made ongoing spending promises based on money that will dry up, thus exceed our expected ability to pay over the long term.  If we do that, future revenue growth would have to first go to closing that imbalance.   

Uncertainty in D.C.  

Beyond our own state budget, the biggest issue we face is uncertainty in Washington.  It’s not something that might affect us someday – it’s affecting us now.  Some have called the situation with the feds the most predictable economic crisis in history.  

One example of this is Build America Bonds (BABs).  Several entities in the State relied on promises from the Federal Government and issued Build America Bonds for infra-structure rather than issuing tax free bonds which have lower interest rates.  The Federal Government promised these entities that they would receive a federal subsidy to make up the difference.  Guess what?  Sequestration hit, and some subsidies weren’t paid.  

I am concerned that this same phenomenon might extend to health care and Medicaid.  Some advocate that we expand these entitlement programs because the Federal Government promises that it will pick up the cost increase.  Those folks are far more trusting in the Federal Government than I am.    

Working toward restoration 

What will it take to restore the private sector’s normal growth?  What will it take to see tax revenues grow because the economy is doing well?  Frankly, it is hard to tell.   

Our Federal Government should be capable of facing the fact that spending is out of control.  Our government should be capable of functioning extremely well absent a crisis – and I don’t believe that it currently can.  The problems we face cannot be solved by tax increases which negatively impact private businesses.   

A few things worth specifically mentioning moving forward: We need to exercise careful stewardship over revenues and the state’s economic climate so the drivers of our local economy have the confidence to innovate, invest, and hire. We need to get Rio Tinto and similar operations operating at full production.  We need the oil and gas businesses operating smoothly.  All these will have produce new money.   

Utah has weathered the current economic storm remarkably, and for that I am proud.  In February, our final official revenue numbers will come out and this could change everything.  Stay tuned and thank you for paying attention.