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June 2012
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NOT SO LEAN $91 million find says much about room in state budget

Governor Steve Beshear announced late this week that he has plugged a $91 million "hole" in the state budget for the fiscal year just ended. The gap reflected a shortfall of state tax revenue below what had been projected for the fiscal year.

But shortfall is a relative term in the odd world of government accounting. In fact the Associated Press reports that the governor's remedy only cuts $3 million from state spending to make up the revenue gap. He also took $21.2 million from the state's "rainy day fund." The rest of the money comes from unspent surpluses and reserves at various state agencies, such as $23 million transferred from Health and Family Services accounts to the general fund and $250,000 from a Juvenile Justice operations fund.

In fact, unspent surpluses from state agencies are transferred back to the general fund every year. A June 20 article in the Louisville Courier-Journal said the state actually budgeted an $80 million "ending balance" this year.

What it all says is that even in what has been described as a "lean" $9.5 billion budget, coming up with a spare $91 million was not such a monumental task.

State officials attribute the revenue shortfall to lower-than-projected collections in 2014 from state income taxes, the largest single source of revenue for the state. But State Budget Director Jane Driskell says that in large part reflects a statistical anomaly she refers to as the "April Surprise."

In late 2012, when the nation looked as if it might actually go over the "fiscal cliff" - a combination of automatic tax increases and spending cuts - many people, including wealthy individuals, sold their investments to avoid the looming tax increase. The result in Kentucky was a 5.6 percent spike in state income tax collections in April 2013.

State budget officials projected there would naturally be a decline in the April 2014 state income tax receipts, but underestimated the 8.7 percent decline that actually occurred. The net of it was that while the state budget assumed overall revenue growth of 2.2 percent, growth actually came in closer to 1 percent due to the income tax shortfall, and it would have been worse but for a stellar performance in the area of state sales tax receipts.

This year's revenue shortfall has led to a fair amount of handwringing in Frankfort over whether the budget for the coming biennium is in deficit from day one. That's because the budget is based on the assumption revenues for the year just ended came in at budget, rather than below, and will grow at a rate of 2.6 percent a year from there.

We're not convinced that growth won't be there. State income taxes for the fiscal year just ended were expected to grow .5 percent even with the impact of the "April Surprise" and they grew by 8.3 percent, 2.8 percent and 6 percent in the three years prior, so a return to more normal growth in that category and continued strong performance of sales taxes could, in our estimation, neutralize the problem.

Further, given the relative ease with which the current budget gap was plugged and the spending assumptions of the budget for the upcoming biennium, we think the now-standard reference to a "lean" budget is a misnomer. A better description probably is that it is a reasonable budget.

The Tax Foundation currently lists Kentucky as 16th in the nation in state and local income tax collected per capita. Yet we remain 46th in the nation in per capita income. That adds up to a pretty stout burden on Kentuckians to fund government and is the reason why, regardless of revenue performance, Frankfort will have to live within its means in the new budget cycle.

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