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The newest issue (May 7) of State Budgeting Matters is now posted on our Website: FY 2010 - FY 2011 State Budget: The Out-of-Balance House Version. Sheridan examines in detail what the House of Representatives did to the governor’s budget proposals, who the "winners" and "losers" are in Sub. H.B. 1, what risks the House takes in its version, and what the Senate will likely be concerned about as it acts on Sub. H.B. 1 in the next four (or more) weeks. Read it here now: https://www.communitysolutions.com/images/upload/resources/sbmv5n9.pdf

Less than one week after the Ohio House of Representatives sent the FY 2010-11 budget to the Senate, a Strickland Administration press conference today highlighted the abysmal under-performance of the personal income tax in April. April is a crucial month when the Tax Department closes its books on the 2008 filing season. Tax Commissioner Richard Levin’s presentation showed that 2008 annual returns produced $192 million (22 percent) less than expected. The administration’s estimates were closer to the mark in estimating employer withholding for the month (just 2 percent below estimates) but were much too optimistic in every other income tax category. In total, the income tax produced $322 million less GRF revenue in April than had been expected. Ten months into FY 2009, income tax collections are 15.3 percent lower than in FY 2009. Commissioner Levin did not mention that some of the underperformance was due to the final round of income tax cuts.

OBM Director Pari Sabety discussed the implications of the shortfall for FY 2009. She expected the downward trend in income tax revenue to continue in May and June, contributing to a cumulative deficit between $600 million and $900 million. With only two months remaining in the fiscal year Director Sabety said that only a small portion of the shortfall, perhaps $100 – $150 million, could be addressed through additional cost savings – the rest would probably have to come from the state’s rainy day fund, which requires legislative approval.

Any substantial use of the rainy day fund in this fiscal year would throw H.B. 1 further out of balance, jeopardizing the gains made by human services advocates in the House for programs such as food pantries and child and adult protective services. H.B. 1 relies heavily on the rainy day fund as well as roughly $6 billion in other federal and state one-time resources.
The continuing shortfall in tax receipts also will impact H.B. 1. OBM will not have new revenue estimates available until the conference committee, but these are likely to be much lower even than the most recent estimates prepared in December.

There are still many pieces to the budget puzzle that we don’t know, but which may become clearer in the coming days. Strangely, today’s press conference only covered the income tax. OBM will release preliminary returns for other April taxes soon (perhaps as early as tomorrow) and then we can see the big picture for total GRF revenue. It is also possible that larger than expected state agency under spending could help to address part of the FY 2009 shortfall.

The bottom line, however, is that H.B. 1 was built on unrealistic assumptions. The House used an extra $100 million in unclaimed funds and more generous Legislative Service Commission revenue estimates to make it fit together. The estimates did not take into account lower revenues from the tobacco tax which will result from recent federal legislation. Let’s stop putting on the band aids and fix the patient -- the state needs to take steps to shore up its eroding revenue base. The 2005 tax change framework, which will cause a net loss to the GRF of $2 billion in FY 2010, simply cannot be maintained in this environment.

Note: Jon Honeck is the author of this post. He can be contacted at jhoneck@CommunitySolutions.com

Increased levels of investment in certain programs through the American Recovery and Reinvestment Act and the Fiscal Year 2010 Budget Resolution passed last week by the U.S. House and U.S. Senate reflects a shift in priorities under the Obama Administration. In recent history, it has been common for a sweeping change in budgetary and fiscal direction during the first year of a new President’s term. During their first seven months, Presidents Ronald Reagan, Bill Clinton, and George W. Bush all signed the most significant economic legislation of their presidencies.

Reagan’s Economic Recovery Act included tax cuts, regulatory relief, higher defense spending, and tight monetary policy to control inflation. After several years of increasing deficits, Clinton changed course and proposed one of the most aggressive deficit reduction programs in history. Clinton’s plan coupled tax increases with modest spending reductions. Bush’s tax cuts, which sought to spur economic growth by putting money in the hands of consumers rather than government, were included as part of his first budget proposal.

1. In the Nation...
For the first time in more than three decades, Social Security recipients will not get any increase in their benefits next year, federal forecasts show.
http://www.nytimes.com/2009/05/03/us/politics/03benefits.html?em

2. In the State...
The same budget plan that promises billions to primary and secondary education over the next decade would deny thousands of low-income Ohio youngsters access to state-funded preschool.
http://www.dispatch.com/live/content/local_news/stories/2009/05/03/preschool.ART_ART_05-03-09_B1_VODO806.html?sid=101

3. In the Region...
Twinsburg plant among five Chrysler to close by end of 2010
http://www.ohio.com/news/top_stories/44179587.html

4. At Community Solutions...
This week, readers of State Budgeting Matters are treated to two editions—one special edition by John Begala (May 1) and the regularly scheduled edition by Dick Sheridan (later this week). The special edition, “Medicaid and the Impending Train Wreck in Ohio Government,” illustrates how the evolution of Ohio’s Medicaid program through the decades is exemplary proof of George Santayana’s well-worn admonition: “Those who fail to learn from history are doomed to repeat it.” Read it here now: http://www.communitysolutions.com/images/upload/resources/sbmv5SpecialEdition.pdf

5. Miscellaneous
The American Chestnut Foundation hopes to reintroduce the American chestnut tree, which once dominated forests in northern Ohio and other states before becoming virtually extinct.
http://www.ohio.com/news/top_stories/44257292.html

As the state budget officially moved from the House to the Senate this week, human service advocates were partially successful at shoring up funding needed for many critical services.

We are pleased that the House made a number of needed changes, and we hope that the Senate will continue working toward full restoration of funding for human service programs. Some of the key changes included:

• Adding $50 million per year for child and adult protective services; These programs are still $12 million short of full restoration;Boosting funding for the Second Harvest Food Banks to $12 million per year, leaving the program $5 million per year below the requested level;
• Adding $1 million per year for behavioral health services for children under the age of 7;
• Increasing the Medicaid rate ceiling for behavioral health providers by ½ of 1% in each year of the biennium; and
• Increasing home and community based options for long term care by creating a “superwaiver” in the Department of Aging and ending limitations such as the number of slots in the assisted living program and regional limits for the self-directed Choices waiver.
  

We are disappointed that the House chose not to restore full funding to county job and family service departments even though more Ohioans are requesting assistance. The House also removed some executive proposals and added other provisions that will increase costs and make it more difficult to keep the budget in balance. In the long run these choices will add to the already substantial FY 2012-2013 structural deficit. Several of these items include:

• Elimination of a provision that limited reimbursements to hospitals from Medicaid managed care plans to rates paid for Medicaid fee for service. The removal of this proposal will increase Medicaid managed care costs by $35.1 million in FY 2010 and $110.5 million in FY 2011 and by even more in the next biennium;
• Increasing state support for nursing facilities – an industry where the supply of beds exceeds demand; and
• Elimination of proposed sentencing reforms that would substantially reduce the number of low-level, non-violent offenders in prisons.
  

We remain concerned about state revenues. April’s monthly report will be released soon, and there is no reason to expect that state revenues will look much better than they did in March. The continued erosion of FY 2009 tax receipts will lower the base for the updated estimate currently being prepared for next month’s conference committee.

Let’s hope that the forecast specialists at the Department of Taxation and Legislative Service Commission are adding foil to the antennae on their crystal balls to improve the signal and rubbing lucky pennies as they update their estimates.

Advocates need to stay alert, engaged, and informed. The ride is just getting started.

Congress finished its work on the budget resolution this week. The President has indicated he will send up his detailed budget request next week, which will help move the appropriations process to the next stage. It will also include important details on the Administration’s revenue proposals, including “loophole closers” and other revenue raisers that can help finance important investments.

BUDGET CONFERENCE
Congress passed a final budget resolution on Wednesday. Remember, as a resolution, it does not go to the President for his signature. The budget projects $3.6 trillion in total outlays, including $1.1 trillion for discretionary spending, in FY2010. It also projects a deficit of $1.2 trillion. It provides reconciliation instructions to the Finance and Health, Education, Labor and Pensions Committees in the Senate, and to the Ways and Means, Education and Labor (HELP), and Energy and Commerce Committees in the House, largely to accommodate the passage of health reform. The late reporting date – October 15 – will allow the Finance Committee to put off the decision about whether to use the reconciliation process to enact health care reform legislation.

The House vote was 233-193. The Senate vote was 53-43. No Republican in either chamber voted for the final budget. Seventeen House Democrats – including Representative Kucinich – voted no. Four Senate Democrats voted no.

Adoption of the budget resolution will help move the appropriations process forward, and will help facilitate consideration of health care, education, and energy/climate change policies.

Meanwhile, House Blue Dogs continue to press for enactment of statutory pay-as-you-go rules to help restore fiscal discipline. Speaker Pelosi and Majority Leader Hoyer put the Senate on notice, via letter, that the House will attach statutory PAYGO to legislation to extend middle class tax cuts, the AMT, the estate tax, or Medicare physician payments, and will not consider any bills or conference reports on these issues unless the bills or conference reports include statutory PAYGO, have been fully offset under traditional scorekeeping, or statutory PAYGO has already been enacted into law. Speaker Pelosi has also asked committee chairmen to find ways to cut spending on programs under their jurisdiction and report back to her by June 2. Her letter did not indicate the level of savings she is looking for.

HEALTH CARE
As part of its deliberations on health reform, the Senate Finance Committee held a closed-door meeting yesterday to review options to cut costs and improve quality in the health care delivery system. In advance of the session, Chairman Baucus publicly released a policy options document, which can be found here. The Committee has not yet made firm decisions about these options, but many are expected to become part of the Chairman’s health reform “mark.”

Two additional policy options documents will be released following the “coverage” and “financing” roundtables scheduled for May. The coverage roundtable is scheduled for next Tuesday, May 5,th and we expect extensive discussion about the role of Medicaid in health reform. If one of your Senators is a member of the Finance Committee, consider contacting staff before Tuesday’s roundtable to reiterate the need to strengthen and improve Medicaid as part of health reform.

The Senate HELP Committee (of which Sherrod Brown is a member) also held reform-related events this week with hearings on primary care access and state-level reform efforts. As mentioned in last week’s email, the Finance and HELP committees are expected to mark up separate, complementary bills that will be merged into a comprehensive piece of legislation.

The American Lung Association came out with State of the Air this week, its annual air quality report card. It gave Cuyahoga County a grade of F in both ozone and particle pollution, and Cleveland-Akron-Elyria ranked 10th highest for people at risk from year-round particle pollution. However, despite these grades, the report noted that Cleveland showed significant, continued improvement over the past five years. We stand to continue improving as we recognize the effects that the built environment has on public health, and we give more consideration to these factors in urban planning decisions to improve air and water quality, safety, and other health factors.

Air pollution increases the risks for certain illnesses. According to the report, year round exposure to particle pollution has been linked to increased risks from asthma, lung cancer, and cardiovascular disease. Particle pollution poses higher risks to children and the elderly, and those with lung or heart diseases. It particularly increases risks for children living near roads with heavy truck or trailer traffic. The report also found disparities in who is exposed to the pollutants, with low-income and some minority groups having higher exposure. It included speculations from scientists about the reasons for the disparities, including racism and class bias in the housing market, lack of access to health care, grocery stores, and good jobs, dirtier workplaces, and higher exposure to traffic.

The report also provided recommendations on how to improve air quality including the use of federal transportation funds to retrofit diesel engines. Local planning decisions can also improve air quality by reducing the amount of miles we drive through mixed-use and denser development patterns, improved public transit, and the use of vegetation in land developments to purify the air.

The May 1, 2009 issue of State Budgeting Matteris now posted on our Website. This special edition issue takes a look at Medicaid and the Impending Train Wreck in Ohio Government. Read it here now: http://www.communitysolutions.com/images/upload/resources/sbmv5SpecialEdition.pdf

Yesterday the state budget bill passed the House and the federal budget resolution was approved by both the U.S. House and Senate. It's almost budget overload for those of us who work on both. An interesting fun fact: the same number of Ohio House Members and U.S. Senators voted for their respective budgets.

After passing along party lines with a vote of 53-45, the $56 billion state biennial budget bill now moves to the Senate. The Plain Dealer had a nice summary of the provisions.

Switching to the federal side, the vote was largely along party lines, (233-193 in the House and (53-43 in the Senate) with a few Democrats in both houses jumping ship and voting "no". Today's coverage in the Washington Post and New York Times of the $3.5 trillion total package is worth a read.

But the worst is not yet over - Congress will take up its 9 appropriations bills to set levels of funding for specific programs very shortly, and the Budget Resolution requires them to consider legislation on health care and higher education funding. And at the state level, we expect that conference committee will be busy as the bill coming out of the Senate will likely be quite different from that just passed by the House.

The House Budget Committee has announced that Senate and House negotiators have reached an agreement on a federal budget plan for fiscal year 2010. Highlights of the plan:

• Discretionary spending set at levels between the House and Senate versions - $10 billion lower than the President’s proposal;
• Includes reconciliation instructions on education investment and healthcare reform. This requires committees to report legislation by October 15 if legislation cannot be achieved through normal procedures;
• Permanently extends the middle-income tax cuts adopted in 2001 and 2003 including the 10% bracket, child tax credit, and marriage penalty relief;
• Indexes the alternative minimum tax to inflation (AMT) – so Congress won’t have to pass a temporary change each year;
• Extends estate tax exemptions at 2009 levels and indexes exemptions for future years.
  

The full House and Senate are each expected to vote on the fiscal year 2010 budget conference agreement this week.

1. In the Nation...
The U.S. declared a public health emergency Sunday to deal with the emerging new swine flu, much like the government does to prepare for approaching hurricanes.
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/26/AR2009042601194.html?hpid=topnews

2. In the State...
Amid cuts in areas such as child protective services and charter schools, state spending on long-term care through Medicaid continues unabated, keeping Ohio at 40 percent above the national average.
http://www.dispatch.com/live/content/local_news/stories/2009/04/26/nursing_homes.ART_ART_04-26-09_A1_8HDLOIQ.html?sid=101

3. In Our Community...
In this, the most dire housing market that tax experts can remember, property values are tumbling.
http://blog.cleveland.com/metro/2009/04/cuyahoga_county_home_values_fa.html

4. At Community Solutions...
Our staff was pleased to collect and donate 12 full boxes of food to the Cleveland Foodbank’s Harvest for Hunger campaign last week. If you’d like to know how to help hungry people in any of these 19 Northeast Ohio counties, click here:
http://www.clevelandfoodbank.org/site/PageServer?pagename=hfh_home

5. Miscellaneous...
The Internet has revolutionized how people look for jobs and how businesses find employees. Career coaches say that LinkedIn…is often the first source recruiters, executives and other professionals check when searching for potential hires. http://www.cleveland.com/help-wanted/index.ssf/2009/04/help_wanted_the_newly_unemploy.html

Congress named its conferees to the budget resolution yesterday and could finish work on the budget resolution next week. The Administration has indicated it could send up its detailed budget request the first week in May, which should help jumpstart the appropriations process.

BUDGET CONFERENCE

Congressional Quarterly is reporting that a tentative deal has been reached between the House and Senate on a final budget resolution that includes reconciliation instructions for health care and student aid and that cuts $10 billion from the President’s discretionary levels. (The House had cut discretionary funding by $7 billion below the President, the Senate had cut $15 billion.) CQ is also reporting that a formal conference meeting will be held on Monday, April 27. If that happens, we can expect the final resolutions to be taken up in the House and Senate during the course of the week.

The House named the following members to be conferees on the budget resolution: Budget Chairman Spratt (D-SC), ranking member Paul Ryan (R-WI), and Reps. Allen Boyd (D-FL), Rosa DeLauro (D-CT), and Jeb Hensarling (R-TX). The House also defeated a motion to instruct conferees to drop the budget reconciliation instructions from the final resolution. The vote was 227 to 196.

The Senate also named conferees after taking a series of votes on several procedural motions. The conferees are Budget Chairman Conrad (D-ND), ranking member Gregg (R-NH), and Sen. Murray (D-WA).

ESTATE TAX

It appears increasingly likely Congress will wait to take up tax legislation to address the 2001/2003 “middle class” tax cuts, AMT, and the refundable credits until next year. This could change, particularly if the debate on health care bogs down. But we remain concerned about the prospects for enacting a one-year extension of the 2009 parameters of the estate tax should the larger tax debate indeed be put off.

To review: enacting a one-year extension to the estate tax could require 60 votes in the Senate, which could be difficult after the vote on the Lincoln-Kyl amendment during the budget resolution. Estate tax supporters are likely to push adopting the Lincoln-Kyl parameters for one year as a “compromise” instead of the 2009 levels. (The Lincoln-Kyl amendment increased the exemptions to $10 million per couple/$5 million per individual and reduced the tax rate to 35 percent.)

Proponents have leverage because, unless 60 votes can be produced for any proposal, the default will be that the estate tax will be completely eliminated in 2010, which they would prefer. Allowing either the Lincoln-Kyl parameters to be adopted for one year or the estate tax to disappear in 2010 would make it more difficult to restore the 2009 parameters as part of a broader tax bill because many members on both sides of the aisle will not want to be perceived as voting for a tax increase.


HEALTH CARE
Action is well underway to structure components of health reform legislation for consideration this summer. Committee chairmen in both the House and Senate are working to have bills ready for committee mark-ups following Memorial Day with floor debate after the July 4th recess.

In the Senate, the HELP and Finance Committees are expected to produce separate bills that will be combined on the Senate floor. Finance Chairman Baucus and Ranking Member Grassley hope to drill down on a number of key issues during a series of health reform roundtables for committee members and health experts, which kicked off on Tuesday. They will focus on three areas: delivery system reform, coverage, and financing.

In the House, the chairmen of the Energy and Commerce Committee, the Ways and Means Committee, and the Education and Labor Committee have pledged to work together on health reform legislation that is expected to follow a similar timetable as the Senate legislation. (Although the public focus of the Energy and Commerce Committee this month has been on climate change legislation, intense behind the scenes work on health reform is well underway.)

We have concerns about a number of unmet needs in the Executive Budget in health and human service programs and the state’s overall fiscal health. Here an update of the changes made by the House to some of the items that we have been watching.

Eligibility determination (income maintenance) for County Departments of Job and Family Services (CDJFSs). CDJFSs serve as the front door for human service programs. GRF dollars are used along with federal food stamp, Medicaid, and TANF dollars to fund staff to perform eligibility determinations for these programs. Even though caseloads for food stamps, Medicaid, and cash assistance are expected to increase, state GRF support for this line item (GRF 600-521) is substantially reduced when compared to FY 2008 actuals ($19 million less in FY 2010 and $25 million less in FY 2011). The state does add some flexibility to counties by allowing the local mandated share to be used for food stamp or Medicaid eligibility determination; however, this change will reduce funding for TANF services at a time when TANF resources already have been substantially reduced due to the spend-down of the surplus balance. In a nutshell, this change plugs a hole in one funding stream by creating a hole in another.

• House Changes: There were no changes to this program.

TANF funding for county Prevention, Retention, and Contingency (PRC) programs and Title XX services. The Executive Budget reduced the TANF allocation for counties by $32 million per year when compared to FY 2008 actuals. In addition the county allocation from the transfer of TANF funds to Title XX will be reduced from $67 million to $6 million per year. PRC funds provide diversion, emergency assistance and work participation activities while Title XX dollars are primarily used to fund child welfare and adult protective services. During an economic downturn, reports of abuse and neglect rise.

• House Changes: The House added $12.5 million in new GRF fund dollars per year through JFS line item 660-533, Child, Family, and Adult Community & Protective Services. Funds will be distributed according to the current ODJFS Title XX distribution formula. Funds are to be used to help individuals at or below 200% of poverty achieve or maintain self-sufficiency; respond to reports of abuse, neglect, or exploitation of children or adults; provide outreach and referral services for home and community based services for individuals at risk of placement in a group home or institution; and to provide protective services in cases of actual or potential abuse, neglect, or exploitation of a child or adult.
  

Child welfare programs. Due to the spend-down of the TANF surplus, a total of $17.5 million per year in TANF funding earmarked for child welfare programs is eliminated in the Executive Budget. These programs provided financial assistance to kinship caregivers who provide a permanent home to children who have been in the child welfare system, financial assistance to help former foster children transition to adulthood, and funding to recruit adoptive families for children in need.

• House Changes: The House added $5 million per year in a new GRF line item (600-541, Kinship Permanency Incentive Program) in the ODJFS budget for financial assistance to kinship caregivers.

Food assistance. The Executive Budget maintains funding for the Ohio Association of Second Harvest Food Banks at $8.5 million per year, but the need for food assistance is rising. An additional $8.5 million per year is needed to help the food banks keep up with their growing demand.

• House Changes: The House added $1 million per year in GRF to JFS line item 600-410, TANF MOE, and earmarked the funds for the Ohio Association of Second Harvest Food Banks to purchase and distribute food products. The House also added $1.5 million per year to JFS line item 600-535, Early Care and Education, for the Children’s Hunger Alliance to fund the Child Nutrition Program outreach efforts.

Lift the statutory cap on assisted living slots. To ensure long term financial sustainability in the Medicaid program, Ohio must develop a long-term care system that is more balanced between institutional care and home and community based care. Right now Ohio's care system is heavily skewed towards nursing facility care, and increasing home and community based options for consumers will help to bring balance to this system.

• House Changes: The House lifted the statutory cap on assisted living slots; however, the House backed away from meaningful long term care system reform by increasing state financial support for nursing home care through a significant rate increase that will cost an additional $56.4 million in FY 2010 and $177.3 million in FY 2011.

Need for New Revenues. We remain concerned about the strength of our revenue system, which has been severely damaged by five years of tax cuts and the unprecedented amount of use of one time funds to support FY 2010-2011 spending. We estimate that up to an additional $8 billion in new revenue will be needed to support state spending in the next biennium. We have been telling everyone who will listen to us that we must act responsibly and act now to start dealing with our structural deficit. We have recommended a series of revenue options that will yield about $2 billion in new revenues over the biennium to begin to address the state’s structural deficit.

• House changes: The House adopted the LSC revenue estimates, which enabled them to assume an additional $342 million in revenues (Federal revenues are excluded from this analysis due to changes in the treatment of Title I federal stimulus). The LSC estimates were more pessimistic than the Executive in FY 2010 but assumed a more robust recovery in FY 2011. The change between the two estimates is very small given the overall size of the state budget; however, we have two concerns about relying on a more optimistic forecast. First, neither the LSC nor executive forecasts have been adjusted to account for the impact of the recent $0.62 per pack federal tax increase on cigarettes. This change, according to the testimony of LSC Director Mark Flanders before the House Finance committee, will likely reduce GRF revenues by $100 million over the biennium. Second, the balance sheets in both the Executive and LSC forecasts assume that $387.2 million in GRF revenue will be carried forward from FY 2009 to FY 2010. Through March 2009 state tax receipts were trailing revised estimates by $195.8 million. It is looking more and more unlikely that the state will be able to hit its FY 2009 revenue targets.