Legislative Update - July 25th, 2020

Hi everybody,

State government got a welcome dose of good news this week, thanks to the announcement that the just-completed fiscal year ended with a slight surplus.  That’s far better than the $457 million shortfall predicted just two months ago.

            There is a cloud behind that silver lining, however.  As we look ahead to the remainder of the current fiscal year, Kentucky could be facing a deficit topping $1 billion, Governor Andy Beshear said.  If nothing changes, that could mean cuts of 25 to 30 percent for some agencies, many of which have yet to rebound from repeated reductions over the past dozen years.

There are several reasons why the recent fiscal year ended in the black instead of the red.  One is that there was more income-tax revenue than predicted when the state and federal tax-filing deadline was moved from April 15th to July 15th.  Agencies also made cuts in the final weeks of the fiscal year that amounted to about one percent annually.

It also didn’t hurt that Kentucky was beating budget projections through March, when the coronavirus first arrived.  Revenues were up almost four percent until that point, well above what we needed to cover expenses.

Other state governments were on a similar trajectory before the pandemic.  All but eight states were outpacing their own budget projections more than halfway through the 2020 fiscal year, according to the National Association of State Budget Officers, and the combined revenues for all states were on track to grow for the 10th year in a row.  Their budget reserves in “rainy day” funds were at the highest level ever.

 It's a much different story now.  The Center on Budget and Policy Priorities said earlier this month that it expects state revenues alone to drop more than a half-trillion dollars by 2022, and state and local governments have furloughed or laid off more than 1.5 million employees, a number that is double what it was during the entire Great Recession.

Here in Kentucky, the state budget office’s most recent monthly report on tax receipts gives us a clearer picture of what is happening in our economy.  In May, sales tax revenue was down more than a tenth when compared to the same month in 2019, highlighting the decline our retailers are seeing.

            There are some extreme variations among other tax categories.   Road funds, for example, were down a fourth from April through the end of June, and coal severance taxes were on track to end the fiscal year a third below 2019’s already-low total.  That is devastating for our coal-producing counties.

            One relative bright spot is our lottery sales, which Gov. Beshear said last week would be able to deliver $15 million extra for needs-based financial aid used by college students.  Lottery officials also noted they’re seeing a strong uptick in online sales, especially since the pandemic began.  That portion of their market was more than 40 percent higher this past spring than it was at the same point in 2019.

            When the General Assembly passed a slim one-year state budget in mid-April, the only thing legislators knew for sure was that the upcoming fiscal year would be one of our most difficult ever.

We’ll know more when we return to the Capitol in January, but as we prepare for potential cuts and write the next one-year budget, there will be a couple of extra hurdles along the way.  One is that odd-year legislative sessions are half as long as even-year ones, giving us less time to do our work, and these shorter meetings also require a greater number of votes on any legislation affecting state finances.  That higher threshold was put in place in the state constitution to maintain the integrity of the traditional two-year budget process, meaning this is a requirement that even a pandemic cannot overcome.

One final unknown is what the federal government might do for state and local governments reeling from the steep decline in tax revenue.  If we’re included in a future relief package, that would make our work enacting a budget next year much easier.  For now, there's little we can do but wait and see. Feel free to contact our federal delegation and ask that state and local governments receive as much as possible to make up for these reductions.

            If you have any thoughts about this or other state issues, please don’t hesitate to contact me.  My email is joe.graviss@lrc.ky.gov, and the toll-free message line for the General Assembly is 1-800-372-7181.