Kentuckians are unlikely to feel immediate pain from a recently announced shortfall in state revenues, but some budget experts warn that it raises the risk that spending cuts will be needed to balance the already lean 2014-16 state budget.
Jason Bailey, director of the Kentucky Center on Economic Policy in Berea, said, "A shortfall in one year has a kind of a domino effect on the next years, and it looks like revenues in the next two years will have to grow in a higher range that's not expected."
Senate Majority Leader Damon Thayer, R-Georgetown, said it's too soon to know if the legislature will have to adjust the budget. "But I know that we're still in a weak economic recovery and revenues are spotty."
The Beshear administration announced June 10 that a significant shortfall is inevitable in tax receipts when the fiscal year ends June 30. Budget Director Jane Driskell said it is too soon to say how far short revenues will be, but that it's likely to be "significantly larger" than a $28 million shortfall projected in April.
Driskell's comments were based on the fact that through the first 11 months of this fiscal year, revenues had only grown 1.1 percent over the same period last fiscal year — yet the budget for this year requires growth of 2.2 percent to meet expectations.
In interviews since the announcement, Driskell said it's still too soon to release an estimate of the size of any shortfall.
But some budget watchers like Bailey note that if state revenues grow in June at the same 1.1 percent rate as they did through the 11 prior months, the shortfall would be about $100 million in the approximately $9.5 billion in revenues anticipated in this year's budget.
Immediate cuts not planned
With the shortfall coming into view so late in the fiscal year, emergency cuts in funding agencies can hardly be made and are not planned, Driskell said.
But following instructions in state law and the budget itself, Beshear has several sources of funds he can turn to to balance by midnight June 30 — which is required by the Kentucky Constitution.
Driskell said options under consideration include tapping the state's so-called Rainy Day fund — or spending part of an $80 million ending balance budgeted for this year that carries forward into the next budget.
Such moves, Driskell said, would restrict the administration's "flexibility" in managing next year's budget.
For instance, the Rainy Day fund, which is a reserve kept to cover such shortfalls, has a balance of $98 million. The budget that takes effect July 1, however, takes about $14 million from that fund for spending during the next two years, leaving $84 million.
Bond rating agencies encourage states to keep a balance of about 5 percent of revenues in rainy day funds. But $84 million is less than 1 percent of annual state General Fund revenues.
To the extent Beshear uses any money from that fund to balance the current shortfall, he'll have that much less available to cope with any shortfalls in the next two years.
And the $80 million on hand as a budgeted ending balance this fiscal year is also spent on state programs within the 2014-16 budget. That means if Beshear taps it for the current shortfall, he'll need a revenue surplus to replace it.
Potential bigger problem
The larger concern of state officials and budget watchers is that this year's shortfall means next year's revenues must grow stronger than expected for the budget to balance next year.
The recently passed state budget assumes General Fund revenues in 2014-15 will be equal to last year's $9.5 billion in revenue — which was presumed before any shortfall was envisioned — plus growth of 2.6 percent. But to the extent that this year's revenues fall short, then the base for calculating next year's revenues is lowered a like amount.
"That puts pressure on us over next year and the second year of the new budget to grow by a higher percentage than the experts project to meet the dollars that have already been projected in the new budget," Rand said. "And that gives me concern because of the volatility we've seen in our revenue stream in recent months."
Driskell said the administration will closely monitor revenues and see what trend develops after the first three months before deciding if any budget cutting is necessary.
Makes bad outlook worse
Bailey said the unexpected shortfall this year is serious "because the 2014-16 budget is extremely lean to begin with."
The budget did fund the first raises for state employees and teachers in six years. It boosted funding for pre-school, phased in a restoration of cuts made earlier to child care for low-income families, and began paying more to the troubled pension system for state workers. But Bailey noted it cut funding to many agencies by 5 percent, cut funding for mine safety by 30 percent, and cut university funding 1.5 percent.
"Many areas, including higher education, have suffered cuts back to 2008," Bailey said. "Dealing with the current shortfall means potentially dipping into an inadequate Rainy Day fund or other steps that create more of a structural imbalance down the road."
Beth Jurek, the top budget official of the Cabinet for Health and Family Services, told a legislative committee last week that the next budget provided $30 million a year less in General Fund appropriations per year than requested by Beshear — an amount that means $100 million less per year for the cabinet when the federal Medicaid match is considered.
"We're looking closely at that, not ready to panic at this point," Jurek said. "We know ... that we never get everything we ask for in Medicaid."
And folks who closely follow the issue are quick to point out concerns beyond the 2014-16 budget. Those include the $13.8 billion unfunded pension liability of the Kentucky Teachers' Retirement System and the state's obligation to pick up part of the tab for expansion of Medicaid beginning in the 2016-18 budget.
"The three troubling things that are on the horizon for Kentucky are soft revenues, but also the Teachers Retirement System and Medicaid expansion. Those are all storm clouds," said Dave Adkisson, president and chief executive officer of the Kentucky Chamber of Commerce.
Many advocates for health and education programs interviewed last week said the current shortfall shows the need for tax reform that would raise immediate new revenue and produce more reliable revenue growth.
"Until this state embraces the notion and the need for comprehensive tax reform, we're going to be playing this game of hold-your-breath, wait-and-see, and hope the bad news doesn't hit us," said Sheila Schuster, a longtime advocate for health and mental health programs. ""I don't think that's the way to care for the needs of the people."
Thayer and Rand both said it will be extremely difficult to reach any political consensus on tax reform. Thayer said, "I'm not optimistic that there'll be any sort of tax reform until after the 2015 governor's race," he said. "It's going to take a statewide debate on that issue for our highest elected office in state government."
But Beshear, who leaves office in December of 2015, "remains interested in implementing comprehensive tax reform," said Governor's Office spokesman Terry Sebastian.