The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Tuesday, January 14, 2003, at 10:00 a.m., in Room 131 of the Capitol Annex. Representative Harry Moberly, Jr., Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Harry Moberly, Jr., Co-Chair; Senator Richard Sanders, Jr., Co-Chair; Senators Brett Guthrie, Paul Herron, Jr., Ray Jones, II, Daniel Kelly, Alice Kerr, Robert Leeper, Vernie McGaha, Gerald Neal, R. J. Palmer, II, Joey Pendleton, Larry Saunders, Dan Seum, Robert Stivers, and Jack Westwood; Representatives Royce Adams, Rocky Adkins, Joe Barrows, Scott Brinkman, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Jack Coleman, Jesse Crenshaw, Robert Damron, Bob DeWeese, Jon Draud, Danny Ford, Joni Jenkins, Mary Lou Marzian, Thomas McKee, Lonnie Napier, Fred Nesler, Stephen Nunn, John Will Stacy, Tommy Turner, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.
Guests Appearing Before the Committee: Mary Lassiter, Acting State Budget Director; Bob Cox, Deputy Director, Governor's Office for Economic Analysis; Beth Jurek, Deputy State Budget Director; Chris Adkins, American Legislative Exchange Council (ALEC); Arturo Perez, National Conference of State Legislatures (NCSL); Sujit CanagaRetna, Southern Legislative Conference (SLC); and Dana Mayton, Secretary, Kentucky Revenue Cabinet.
Guests: George Moore, Commonwealth Attorneys; Bill Doll, KMA; David Cox, KyBoels; Tony Sholar, Ky Chamber of Commerce; Eric Gregory, East Ky Power Co-op; Terry Thompson and Stan Head, GOT; Shawn Sparks, KRS; Steve Stevens, No. Ky. Chamber of Commerce; James Halvatgis and Charles Lewis, KDVA; Gay Dwyer, KRF; Jill Seyfred, PCAK; Mike Carr, KASA; Travis Shiurley, KWPCC; Mike Ridenour, Lexington Chamber of Commerce; Charlie Harman, Workforce Cabinet; Wayne Johnson, KAHCF; John Cooper, Toyota; and Ned Sheehy, KMTA.
LRC Staff: Terry Jones, Lou Pierce, Pam Thomas, and Kathy King.
Chairman Harry Moberly opened the meeting and welcomed new members to the committee. Next, he recognized Mary Lassiter, Acting State Budget Director, and Bob Cox, Deputy Director for the Governor's Office for Economic Analysis, for a presentation on General Fund and Road Fund revenue receipts.
Ms. Lassiter said General Fund receipts collected in FY 2002 were $93 million less than receipts collected in FY 2001, which is a first in documented Kentucky history. Kentucky is dependent on two particular taxes for its General Fund revenue source - the sales and use tax and the individual income tax. In 1991, the first year after KERA tax changes, 68 percent of Kentucky's General Fund came from the sales and use tax and the individual income tax. Since 1991, Kentucky's reliance on these two taxes has increased to 76 percent of the General Fund.
Ms. Lassiter said Kentucky is currently operating under the Executive Branch Spending Plan, which is based on House Bill 1 introduced in the April 2002 Special Session of the General Assembly. A 6.2 percent growth off of actual General Fund revenue from FY 2002 is needed to fund the spending plan. The Consensus Forecasting Group met and revised the official estimate downward on November 15, 2002. The revised estimate requires 3.2 percent growth through the end of the year to meet that estimate. Ms. Lassiter said actual revenue growth through December 31, 2002, was 5.1 percent.
Senator Sanders asked how internet sales are affecting the sales and use tax. Ms. Lassiter said Dr. Bill Fox's 2002 study estimated that Kentucky would probably lose about $107 million in sales and use tax revenue in FY 2002 because of remote sales, or catalog and internet sales. There has been a rapid increase in internet sales activity, and it is continuing to grow faster each year.
Mr. Cox said there was 4.3 percent revenue growth in December 2002, but the two taxes that Kentucky's economy depends on the most, the sales and use tax and the individual income tax, were both down in December 2002. There are no signs of solid growth in individual income taxes, which fell by 3.2 percent, and the sales and use tax declined by 1.2 percent. There has been good growth in the corporate income and license tax due to higher declaration payments, a lower level of refunds being issued, and income from the tax amnesty program. Coal severance tax receipts are on the decline again because energy prices fell. The property tax has remained about the same, and lottery receipts are down slightly due to a timing difference. Mr. Cox said lottery receipts are up from where they otherwise would have been because Kentucky was the beneficiary of a large powerball jackpot in the first half of 2002, and will be receiving funds from another large powerball jackpot. The "other" category grew significantly because of unexpected large inheritance tax payments. Revenues were up about $25 million for the inheritance tax in December 2002 over the previous year.
Mr. Cox said there has been a 5.1 percent growth in the first half of this fiscal year, but the growth is due to some one-time events, some accelerations and other extenuating circumstances. There was an unexpected sales tax payment of $32 million received in August 2002, and a single inheritance tax payment of $17 million was made in December 2002. An estimated $74.1 million in funds from the tax amnesty program was accelerated from the second half of the fiscal year into the first half of the fiscal year. Mr. Cox said if these one-time circumstances were discounted from the General Fund year-to-date growth, actual growth would only be about 1.3 percent.
Senator Kelly said the spending plan that the Governor is currently spending under is based on a 6.2 percent growth in revenue for FY 2003. In November, the Consensus Forecasting Group revised the FY 2003 General Fund estimate downward projecting revenue growth of 3.2 percent. Today, the growth is projected at 5.1 percent, but because of receiving some one-time money, the real economic growth is only 1.3 percent. Ms. Lassiter said actual receipts and revenues in the bank represent a 5.1 percent growth, but for economic planning purposes and how actual economic activity is performing in Kentucky, real economic growth is unofficially estimated at 1.3 percent.
Senator Kelly asked whether, because of these unexpected surprises, a 1.3 percent level of growth is needed to meet the current revenue estimates in order to have a budget shortfall of no more than what has already been projected. Ms. Lassiter said that is correct. Senator Kelly commented that this growth is likely to happen given the level of growth in the first half, but there will be significant impacts for 2004. Instead of growing at the 6.2 percent rate that the original spending plan was based on, or even the 3.2 percent rate that the revised estimate was based on, there may be as much as a 50 percent reduction in growth for 2004, because the revenue base will be lower. Ms. Lassiter said the economic outlook upon which the estimates were based for 2003-2004 has not changed significantly from November. The economic outlook for 2004 was for a pick-up in the economy over 2003. Mr. Cox said the Consensus Forecasting Group actually looks at special circumstances when they forecast forward.
Senator Kelly asked when the Consensus Forecasting Group will provide their latest estimates. Ms. Lassiter said the Consensus Forecasting Group is scheduled to meet on Friday.
Chairman Moberly said the point being made is that the base will be artificially high because of these one-time money surprises. Ms. Lassiter said there are some one-time surprises every year; however, there have been more this year than what is normally experienced.
Representative Clark asked what the dollar amount is for the projected shortfalls. Ms. Lassiter said $144 million in 2003, and $365 million in 2004. She said these figures include both the revenue and expenditure sides of the budget.
Representative Clark commented that a 1.3 percent revenue growth may get us through this fiscal year, but there will be problems in FY 2004. Ms. Lassiter said there is still a budget shortfall in the current year that needs to be addressed. The projected growth of 1.3 percent for the balance of this fiscal year will get us to what the Consensus Forecasting Group estimated when they met in November, but the spending plan assumed 6.2 percent growth.
Representative Clark asked what the anticipated dollar amount will be if there is 1.3 percent growth. Ms. Lassiter said on the revenue side, it is right at $200 million. With expenditure offsets, it is still in the neighborhood of $144 million with the most significant adjustment for the Department of Education. She said previous estimates on the shortfall in the SEEK formula have been revised downward to $100 million in the current year.
Representative Moberly said the latest analysis includes some possible one-time funds of about $160 million that reduces the current biennial shortfall to about $97 million, but it goes up to about $398 million in the second year, so it is still close to $500 million for the biennium. Included in that $97 million is the $48 million shortfall in SEEK.
Representative Nunn said another significant area of shortfall is a structural imbalance of about $450 million in the Medicaid program. Ms. Lassiter said the total Medicaid budget that was introduced in January 2002 had a structural imbalance of an estimated $216 million. Kentucky's Medicaid match is about 70 percent federal funds and 30 percent General Fund. Current estimates are that by the end of 2004, the shortfall will be in the magnitude of $450 million. Ms. Lassiter said Governor Patton's approach has been to try to manage the Medicaid program within its own budget and a list of actions that will need to be taken to get that program within its budget will be introduced very soon.
Representative Nunn said about $2 billion went through the Government Contract Review Subcommittee for personal service contracts (PSC) and memoranda of agreement (MOA) in the last biennium. About $1.5 billion has gone through the same subcommittee in the first seven months of this biennium. If that trend continues, over $3 billion will be spent on resources outside of state government for the operation of state government. He asked why there is so much growth taking place at a time when the state is experiencing significant economic shortfalls. Ms. Lassiter said Governor Patton just recently signed an Executive Order that outlines a list of cost cutting measures and management dollar-saving initiatives that government should undertake across-the-board regardless of the fund source. The Executive Order included a moratorium on PSCs unless the contract could be justified by Secretary Gordon Duke of the Finance and Administration Cabinet. Secretary Duke is reviewing existing contracts and putting together information that outlines the contracts. Ms. Lassiter said a significant portion of the contracts are program management issues that involve large programs. She said funds are appropriated to operating units of state government and management decisions are made within those operating units of state government to determine the best use of the state's resources to deliver services to Kentucky citizens.
Representative Ford asked what the total cost is for the Medicaid program. Ms. Lassiter said the Medicaid program costs approximately $4 billion. Representative Ford commented there was a $216 million shortfall in the Medicaid budget in January 2002, and asked if the shortfall is due to an increase in the number of people added to the Medicaid roles. Ms. Lassiter said there is an increase in the number of eligible individuals. Another significant factor is the increase in health care costs in general, but the most significant cost-driver for Kentucky and all states is pharmaceuticals.
Representative Ford asked if the poverty guidelines have been updated. Beth Jurek, Deputy State Budget Director, said federal poverty guidelines are updated each year by the federal government, and Kentucky basically follows the federal guidelines.
Mr. Cox said the Road Fund receipts are up 2.8 percent overall with some growth in the motor fuels tax, the motor vehicle usage tax, and the weight distance tax. The Road Fund is more volatile than the General Fund because of timing differences, so there are double digit increases and decreases month-to-month. The consensus revenue estimate required Road Fund growth of -0.6 percent in fiscal year 2003. Based on year-to-date growth, the Road Fund could decline by as much as 3.8 percent for the remainder of the fiscal year and still reach its consensus estimate.
Senator Stivers asked if there are any liabilities, such as court cases on the expenditure side, built in to the revenue projections. Ms. Lassiter responded that the Illinois Tool Works, Inc. (ITW) case could have a significant impact. She said there is a list of contingent liabilities that are assessed every year and the state comptroller is bound by generally accepted accounting principles to assign a probability to those contingent liabilities for the state's financial report.
Senator Stivers asked if the known impact of the ITW court case is a part of the budget projection. Mr. Cox responded that it is not. He said the Consensus Forecasting Group prepares its estimates based on current law and does not speculate, or anticipate anything that has not yet occurred. He said the Consensus Forecasting Group does track all potential liabilities and can adjust the forecast if the liability becomes a reality.
Senator Stivers said approximately ten months ago he asked if there were any revenue sources, revenue streams, or interest-bearing accounts that had not been made public, and it was reported that there were not any; however, since that time, the state has found $161 million in one-time "surprise" money.
Senator Kerr said the costs associated with PSCs is staggering, and the information given to staff does not provide enough detail to consider thoroughly. She asked if more detailed contract information can be provided to committee members. Ms. Lassiter said she does not have information on PSCs, but that she would confer with the Finance and Administration Cabinet about more detailed information for committee members. Regarding personal service contracts, Ms. Lassiter said agencies cannot spend more money then they have been appropriated. She said it is the responsibility of an agency to provide a required service and agency management makes the decision on how to provide those services most efficiently.
Senator Seum asked what the federal poverty level is for a family of four. Ms. Lassiter responded that the federal poverty level is about $17,000 for a family of four.
Senator Seum asked where Kentucky stands regarding the services provided to Medicaid eligibles. Ms. Lassiter said the state is required to provide certain seniors under Medicaid, but it is permissible to provide services beyond what is required. There are mandatory services and there are optional services, and every state makes different decisions about what services to provide for their citizens. She said Secretary Marcia Morgan has a list that details how Kentucky ranks with other states in the services that it provides through Medicaid.
Senator Seum asked what amount of money would be generated if all Medicaid programs are trimmed back to the minimum amount required at the federal poverty level. Ms. Jurek said the Cabinet for Health Services is looking at this issue as part of its budget process.
Senator Westwood asked about the SEEK underfunding for per pupil average daily attendance (ADA) in the Department of Education. Ms. Lassiter said an erroneous estimate was made in the initial budget analysis provided by the Department of Education that centered on the property tax side. After review by the Governor's budget staff, the Governor's Office for Economic Analysis, and the Revenue Cabinet, that figure was adjusted. Since that time, the LRC Program Review and Investigations Committee discovered an error so the number has changed several times since the initial analysis was presented. Senator Westwood said that he has not seen that kind of underestimation for ADA before. Ms. Lassiter said that, historically, erroneous estimations of ADA base funding have been on the plus side resulting in more money than actually needed.
Senator Leeper asked how the amount of $398 million for the projected budget shortfall for 2004 was determined. Ms. Lassiter said the starting point was revenue estimates done in December 2001, upon which the Executive Budget recommendations were made in January 2002. Following the 2002 legislative session, adjustments were made when other revenues were assumed as a result of enacted legislation. In November 2002, the Consensus Forecasting Group revised the revenue estimates and there was an adjustment of about $186 million. On the revenue side, there was approximately $200 million less in revenue for FY 2004 when HB 1 was being considered. On the expenditure side, $15 million is set aside for necessary government expenses and $78 million for SEEK in the second year to fully fund the per pupil ADA that was in HB 1. Public financing for gubernatorial campaigns was taken out adding $2 million in FY 2004. In addition, HB 1 assumed $81 million in fund transfers from other sources on the resource side. Approximately $22 million of fund transfers that were planned for FY 2004 were moved to FY 2003 to help make the problem in 2003 smaller. Also, HB 1 assumed that the beginning balance in FY 2004 would be $79 million and that is no longer there because of the shortfall in 2003.
Senator Leeper said when the budget was being discussed, there were items discussed that just may not be affordable now. He asked if any analysis has been done that includes only the most necessary expenses, such as heating, electric and insurance. Ms. Lassiter responded that such an analysis had not been completed.
Representative Draud asked what the budget is for the Department of Education. Ms. Lassiter said the Department of Education's budget is about $3 billion and is almost all General Fund money.
Representative Clark said he would like more information on the growth of LLCs in Kentucky. He said about 7,300 LLCs have been formed but revenue from the business tax has continued to decline over the last seven to eight years.
Representative Cherry asked about the lottery proceeds. Ms. Lassiter said the lottery is dedicated to merit-based KEES scholarships and needs-based financial aid for Kentuckians to go to college. What is left over goes into the Kentucky Affordable Housing Trust.
Representative Wayne said that an Associated Press news article reported this morning that nine states and the District of Columbia have banned together to address the Medicaid prescription drug issue. He asked if Kentucky is a member of this group, or if it plans to join the group. Ms. Jurek said she is not aware that Kentucky has joined this group. She said most states have been stymied on their initiatives because the pharmaceutical companies have blocked their attempts by filing lawsuits to prevent them from moving forward. She said all states share information whether they are directly involved, or not. Representative Wayne said the group initiative may be promising and perhaps Kentucky should join.
Next on the agenda, Chris Adkins, from the American Legislative Exchange Council (ALEC); Arturo Perez, from the National Conference of State Legislatures (NCSL); and Sujit CanagaRetna, from the Southern Legislative Conference (SLC), discussed how other states are addressing budget shortfalls. Their handouts are on file in the Appropriations and Revenue Committee office and the LRC library.
Secretary Dana Mayton, Revenue Cabinet, explained Administrative Regulation 103 KAR 44:070 & E, relating to taxation of loaner and rental motor vehicles. Representative Adams moved for approval of the administrative regulation. The motion was seconded by Representative Adkins and adopted by voice vote.
Representative Callahan asked Mr. Atkins to provide the committee with a copy of his testimony.
The meeting was adjourned at 12:35 p.m.