The State Board of Equalization met on February 21st to approve revised revenue estimates for FY 2017 and FY 2018. This estimate will be binding on the Legislature as it develops the FY 2018 budget over the coming months.
Here are our main takeaways from the new certification:
#1 This year’s revenue estimates have missed the mark by enough to trigger mid-year budget cuts
The revised estimates for FY 2017 are for revenues to be come in under projections by $296 million, or 5.7 percent. Since there is a 5 percent cushion between certified revenues and the amount the Legislature can appropriate, this creates a mid-year shortfall of 0.7 percent. The $296 million gap between the revenue estimates certified last June and the revised February projection is attributable to plunging corporate income tax collections (off by $205 million) and weak sales tax collections (off by $96 million). Gross production tax revenues are slightly above original projections.
Once the revenue failure was declared, the Office of Management and Enterprise Services (OMES) sent out a memo to all agencies announcing mid-year cuts equal to 0.7 percent of their appropriation from the General Revenue (GR) fund. The cuts total $34.6 million. Agencies that are appropriated in whole or in part from sources other than the GR fund receive less than a 0.7 percent cut. This includes the Health Care Authority, Corporation Commission, Land Office Commission, and State Department of Education (but see below). Unlike last year, the Department of Transportation did not receive a cut in its allocation from the ROADS fund.
This is the first time the Board of Equalization has made an official declaration of a revenue failure. In the past, the director of the Office of Management and Enterprise Services (OMES) has used his discretionary authority to decide the timing of revenue failures and size of mid-year cuts. This decisions seems to have been prompted by a desire to avoid a recurrence of what happened last year, when OMES cut agencies by considerably more than what turned out to be needed, which led to surplus funds being returned after the end of the fiscal year.
This is the third time since 2000 that there have been revenue failures in two consecutive years; this also happened in 2002-03 and 2009-10.
#2 Common education faces an additional $39 million shortfall.
The State Department of Education was cut $11 million as a result of the revenue failure, which is 0.45 percent of its appropriation. But in a presentation by Finance Secretary Doerflinger to the Board, it was explained that the HB 1017 Fund – a fund directed exclusively for common education that receives a portion of revenues from various taxes, including the corporate income tax – is facing a $39 million shortfall in FY 2017. This amounts to a $50 million reduction to the agency’s appropriation, or 2.1 percent. The Legislature could make a supplemental appropriation to Common Education from the Rainy Day Fund.
#3 The budget outlook for next year is largely unchanged – and still extremely dire.
Unlike the past three years, when the revised revenue estimates released in February saw significant drops compared to December, this year’s revised estimate is just $9.4 million below December’s initial certification. Unfortunately, this leaves an enormous shortfall. The Legislature starts with $6.030 billion in available revenue for FY 2018; this is $713 million less than this year’s budget (after mid-year cuts). This understates the true extent of the shortfall, because the Legislature is also trying to find funds to provide a mid-year supplemental for the Department of Human Services (and possibly other agencies), cover a loss in federal matching funds for Medicaid, and address other critical needs, including a teacher pay raise. The Governor, in her budget, proposed some $320 million in spending increases, along with a number of major new taxes and tax increases to bring the budget into balance. Legislative leaders reacted with skepticism to many of the Governor’s proposals, by they have so far presented few specific ideas of their own to solve the budget crisis.
#4 Another tax cut will not be automatically triggered in 2018.
The Equalization Board officially determined that the conditions that would have triggered an automatic cut in the top income tax rate from 5.0 to 4.85 percent have not been met. This averts a situation, as we discussed here, where the tax cut could have been triggered next year even as revenues remained hundreds of millions of dollars below previous levels. Under current law, we will face the prospect of a tax cut for 2019 being triggered next year. Many legislators have concluded that triggers are not the right approach and are supporting proposals that would either repeal the next tax cut entirely (SB 170) or delay it until revenues have more fully recovered (SB 130).
Everyone understands that the state has already imposed deep and damaging cuts to core services over recent years and faces enormous needs in education, public safety, human services, and other areas. Lawmakers are out of excuses to avoid finding the new recurring revenues necessary to bring our budget into balance. It’s time they get to work.