Bob Bernick’s Notebook: Breaking Down Herbert’s Budget Sleight of Hand

No tax hike.

No tax cut.

Spend just about all the new money coming into state government – a near record $638 million.

That, in a nutshell, is GOP Gov. Gary Herbert’s suggested 2015-2016 budget, released Thursday morning.

Herbert, who is looking ahead to a 2016 re-election, believes there should be more money for roads and bridges, but isn’t ready to suggest how the current state per-gallon gas tax should be restructured.

There’s a clear need for more money for water development projects, he said. But Herbert is not ready to recommend how that should happen, either.

The governor does want to spend a record amount on public and higher education, with 68 percent of all new monies going into his “No. 1 budget priority.”

He wants a 6.25 percent increase in the Weighted Pupil Unit, the main state public education funding formula, which – depending on the labor agreements made by each of the 41 local school districts – could be a healthy pay hike for teachers.

He wants a 2 percent pay hike for state college employees, with a few million dollars kicked into college funds for special performance incentives.

But Herbert is not suggesting any kind of income tax reform or general tax hike for schools – as some pro-education groups are advocating.

He does want a kind of financial slight of hand, however: Take $94 million of General Fund monies that are now sales tax earmarks for road and water projects and give that money unencumbered back into the GF – where it can offset sales taxes going into colleges, which in turn will allow more GF money to flow into public education.

It’s an odd twist, since at the same time the governor says there are enough road revenues to pay for currently-scheduled road construction and maintenance.

“No road projects will be delayed” by un-earmarking that sales tax for transportation, said the governor.

However, in the long term, Herbert said, the 2015 Legislature – in consultation with him – needs to come up with a new way to gain tax revenue for roads, mainly coming from those who use the roads the most.

Those increased revenues could come in placing a sales tax on fuel sales – which would rise and fall with gasoline prices – or putting some kind of excise tax on oil products.

But Herbert’s not saying what he likes best – although he does ask that lawmakers, who convene Jan. 26, work that out before adjournment in mid-March.

If the 2015 Legislature precedes politically much like the last few have, you can expect this:

Senate Republicans will go along with most of what Herbert wants, and it will be the House Republicans who may well stand up to him.

And you’ll see arguments over his Healthy Utah Medicaid expansion proposal, to which he’s dedicated $4.6 million in his budget recommendation.

Democrats and a few Republicans will want to increase the current 5 percent personal state income tax to 6 percent or higher; or they may want to remove child deductions from large families, with a lot of kids in public schools.

Both ways (and no doubt there’ll be some other new revenue ideas) would bring in tens of millions of dollars more for Utah public schools, which still remain underfunded.

Herbert proposes putting $8 million dollars more out of the estimated $325 million in new tax revenue growth next year into the state’s two Rainy Day Funds.

Other than that, his $14.3 billion fiscal 2016 budget recommendation calls for spending ALL of the $638 million in one-time tax surplus and new ongoing revenues.

That is a 5.925 percent increase over the current year’s budget of $13.5 billion.

That’s as pretty big percentage increase – rivaling the annual spending hikes seen in the halcyon economic days of former Gov. Mike Leavitt and the 1990s.

And at least the current House and Senate GOP leaders don’t want to start their budgeting at such growth in state spending.

On Tuesday, the Executive Appropriations Committee voted to begin their 2015 legislative budgeting by taking $116 million in new revenue growth off the table.

In answering press questions after his budget presentation at a Salt Lake County junior high school, Herbert seemed a bit miffed at that.

For years the governor’s office, the Tax Commission, and the Legislature’s budget staff have agreed on revenue estimates as the budget-setting process began each December.

And those forecasts have never included any kind of revenue-leveling or trend-line modeling.

But at the urging of Rep. Brad Wilson, R-Kaysville, who was the House’s budget vice-chair and is now the new assistant majority whip, and following a complicated bill Wilson got through the last session, legislative budgeters are attempting to level out “revenue bubbles.”

Such bubbles are defined as spurts in state tax revenues that are higher than average years’ growth.

Wilson told his EAC colleagues Tuesday that while the state’s Rainy Day Funds are gaining, the state is not in as good a financial situation as before the 2008 Great Recession.

“We have a long ways to go” in controlling state debt, in putting money aside and in controlling state spending, said Wilson.

Herbert couldn’t disagree more.

The governor went out of his way Thursday in pointing out that Utah’s Rainy Day Funds have rebounded financially, that Utah is ranked as the best managed state in the nation, we have a growing, vibrant economy, and there is no reason to believe that such prosperity – which Herbert no doubt should take some political credit for come 2016 – won’t continue into the near future.

“We had consensus” in both revenue projections and how the state budget would be put together, Herbert said Thursday.

“Two days ago” GOP legislative leaders said “we’ve changed our minds” over those understandings, said Herbert – by initially taking $116 million off the budget table.

“I have not changed my mind. We’re seeing positive growth” in the Utah economy and in state tax revenues, said the governor.

“I see no reason that Utah can’t continue to grow economically.”

Herbert said in recent years Utah’s economy has grown from 3.3 percent to 3.5 percent a year – and his budget, and the consensus revenue estimates – show growth at 3.6 percent to 3.7 percent in the near future.

While the latter are higher estimates, they are not unreasonable, said the governor.

The fight over the $116 million is just one area of likely contention.

In his budget, Herbert is also assuming lawmakers will take the road and water development sales tax earmarks off of $94 million of General Fund monies.

“I am spending that in other areas,” he said, “mainly in education.”

The governor believes that the General Fund – which pays for most state services besides public education – has too many sales tax earmarks.

Those earmarks take up 19 percent of the GF. That means 19 percent of the money is “off the table” before Herbert and lawmakers can even compare, contrast and decide priority spending out of the GF.

Worse, says the governor, 43 percent of new sales tax revenues coming into the General Fund are earmarked – even further restricting the spending flexibility the governor seeks. (This comes through a bill Herbert vetoed several years ago that earmarks GROWTH in GF revenues for roads. The GOP-controlled Legislature overrode that veto, no pun intended.)

There is sympathy among Senate Republicans, and some House members, as well, to ease the General Fund earmarking.

But whether either body will agree to remove $94 million in earmarking is another question.

If $94 million in GF earmarking is not removed, lawmakers will have to trim Herbert’s education funding, or find school monies elsewhere.

Finally, in planning his political future, Herbert is clearly remembering what happened to former GOP Gov. Norm Bangerter in the mid-1980s.

Facing a poor/recovering economy – and with polls showing that Utahns favored tax increases for public education – Bangerter suggested the largest tax hike in Utah history, almost all of it for school children.

The GOP Legislature trimmed back that tax hike, but passed a healthy one anyway.

A citizen tax revolt sprung up. Bangerter was hammered politically and narrowly won a second term in 1988 by 2 percentage points in a tough three-way race.

Herbert suggests no tax hikes in his new budget, one that does have considerably more spending on public and higher education.

If pro-education advocates can’t get a tax increase – or significant income tax reform that would bring in more education revenues – in the non-election year of 2015, don’t look for any kind of that action until 2017 – when Herbert may or may not be starting his new four-year term in office.