Thursday, September 18, 2008

 

And Now, More Budget Cuts

State agencies just submitted their FY2010-11 budgets, and now they’re revising their current budgets to accommodate the latest round of budget cuts. Last week, the Governor announced another $540M in spending cuts ($198M to agencies and $342M in other actions). Combined with the $733M cuts announced last January, this brings us to the “zero growth scenario” middle range of the original OBM deficit projection – OBM had estimated the deficit to be between $733M and $1.9B. Other options include postponing phase-in of tax cuts, federal stimulus, and rainy day funds.

These cuts come as a response to the lagging economy. Both the personal income tax and the sales tax are coming in below estimate, both of which reflect economic conditions. We’ve seen eight straight months of Ohio job loss, along with recent Wall Street drama, and OBM has reported that it expects weak growth for several more quarters. A recent court case also narrowed revenues from the Commercial Activity Tax (CAT) by an estimated $188M in FY2010 when it found the CAT unconstitutional as applied to grocers. The CAT is therefore not as broad-based as originally intended. In addition, we started FY2009 with expenditures that had been delayed from last fiscal year. However, August GRF tax revenues came in (although still below estimate) much better than July’s. Even before these cuts, we’ve seen decreased revenues and spending each year since 2006. The latest budget cuts will be implemented starting October 1. Although painful, it’s better to act sooner than later because it allows more time to fix the problem.

The 4.75 percent across-the-board cuts include an estimated $80M to ODJFS but do not touch “core priorities” which include tax reform and the homestead exemption expansion as well as children’s health care expansions, tuition freezes, and increased local school funding. Programs will be cut at a time when the need for public services is rising. This will cause job lay-offs and cancelled contracts, which further weaken the economy. If we increased revenues (or postponed phase-in of tax cuts) rather than cutting programs, some of those revenues would come from money that would otherwise remain in savings rather than being spent. Additionally, those tax payments could be partly deducted from federal taxes, which would keep more money in Ohio.

Federal stimulus would also help, which Governor Strickland is requesting from Washington D.C. including Medicaid, unemployment insurance, and public infrastructure grants.

Another option is to access the Rainy Day Fund. The Governor announced that they will use existing authority to use $63M of the reserve for Medicaid, and that they will avoid using more of the reserve now in case things get worse later, which seems probable. Using the reserve fund at this point would put those dollars into our economy now and avoid the negative effects that program cuts have on the economy.

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