The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, August 27, 2009, at 2:00 PM, in Room 154 of the Capitol Annex. Representative Rick Rand, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators David E. Boswell, Denise Harper Angel, Ernie Harris, Dan Kelly, Alice Forgy Kerr, Vernie McGaha, R.J. Palmer II, Joey Pendleton, Tim Shaughnessy, Brandon Smith, Robert Stivers II, Gary Tapp, Elizabeth Tori, and Jack Westwood; Representatives Royce W. Adams, Dwight D. Butler, James R. Comer Jr., Jesse Crenshaw, Mike Denham, Danny Ford, Derrick Graham, Keith Hall, Jimmie Lee, Harry Moberly Jr., Lonnie Napier, Fred Nesler, Sannie Overly, Don Pasley, Marie Rader, Jody Richards, Charles Siler, Arnold Simpson, Tommy Turner, Jim Wayne, Ron Weston, and Brent Yonts.
Guests: Ms. Mary Lassiter, State Budget Director and Secretary of the Governor’s Executive Cabinet, Mr. Gary Morris, Policy Advisor to Commissioner Miller, Department of Revenue, Mr. Don Richardson, Executive Director of Income Tax for the Department of Revenue, Mr. Richard Dobson, Executive Director of the Office of Sales and Excise Taxes in the Department of Revenue, and Mr. Jim Oliver, Director of the Division of Miscellaneous Taxes in the Department of Revenue.
LRC Staff: Pam Thomas, John Scott, Jennifer Hays, Eric Kennedy, and Sheri Mahan.
Chairman Rand welcomed new Appropriations and Revenue Senate Chair and Interim Co-Chair, Senator Leeper. Senator Leeper greeted the members and briefly discussed his enthusiasm for his new position.
Chairman Rand announced that Representative Webb has been elected to the Senate. A resolution in honor of Representative Webb was carried by voice vote. Representative Webb thanked the members.
Chairman Rand introduced the new LRC staff member, Eric Kennedy.
Ms. Mary Lassiter, State Budget Director and Secretary of the Governor's Executive Cabinet, reported to the committee on Fiscal Year (FY) 2009 and prospects for the FY 2010. She stated that the General Fund decreased by 2.7% in FY 2009 and is anticipated to continue to decrease in FY 2010. She identified the major areas of concern for reduction of revenue: the sales tax (-0.7%), individual income tax (-4.8%), and corporate income tax (-38%). Revenue from the coal severance receipts, however, continues to increase. Revenue from the cigarette excise tax increased in FY 2009, but as a result of the rate increase approved in the 2009 Regular Session. She said if not for tax increases passed, there would have been a 3.3% decline in the General Fund in FY 2009.
Next, Director Lassiter reviewed the actions to balance the FY 2009 budget. She cited two key pieces of legislation enacted during the 2009 Regular Session: HB 143, which amended the budget reduction plan, and HB 144, which increased the tax imposed against tobacco and alcohol. She also discussed budget reduction orders enacted in March and July. The budget reduction order adopted in March relied on using funds from the rainy day fund, spending reductions, fund transfers, revenue increases, and a SEEK lapse to address a $493 million shortfall. The budget reduction order issued in July addressed an additional shortfall of $63.2 million by diverting excess funds from the Medicaid program. She noted that the funds were not needed in Medicaid due to an enhanced federal match rate under the American Recovery and Reinvestment Act (ARRA).
Director Lassiter reported there were currently no funds in the Budget Reserve Trust Fund. $219 million from the fund was used during the 2009 Regular Session to balance the FY 2009 budget. The remaining balance of $7.1 million has already been expended in FY 2010.
Next, Director Lassiter discussed the FY 2010 budget. The governor called the 2009 Special Session to address an estimated $1 billion budget shortfall for FY 2010. The Governor’s proposal to balance the budget included the use of stimulus funding, spending reductions, debt restructuring, enhanced revenue collection efforts, and suspension of 3 to 5 paid holidays for state employees. The proposal reduced the budget 2.6% from FY 2009 spending levels and was enacted by the General Assembly with two exceptions. The Governor’s proposal for unpaid holidays for state employees was not included in the reductions authorized by the General Assembly and the General Assembly recognized unique funding requirements for PVAs, prosecutors, the public advocate, and judicial and legislative branches. The General Assembly also enacted a tax exemption for military pay and a tax credit for homebuyers that are anticipated to have a FY 2010 impact.
Director Lassiter next reviewed the planning estimates made by the Consensus Forecast Group (CFG) in August of 2009. CFG’s current planning forecast estimate for FY 2010 is a reduction of 2.5% from FY 2009 revenue levels, resulting in an additional projected shortfall of $82.2 million. The planning estimates for FY 2011 and FY 2012 did not change much from the previous estimates. Recovery is projected in FY 2011 and 2012, but growth is not expected to be enough to sustain current spending levels. Planning estimates state that Kentucky will not return to FY 2008 funding levels until FY 2012.
Next, Director Lassiter went through the budget measures passed during the 2009 Special Session relating to FY 2010. There was no spending reduction from FY 2009 levels for SEEK per pupil guarantees or for the post-secondary institutions. Also, there were no reductions from the FY 2009 Medicaid program. Other preserved areas with no cuts from FY 2009 funding levels are: mental health, economic development, state police, local jail support, KET, the Kentucky Horse Park, and the ethics commission. Additional funding over the FY 2009 revised budget, but at levels below the enacted FY 2010 levels was also provided in several areas. Finally, the Department of Revenue, state parks, the Horse Racing Commission, Public Advocacy, Prosecutors, and LGEAF/LEGDF all received funding at levels greater than the FY 2010 enacted budget.
Director Lassiter reported that with current spending levels and the tax credits and exemptions enacted during the 2009 Special Session, further cuts beyond the 2.6% budget cuts approved in the 2009 Regular Session are needed. The Governor will issue a budget reduction order which, for most state agencies, will mean a 4% reduction from FY 2009 spending levels. She noted that all cabinets are working to mitigate the impact on services caused by reduced spending and to preserve the infrastructure of state government.
Director Lassiter discussed the status of the Road Fund. In FY 2009, the Road Fund declined 5.6% and there was a 17.1% reduction in revenue from the Motor Vehicle Usage Tax. A temporary increase in revenue under that tax is anticipated in FY 2010 due to the “Cash for Clunkers” federal program and the additional state incentives passed during the 2009 Special Session. Adding the fiscal impact of the state car buyer credit, the shortfall for the Road Fund in FY 2010 is estimated to be $264.1 million. Planning estimates from CFG indicate the Road Fund will not return to FY 2008 levels until FY 2012.
Senator Stivers asked if the exemption from reduction in funding for Contract Spaces, which allows Kentucky students to attend out-of-state veterinary school in FY 2010 was included in the language in HB 4. Director Lassiter replied that HB 4 was an amendment to the budget reduction plan. Budget reduction plans include a prioritized list of reductions, but the Governor has discretion as to where reductions are made.
Representative Wayne asked how the State Fiscal Stabilization Funds for FY 2010 were to be used. Director Lassiter replied that the funds were fungible and would be used to help balance the overall budget.
Representative Moberly asked whether the next budget would consider stimulus funds to avoid penalizing programs which have these funds in their base during the current fiscal year. Director Lassiter said that consideration would be given to those programs. The current budget documents identify the source of funding for agencies. The FY 2010 budget instructions are being drafted and she anticipates that the instructions will contain guidance to the agencies on this issue so that no penalization occurs.
Chairman Rand asked if the CFG has factored in inflation into their estimates. Director Lassiter reported that the CFG receives information regarding inflation from several forecasting groups. Those national economic indicators are used when forecasting state expense as appropriate.
Senator Shaughnessy asked why the Coal Severance Tax revenue declines almost 24% from FY 2009 to FY 2010. Greg Harkenrider, Chief State Economist, reported there is an anticipated decline in FY 2010 Coal Severance Tax based on an anticipated drop in coal price, which is a factor in determining tax owed.
Representative Lee asked if the FMAP will change based on the unemployment rate and if there are enough General Fund moneys to compensate for any change. Director Lassiter confirmed that if the unemployment rate decreases, there could be a decrease in the federal matching rate for state Medicaid. However, after studying historical data on unemployment in the Commonwealth, the CFG does not project unemployment will drop below 8.9% in the near future.
Representative Yonts asked if repayment of the funds borrowed from the Federal government for Unemployment Insurance Trust Fund was part of the FY 2010 budget. Director Lassiter responded that the repayment was not part of the FY 2010 analysis. The Governor has appointed a taskforce to evaluate the program and recommendations are expected on November 1, 2009.
Representative Wayne asked if there will be a task force to evaluate tax reform to address continued problems with funding. Director Lassiter said that there have been numerous studies completed on tax reform and that there may be further discussion and debate in the future based on prior studies.
Senator Leeper asked if the cigarette excise tax increase has influenced the amount purchased. Director Lassiter stated that while revenue from the tax came in as expected, total sales were less than projected. However, the decrease in sales is primarily attributed to the federal cigarette tax increase. Senator Leeper also asked how the North Point Training Center would affect the budget. Director Lassiter stated that all state properties are self-insured through the State Fire and Tornado Insurance Fund and state agencies pay premiums into that fund. Those dollars are then used to purchase reinsurance. From a budget standpoint, North Point Training Center will not have much of an impact. There will be some impact to the correctional system in the short-term and a reevaluation of the capital plan in the long-term. Finally, Senator Leeper asked how the decrease in property and motor vehicle assessments will affect SEEK. Director Lassiter replied that SEEK funding was a concern that is being addressed as Budget starts working on the next biennial budget. There will be a SEEK impact, but the total value has yet to be determined.
Representative Webb asked about the status of space and personnel after the removal of 700 inmates from North Point Training Center. Director Lassiter replied that inmates were moved to state or private institutions but the increase in operational costs are covered by insurance.
Next, Mr. Gary Morris and Mr. Don Richardson with the Department of Revenue addressed the committee regarding the New Home Tax Credit, enacted in HB 3 in the 2009 Special Session. Mr. Morris stated HB 3 had an emergency clause and went into effect on July 26, 2009. The credit applies to the purchase of new homes in the Commonwealth made by a qualified buyer who purchases a new home in a transaction defined in KRS 141.388. The homebuyer applies for the credit through the Department of Revenue. If approved, the taxpayer then claims the credit on their individual income tax return in the calendar year in which it was approved. The effective date range is one year, from July 26, 2009 to July 25, 2010. The credit is a maximum of $5,000 per home, is non-refundable, and cannot be carried forward or back to any other tax year.
Mr. Morris explained that the Department of Revenue posts on its website the total amount of credit which has been approved. The program has a cap of $25 million and when it has been reached, any additional applications will be denied. As of August 25, 2009, $765,000 in credit has been approved. Mr. Morris stated that to date there have been 162 applicants for the credit, of which 153 have been approved and 9 have been denied. Revenue has reached out to potentially interested individuals and organizations to let them know about the program. Finally, if an applicant is eligible for the Federal First Time Homebuyer’s Credit, they are not eligible for the Home Tax Credit.
Representative Denham asked when escrow occurs for the purpose of the credit. Mr. Morris reported that Revenue was interpreting escrow as the date on which the bank, buyer, and seller have closed. From the date of escrow, the buyer has seven days to fax an application for the credit. Representative Denham also asked if a purchaser can be pre-approved. Mr. Morris replied that a form is only considered after the purchase has been finalized but that taxpayers can call and have questions answered.
Representative Crenshaw asked if this program has had a measured influence on the number of houses sold. Mr. Morris responded that it was too early to measure such an impact. He said updates on the impact of the program could be provided to members as requested, and Revenue would solicit help from economists in the Governor’s Office of Economic Analysis to determine overall impact.
Representative Webb asked what the issues were with the 9 applicants denied the credit. Mr. Morris responded that the majority issue was filing beyond the statutorily-required 7 day deadline. Mr. Richardson also stated there were some denials due to incorrectly filled out forms, which could be rectified by resubmission. The only time a resubmission would affect an applicant is if their amended application was resubmitted after the credit cap was met.
Finally, Mr. Richard Dobson and Mr. Jim Oliver with the Department of Revenue discussed the credit for Motor Vehicle Usage Tax. The credit is capped at $25 million. This is a temporary trade-in credit allowance which starts September 1, 2009 and runs through August 31, 2010, assuming funding is still available. The Department of Revenue has been offering training programs to the County Clerks with regard to the implementation of this tax credit. The credit amount used will be published online and updated throughout the day. The Department has also promulgated an emergency regulation to provide some detail about the process to interested parties.
Chairman Rand noted that in the handout was a packet of information which needs no action. It directs some routine allotment adjustments and appropriation changes which have been reviewed by staff and deemed in order.
Representative Harper Angel asked about HB 44 and whether counties were taking the full 4% increase in property tax. Pam Thomas clarified that it is the state property tax rate that is designed to automatically increase by 4% every year, based on the estimates of the assessment base. The property rate increase for local property taxes works very differently. Representative Harper Angel asked that the staff look into the changes in local property taxes, especially as regards SEEK.
Being no further business, the meeting was adjourned at 3:30 p.m. A cassette tape of this meeting and all meeting materials are available in the Legislative Research Commission library.