The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, August 22, 2002, at 2:00 p.m., in Room 131 of the Capitol Annex. Senator Richard Sanders, Jr., Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Richard Sanders, Jr., Co-Chair; Representative Harry Moberly, Jr., Co-Chair; Senators Brett Guthrie, Daniel Kelly, Alice Kerr, Robert Leeper, Vernie McGaha, Ed Miller, Gerald Neal, Dan Seum, Robert Stivers, Johnny Ray Turner, Jack Westwood, and Ed Worley; Representatives Royce Adams, Rocky Adkins, Joe Barrows, Jim Callahan, Mike Cherry, Larry Clark, Barbara White Colter, Jesse Crenshaw, Robert Damron, Bob DeWeese, Danny Ford, Joni Jenkins, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, John Will Stacy, Mark Treesh, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.
Guests Appearing Before the Committee: Dr. Jim Ramsey, State Budget Director, and Brenda Major, Director, Division of State Valuation, Revenue Cabinet.
Guests: Randy Smith, PAC; Tony Sholar, Ky Chamber of Commerce; Lyle Cobb; Bart Baldwin, Children's Alliance; Jack Couch, KCADD; Ann Hester, KYTC; Ruth Schiller, DPA; Brenda Crossman; Darla Barley, Kaleidoscope, Inc.; and Bert May, KLC.
LRC Staff: Terry K. Jones, Lou Pierce, Susan Viers Wobbe, and Kathy King.
Chairman Sanders asked for a motion to approve the minutes of the July 16, 2002 meeting. Representative Damron moved for approval. The motion was seconded by Representative Cherry and adopted by voice vote.
Dr. Ramsey, State Budget Director, addressed the committee regarding the fiscal year close out and anticipated revenue receipts. He said balancing resource revenues against expenditures is an ongoing process that occurs throughout the year and not just at the end of a fiscal year, and then discussed the Consensus Forecasting Group. In January 2000, the Consensus Forecasting Group provided its revenue forecast in preparation for the 2002 budget. The group met again in June 2001, and revised its January forecast downward, estimating that there would be a $295 million revenue shortfall in 2002. Statute requires the Executive Branch to take appropriate action to get in balance when the Consensus Forecasting Group revises its estimate. Soon after the shortfall was announced in June 2001, cutback order #1 went into effect to get back in balance. In October 2001, the Consensus Forecasting Group met again and revised its estimate down another $166 million. Again, the Executive Branch took appropriate action and effected cutback order #2. The Consensus Forecasting Group met again in December 2001 to finalize revenue estimates for the 2003-2004 biennium. No additional revisions were made at that time. In early June 2002, it became obvious that collected revenues were not going to meet the official revenue forecast, and a policy decision was made to bring that back into balance. In late June, cutback order #3 went into effect, and in early July, cutback order #4 was instituted. These two cutbacks totaled an additional $155 million. Dr. Ramsey said the total revenue shortfall came to $617.5 million.
In addition to the revenue shortfall, there were some expenditure requirements that had to be covered. A General Assembly budgeted lapse came to $15 million; $11.8 million in dedicated revenues to local governments from the coal severance tax; partial restoration of SEEK funds amounting to $15.8 million that were taken in the first-round budget cut; $9.1 million in increased lottery receipts dedicated to needs and merit-based scholarship programs; the legislative claims bill (HB 707) at $644,800; current year appropriations for two projects - $300,000 to the Kentucky Horse Park, and $30,000 to the Attorney General's office; and $16.7 million in necessary governmental expenses. Dr. Ramsey said Kentucky had several natural disasters due to floods, fires, and a tornado. The state had to put up the $16.7 million to pay the required ten percent to the federal government to receive 90 percent in federal funding to pay for those disasters.
Dr. Ramsey stated the total budget shortfall came to $687.1 million. To get resources and expenditures back in balance, the state has followed the budget reduction plan which the General Assembly enacted in its appropriation bill in the 2000 Regular Session. He said a policy decision was made to exempt K-12 education from any programmatic reductions. In an effort to preserve services and to prevent state employee layoffs, every agency was asked to reexamine their overtime, travel, and cell phone use in an attempt to save costs. The state has also taken advantage of the lower interest rates by refinancing its outstanding bond issues to lower its debt service costs. The EMPOWER Kentucky program has been very useful because it has identified processes that maximize program savings and efficiencies without cutting program delivery. Dr. Ramsey said authorized capital projects have not been interrupted since community projects often boost local economies.
The state was able to meet its $687 million shortfall obligations. Total agency expenditure reductions came to $231 million. Some of that amount is reflected in cost savings and some is reflected in a reduction of services in certain programs. The state captured $112 million in debt service reductions and $97 million from fund transfers by moving money from non General Fund accounts to the General Fund. The state had to use the $240 million in the Budget Reserve Trust Fund and that account has been depleted. Dr. Ramsey said an accounting error in the budget two years ago resulted in an additional $5.5 million adjustment to General Fund budgeted revenues.
Dr. Ramsey said economic times have been very difficult and they are probably not over. The state did manage through the fiscal year without making any reductions in K-12, which is approximately $3 billion out of a nearly $7 billion budget. Some minor reductions were made in postsecondary education. On the average, the institutions took a 1.9 percent cut. The rest of state government took a five to six percent reduction. The cuts were varied program cuts rather than across-the-board cuts. There were a significant number of fund transfers that resulted in program reductions, but the state tried to make sure that the fund transfers did not impact service delivery. As noted before, the Budget Reserve Trust Fund was depleted. Dr. Ramsey said there is also a $23.5 million carry-forward from 2002 to 2003, which is about $14 million less than what the General Assembly had planned on and discussed in its deliberations during the Regular Session and the Special Session.
Dr. Ramsey stated the state has been able to pay its required expenditures on time under the spending plan. Even though the credit rating agencies still have concerns about Kentucky's economy and its overall budget situation, Moody's took Kentucky off its credit watch on August 1st after Kentucky made $55 million in debt service payments on that date.
Dr. Ramsey said the Consensus Forecasting Group will convene after first quarter receipts are reviewed.
Representative Damron asked if the savings captured by refinancing outstanding bond issues is recurrent savings. He said the savings should be reflected in future reductions for taxpayers over the life of the state bond. Dr. Ramsey said his office tried to capture the savings through the budget process on a recurring basis; however, some refunding was done early in the year to level out the debt service payments over time.
Representative Adkins commented that the administration promoted the Empower Kentucky program, which cost $80 to $90 million to implement, by saying that it would streamline state government resulting in a savings to the state. He asked if the program is meeting that goal. Dr. Ramsey said the annual recurring savings from the Empower Kentucky program is probably reaching near $100 million, a four to one ratio of savings to investment on a multiple year calculation. He said the Empower Kentucky initiative totally revamped Kentucky's financial management programs and provides some tools on both the asset and liability side of the balance sheet that were not there before. It has helped with additional investment income and Kentucky's bond issues. He said Kentucky has received several national citations for its Empower Kentucky program.
Senator Miller commented that he has been very disappointed that Kentucky has not revamped its tax structure even though several tax studies and tax experts have recommended changes that would update the tax system. Failure to execute a change puts Kentucky at risk in the future. He added that he is also disappointed that Kentucky has failed to raise the tobacco tax when Kentucky is one of the leading states in lung cancer and other health problems related to tobacco.
Representative Siler asked how the tax amnesty program is performing. Dr. Ramsey said it is too early to comment on its progress because the program is in its early stages. He said the history of a tax amnesty program is that most of the money flows in at the very end of the program.
Representative DeWeese said that federal intergovernmental transfers (IGTs) were used extensively during budget deliberations to balance the Medicaid budget. The federal government has been scrutinizing this program because some states have abused the use of IGTs. He asked how Kentucky stands with the federal government on the use of IGTs. Dr. Ramsey said IGTs were used to balance the Medicaid budget and even help with its state budget. He said several states have abused the use of IGTs and when Kentucky began looking at IGTs as a way to balance its budget, an outside, independent lawfirm was hired to make sure the use falls under the laws and regulations of the program to avoid any perception of abuse. Kentucky has been a state that has not been aggressive in getting all of its eligible Medicaid dollars, and the decision was made that the use of IGTs is the right thing to do as opposed to cutting provider payments, or cutting services to eligibles. He said the administration is aware that the federal government has swung from a surplus to a deficit, and there is going to be increased pressure to control costs, which may mean elimination of the program in the future.
Representative Ford said there are no penalties and no interest due for delinquent taxpayers during tax amnesty. He asked if the people taking advantage of the tax amnesty program are people known to the Revenue Cabinet, or new people coming forward and saying they have a tax liability. Brenda Major, Division of State Valuation, Revenue Cabinet, said the bulk of those coming forward right now are those who know they are in trouble and know that they need to get their taxes done, but the cabinet is also seeing new people come forward who were unknown to the cabinet.
Representative Ford stated that if a property sells, the tax lien must be paid and asked if the cabinet uses enforcement to collect that tax. Ms. Major said the cabinet's collection efforts are going to increase after the tax amnesty program with even higher penalties and fees. Representative Ford said enforcement can be an advantage to the taxpayer because if the property just sits for five or six years, it builds interest and penalties. He said he had a situation recently on a property that was sold but there was a property tax bill in the original owner's name since 1997. The new owner was not aware of the taxes owed. Ms. Major said that problem does occur because people move and do not leave a forwarding address. It is an issue that the cabinet must deal with.
Chairman Sanders recognized Representative Nunn. Representative Nunn said the Kentucky Organization for Foster Youth recently commended Representative Barbara Colter for her dedicated service to Kentucky's foster children. Representative Colter has also been recognized as "legislator of the year" by other states in the Southern Health Association, for her continued efforts for health departments throughout her legislative career.
Senator Stivers said General Fund receipts show a 47.8 percent change in property tax receipts. He asked if there has been a change in accounting procedures. Ms. Major said because of the budget crisis, accounting entries were not made to move that money from the General Fund. Dr. Ramsey said an important point is that the payments to local governments are made in August. He said it has been a management call as to when accounting entries are made, some years it has been done one way and some years, it has been done another way. In the last six years, it was done in one fiscal year and in the three other years, it was done in the next fiscal year. He said it will have to be made up in July.
Representative Wayne said many states with budget deficits would benefit from revenue sharing. He asked if there has been any effort in Washington to lobby for revenue sharing. Dr. Ramsey said the federal government has gone from a $160 billion surplus to a $150 million deficit so the focus has been on the federal budget rather than state budgets.
Senator Neal commented the economy has always been cyclical with high periods and low periods. Taxes were cut over a period of years and our present economic state is directly related to those cuts. He said it is time to pay close attention to the sins of the past and take advantage of the opportunity to plan for Kentucky's economic future.
The meeting was adjourned at 3:35 p.m.