Governor Beshear's and the Legislature's Responses to the $456 Million Shortfall
In November, the CFG had predicted a revenue shortfall of $406 million and Governor Beshear indicated that he'd be an additional $50 million short of his spending objectives, for a total $456 million shortfall.
In December, Governor Beshear presented his plan to answer the projected shortfall.
He proposed:
- $147.1 million in spending cuts
- $81.5 million from a 70-cent cigarette tax increase this fiscal year, which ends June 30, 2009.
- $8 million by furloughing state workers three days, during which they won't get paid.
- $40.6 million in money transfers from various "restricted" funds throughout state government.
- $178.9 million by tapping the state's "rainy day fund."
It is unclear whether the $147 million in proposed cuts include the $50 million of proposed new spending. In other words, we're not sure if he's proposing to cut the $50 million in spending that wasn't in the budget anyway.
We noted then, as we've noted twice in this review, that there is not $178.9 million in the state's "Rainy Day Fund", only $46 million in reserves:
| Balances in reserve to carry into the next fiscal year | ||
| 2008 | 2009 | 2010 |
| $347 | $285 | $46 |
| (in millions) | ||
Any spending of reserves more than $46 million would leave a deficit in 2010.
His proposals instantly met opposition, including the size of the cigarette tax, the furlough proposal and the fund transfers.
Eventually, the General Assembly passed HB 144, a cigarette tax increase and a new sales tax on alcohol which is estimated to create $52 million in tax revenues for FY 2009.
Additionally, the General Assembly passed HB 143, legislation that would allow the governor to make his proposed cuts, spend up to $209 million of the Budget Reserve Trust Fund, and transfer over $50 million from the state pension system's health care fund.
With these actions, Governor Beshear has $199 million of new room in the budget for 2009 (the total of the $147 in spending cuts, $52 million in revenues from the new taxes).
And an additional $250 million of flexibility, adequate to cover a slightly revised shortfall projection of $459 million ($199 million of budget space + $250 million of flexibility = $459 million).
Let's note that the budget changes will help in 2010, while the flexibility is just a quick fix.
The budget portion follows into 2010. The spending cuts should reduce the baseline for both years. The new taxes are estimated to create an additional $159 million in 2010. These total $306 million in new budget room for FY 2010.
The remaining $250 million remains an obligation in 2010. The $50 million must be repaid to the the retirement health fund, and spending $209 million of reserves will leave an instant deficit for 2010 of at least $163 million.
