Call to Order and Roll Call
The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, June 23, 2011, at 1:00 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 Joe Bowen, Tom Buford, Denise Harper Angel, Ernie Harris, Jimmy Higdon, Paul Hornback, Ray S. Jones II, Vernie McGaha, Joey Pendleton, Brandon Smith, Jack Westwood, and Mike Wilson; Representatives Royce W. Adams, John A. Arnold Jr., John "Bam" Carney, Jesse Crenshaw, Ron Crimm, Mike Denham, Bob M. DeWeese, Danny Ford, Derrick Graham, Richard Henderson, Jimmie Lee, Sannie Overly, Marie Rader, Jody Richards, Sal Santoro, Arnold Simpson, Tommy Turner, Alecia Webb-Edgington, Susan Westrom, and Brent Yonts.
Guests: Mr. Greg Harkenrider, Deputy Executive Director for Policy Research, Office of the State Budget Director; Mr. Ron Crouch, Office of Employment and Training, Kentucky Education & Workforce Development Cabinet; Representative Rocky Adkins.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, Margot Royar, and Sheri Mahan.
Revenue Report
Mr. Greg Harkenrider, Deputy Executive Director of the Governor’s Office for Economic Analysis, presented the third quarter of fiscal year 2011 update. He discussed Kentucky’s current economic status and provided an overview of General Fund and Road Fund revenues for the third quarter of 2011. He discussed the most recent economic update, stating that the two most important items that revenue is driven by are wages and personal income. Personal income has increased by 4.7 percent and wages has increased 4.8 percent. These numbers are less than those seen on a national level, but Kentucky was spared the full brunt of the economic downturn, so it would follow that Kentucky’s percentages would show less dynamic growth. The manufacturing sector is expected to grow by 3.3 percent which is outpacing the sector on a national level.
Mr. Harkenrider discussed the General Fund revenues and interim forecast, stating there has been strong revenue growth during the third quarter, and this growth is expected to continue into the fourth quarter. The growth has been in the individual income tax, corporate tax, and coal severance tax segments. Corporate income tax is expected to surpass the Consensus Forecasting Group (CFG) estimate, and the increase in individual income tax is seen in declaration payments and net returns. The overage seen in the coal severance tax does not go to the General Fund total, but instead is distributed among the coal severance counties according to statutory formula. The General Fund showed a total increase of $95.7 million, but after subtracting the $31.1 million for coal severance distribution, the net general fund increase was $64.6 million for the third quarter.
Mr. Harkenrider discussed the state’s Road Fund revenues and interim forecast, stating that the fund has the largest gain in percentage of actual incoming revenue as compared to CFG estimates. The motor fuels tax and motor vehicle usage tax have increased, giving the fund higher than expected growth. The motor fuels tax increased $55.3 million over the CFG projection, while the motor vehicle usage tax had a $18.4 million increase over projected. The total Road Fund revenue is $75.6 million over estimate, and when $26.6 million is removed for motor fuels tax sharing, the Road Fund showed a net revenue increase of $49 million for the third quarter.
Mr. Harkenrider stated that since the third quarterly report the General Fund has grown by 7.9 percent in April and 17.8 percent in May. May produces a nominal revenue increase of increase of $113.6 million. This was accomplished by a 37.5 percent single month growth in individual income tax, with the withholding component growing by 12.3 percent for May. The coal severance tax also grew sharply in May, increasing by 37.1 percent with a nominal revenue increase of $9.0 million.
In response to a question from Chairman Rand, Mr. Harkenrider stated that the nation’s economy will eventually recover, but the more important issue is how long will the economy remain at the lowest point of the recession. He believes that Kentucky is poised to recover as well as, or possibly better than, the national average, with the strongest recovery seen in the state’s manufacturing sector. He believes the continued difficulties in the housing market are caused by the decrease in jobs and more stringent credit underwriting practices.
In response to a question from Representative Lee, Mr. Harkenrider replied that the Road Fund estimates do include additional revenues raised by the statutory increase in the gasoline tax.
In response to a question from Representative Ford, Mr. John Hicks, Deputy State Budget Director, answered that the receipts received from the sale of state surplus property are included in the third quarterly report statistics. Most surplus items are first offered for sale to other state and local governmental agencies, and the remaining property is offered for sale to the public at auction.
In response to a question from Representative Crimm, Mr. Harkenrider said that the revenue increases discussed in the presentation do not represent a budget surplus, but rather increased revenues to go towards necessary government expenses (NGEs) and the remainder would be deposited into the Budget Reserve Trust Fund. The executive branch does not have the authority to spend any additional revenues outside those appropriations contained within the state budget.
In response to a question from Senator Buford, Mr. Harkenrider said that the forecasted sales tax revenue figure was high in his opinion, and with economic recovery sluggish consumer confidence is low which is leading to lower sales tax revenues.
Kentucky Census Data Results
Mr. Ron Crouch, Director of Research and Statistics for the Office of Employment and Training of the Kentucky Education and Workforce Development Cabinet, discussed Kentucky’s census data results, including data regarding population, employment, income and economic realities. Nationwide, the northeast, southwest, and midwest are in major decline, the northwest is in moderate decline, and the southeast is poised to become the economic engine of the nation. He discussed worldwide population trends, stating that there is only 12 percent in the under 25 years of age population, as compared to over 500 percent growth in population age 80 or older. Longevity is driving the world’s population growth, but most developed world countries have seen population replacement decline.
Mr. Crouch discussed Kentucky specific trends, providing data in the following areas: percentage change in population from 2000 through 2010; change in employment by industry from 2001 through 2010; the ratio of employment to population among ages 15 to 64 for all Kentucky counties; median income by county; average monthly earnings by county; average monthly earning including healthcare and social assistance; percentage of births to unmarried mothers by county; and current personal transfer receipts for the state by county.
In response to a question from Chairman Rand, Mr. Crouch stated that Kentucky’s interstate system and improvements in the educational system are advantages in economic development. The group aged 25 to 45 has been the hardest hit by the economic downturn. Mr. Crouch then discussed the reasons for the probable rebound in Kentucky’s manufacturing sector.
In response to a question from Senator Bowmen, Mr. Crouch said it is important to bring a state’s immigrant population to legal status and invest in their education. Across the nation, all population growth is from immigration, and the largest sector of that growth is Hispanic immigrants.
In response to a question from Representative Adkins, Mr. Crouch discussed improvements in the road system and education in east Kentucky and the impact of those improvements on the region’s future economic development.
Chairman Rand informed the committee that the next meeting will be held on Thursday, July 28, 2011 in Room 154 of the Capitol Annex.
Being no further business, the meeting was adjourned at 3:35 p.m. All meeting materials and a cassette tape of the meeting in its entirety can be found in the LRC Library.