Legislators Hear Multi-Year Budget Plan From Senator Ken Yager
MARCH 26, 2009
Calling it “the most complex and difficult” budget that he has ever presented, Governor Phil Bredesen laid out his $29.3 billion plan to fund state government for the fiscal year that begins in July to a joint session of the General Assembly on Monday. The governor also outlined a multi-year proposal that spends almost $5 billion in federal stimulus money coming into Tennessee over the next two years as a result of the American Recovery and Reinvestment Act passed by Congress in February.
The governor had been scheduled to present a budget plan for the 2009-2010 fiscal year in late January that would make cuts of up to 15 percent in spending in almost all areas of state government. However, the passage of the Congressional stimulus bill, which added almost a trillion dollars to the more than $10.7 trillion national debt, gave states across the nation the ability to delay more painful cuts for another year.
“This stimulus package is not a silver bullet – what it does is buy time,” said Bredesen. He warned state and local governments, “You have a windfall for the next two years. If you create obligations with it that go beyond two years, do not look for the state to bail you out.”
Unlike Congress, Tennessee has a constitutional requirement for a balanced budget.
Stimulus Package comes with Congressional mandates and earmarks that limit the states’ ability to use funds to balance budget
Even with the influx of $5 billion, Governor Phil Bredesen’s multi-year budget plan phases in cuts of up to 15 percent for most Tennessee agencies by 2011 due to the federal mandates tied to the stimulus bill that limit how the money can be spent. Bredesen said his administration continues to receive “guidance” directives from federal agencies detailing the mandates that states must implement in return for receiving federal stimulus dollars. An example of this is the requirement that Tennessee must make substantive changes to its unemployment law in order to receive $141 million to extend benefits through the state’s Unemployment Fund.
Although Bredesen said $2.1 billion of the $5 billion may help Tennessee in various ways over a two-year period, only $1.6 billion of those dollars are available to help balance our budget and assist state agencies to transition to smaller budgets in the future. The rest of the $2.9 billion, or 58 percent, has been earmarked by Congress for increasing aid to programs such as food stamps, public housing, and road and bridge infrastructure. Most of this money will simply pass through the state’s budget, while other funds will be paid directly to various non-state agencies. For example, $524 million will be sent directly to local school districts based on their proportions of low income and special education students.
Because Tennessee has already stabilized its Medicaid program (TennCare), the state will be able to use some of the $1.1 billion coming to help states shoulder the cost of their health care programs for other purposes. Tennessee already has about $450 million in TennCare reserves, of which $132.5 million will be used to help bridge the $1.2 billion gap to close the 2008-2009 budget year. The governor also proposes to dip into $64.6 million in Rainy Day funds to close out the current budget year with cuts to various state expenditures making up the rest of the difference.
One of the areas of state government suffering the deepest cuts to bridge the budget gap was higher education, which incurred a decrease of over $40 million to help balance out the past budget year. The federal stimulus plan mandates that in order to receive higher education money, about $100 million must be restored in the upcoming fiscal year to receive approximately $500 million over the next two years for Tennessee’s colleges and universities. Bredesen said, however, “When this money ends 21 months from now, our campuses will suddenly need to begin operating with about $180 million less in state funding than they had this year.” That point was illustrated in the Senate Finance Committee on Wednesday by charts showing a “cliff-like” drop-off for state spending in higher education and many other areas of state government in the 2011-2012 budget year. Many legislators have expressed concern about using one-time money to pay for recurring year-to-year state government expenses.
Tax Increases part of Bredesen budget plan
The governor’s budget proposal includes a plan to raise premium taxes on Health Maintenance Organizations (HMOs) to draw enough in federal matching funds to avoid a $300 million cut to TennCare, according to Finance Commissioner Dave Goetz. Approximately 85 percent of income received by HMOs in Tennessee comes from TennCare. The administration maintains that the $139.3 million raised by increasing the tax would benefit the HMOs due to increased TennCare funding that would be gained under federal matching funds.
The second tax included in the budget is a plan to repeal the current business tax exemption on family-owned, non-corporate entities, known as “FONCEs.” These are
certain family-owned limited liability corporations and partnerships that derive passive income through commercial property. The proposal, which would raise $25 million, failed in the General Assembly last year due to concerns about the negative impact the tax increase on small family-owned businesses would have on jobs, especially in a time of economic decline.
In addition, the administration has proposed increasing unemployment insurance by raising the taxable wage base to $9,000 from $7,000 and adopting a 0.6 percent premium charge. Many employers with little or no previous history of paying high premiums recently experienced increases in their unemployment tax through a law already in place that triggers higher premiums when the state’s unemployment funds go down to insure solvency.
With unemployment at 9.1 percent in Tennessee, there is a tremendous increase in benefit claims that threaten the solvency of the state’s Unemployment Fund by the fourth quarter of 2009 if no action is taken. Insolvency would mean federal control of the state’s fund, meaning Washington could dictate future tax rates and wage base thresholds. It would also mean mandatory borrowing with interest from the federal government that could cost businesses more in the long run according to the administration.
Budget Plan calls for state to incur bond debt for capital projects and transportation fundsThe Bredesen budget presented on Monday also calls for the state to incur general obligation bond debt for infrastructure needed to bring jobs to Tennessee through the Volkswagen, Hemlock and Wacker plants; and to develop a megasite in Haywood County in West Tennessee. About $262 million was approved earlier this year to provide infrastructure funds for Volkswagen plant in Chattanooga and the Hemlock plant in Clarksville. The budget proposal includes $62.9 million in bonds and $7.3 million in state funds to complete obligations and provide infrastructure for the Wacker plant in Bradley County. In addition, the budget contains $ 27.3 million for developing a megasite in West Tennessee.
Tennessee has the lowest debt per capita of any state in the nation. Plans to float bonds for these economic development projects will continue to be a topic for debate as the budget bill comes before the Senate Finance Committee.
In addition, the budget calls for a departure in Tennessee’s current “pay-as-you go” system for building roads in the state for one that would incur general obligation bond debt. The administration estimates that about $12.3 billion is needed for road projects for the next 10 years. The budget calls for borrowing $350 million in general obligation bonds to repair structurally deficient bridges.
Over the last five or six years, $280 million in road funds have been funneled from the gas tax to meet other state government expenditures. This diversion, along with declining state revenues, sharply rising constructions costs, and a shaky Federal Highway Trust Fund, has caused grave concerns about the state’s ability to keep up with transportation needs.Tennessee must compete in a very competitive economic climate. Erosion of needed road money could hamper this effort. However, incurring debt to pay for Tennessee’s road needs is a departure from the “pay as we go” system the state has used for the past 31 plus years. Legislators will carefully weigh the “pro’s and con’s” of such a proposal over the next several months.
