WJHL – When legislators return to Nashville Monday, they’ll be facing an even grimmer budget scenario than the one they left behind March 19, House finance subcommittee member David Hawk said.
“In the interim we have actually seen larger negative budget revenues than we expected, so what we had planned on being a zero growth budget actually appears now to be a negative growth budget,” Hawk said.
Rather than end fiscal 2020 with revenues matching budgeted expenses, the General Assembly is now looking at a projected $500 million hole for the year that ends June 30. And instead of a fiscal 2021 flat budget like the temporary one passed in March, legislators will reduce projected revenues by about $1 billion.
“I think it’s important that folks know that we are handling this … budget in a responsible way,” Hawk said Wednesday. “I’m all about transparency and I think folks need to know that there is a potential for a substantial alteration to the budget document.”
Indeed, Gov. Bill Lee’s commissioner of finance and administration is asking the heads and budget directors of Tennessee’s various state departments to find 12 percent in cuts within their previously approved budgets and have a plan to implement those in the year that starts July 1.
Butch Eley’s letter dated May 26 refers to the likelihood of a COVID-19 created revenue decrease from which “experts predict it could take years to recover.”
The glass half full take
Legislators had already made adjustment for COVID in their preliminary budget, which reduced Lee’s original proposal signifcantly, Hawk said. But with March revenue figures in and some early idea of April’s numbers, the increased reductions are a must.
Before the pandemic hit, though, revenues were running about 6 percent ahead of fiscal 2019’s and 3 percent above budget. That mid-year surplus is plugging part of the hole as revenues drop sharply for the last four months of the fiscal year, Hawk said — and Tennessee still has a healthy rainy day fund.
Hawk reckoned about $350 million of the $500 million from this year’s budget will likely be plugged by a withdrawal from that rainy day fund. That fund was $875 million at the end of fiscal 2019 and projected to hit $1.2 billion at the end of this year.
“We were saving for a rainy day and as we all realize now it has begun to rain and is seriously raining,” Hawk said.
The fund was almost 6 percent of general fund expenses by the end of last year, according to the state, and would have risen to more than 7 percent with a deposit that now won’t occur. The state also has healthy pension reserves and other fiscal indicators, Hawk said.
Hawk said Tennessee fiscally is “in better shape than just about every other state in the country.” The latest U.S. News and World Report state fiscal stability rankings back that up, putting Tennessee at No. 1 for long-term stability and No. 7 for short-term stability.
Just how far legislators will dip into an already reduced rainy day fund to offset 2021 revenue challenges is unknown.
“As we go forward to balance I feel confident that we will dip into the rainy day fund to some degree,” Hawk said. “We’re not gonna wipe it out.”
He also said some preliminary April numbers appear to show a less severe hit than previously projected to sales taxes, which comprise slightly more than half of all state tax revenues. Early projections anticipated a hit of up to 50 percent.
“I’m the eternal optimist and I see signs and indicators that our budget in Tennessee is coming back online more quickly than other states,” Hawk said. “We’re going to have to take a substantial portion of the rainy day fund to balance the fiscal year ’21 budget, but I feel better about it now than I did even two weeks ago with some numbers that I’m seeing so far.”
He said local government revenues may be even less hard hit. They rely more on property taxes, and the local option sales tax doesn’t have reductions for grocery purchases, which remain strong. Conversely, local schools receive a much higher portion of their funding from sales tax than other parts of local government operations.
The glass half empty take
After years of steady growth in revenues and in reserves, that rainy day is going to create some hard choices, Hawk said. The crises created by COVID-19 will produce even more vulnerability among Tennessee families, and a $1 billion hit to a $39 billion-plus budget won’t be overcome easily.
The general fund budget is around $16 million, so the real impact is likely to be higher than the 2.5 percent that $1 billion represents as a portion of the total budget, which includes federal and other funds, particularly for TennCare.
The March temporary budget actually increased grants for local governments — from $100 million to $200 million — and a few other items such as the health care safety net. Hawk said he’s hopeful those can survive.
“We’ve got to maintain those services to get the vulnerable back on their feet again and to get them into whatever successful posture we can,” he said.
Road projects, unless they involve immediate safety issues, are likely to be put on hold. Teacher pay, which already was going to see a 4 percent increase for the state portion cut to 2 percent, could be hit further. Capital projects and maintenance could see cuts.
“There’s going to be very few new buildings that we’re going to see go up over the next few years,” Hawk said.
How a federal influx of potentially more than $2 billion will factor into the equation remains unknown. Hawk said state leaders are trying to get guidance on how flexible the feds will be with use of that money, which is supposed to be used to backfill COVID-related cost increases.
“I think I can make the argument that every reduction in our state budget is related to COVID,” Hawk said. He was quick to note, though, that those stimulus injections are contributing to the current run up to what he said is a record $3.8 billion current year deficit and a debt approaching $25 trillion.
“We don’t want to be part of problem with the federal deficit so we’re going to wisely spend those dollars,” he said.
Hawk was on finance-related committees when Tennessee dealt with the Great Recession. He remembers “a painful time” with several cuts and no budget growth. He’s preparing for a rougher ride in the coming months.
“The budget document we’re working with right now, it’s in much more serious conversations than we were 12 years ago. The cuts are going to be deeper than they were 12 years ago.”
Hawk said Democrat Phil Bredesen, then governor, led a bipartisan effort to create reasonable budgets with reasonable spending in 2008 and 2009. He said Bill Haslam and Bill Lee have kept that kind of approach, allowing the state to be in an enviable fiscal position coming into the crisis.
Things may go better than projected, Hawk said. If they do, some mid-year supplemental appropriations could be in order. But until then, the state — and thus its people from Mountain City to Memphis — will find themselves living in a leaner spending environment.
“Every 10 years it seems we’re going to have a cycle like this,” Hawk said. “You don’t know where it’s gonna come from. No one could predict that it was going to be an illness-related recession that brought this about, but that’s why it’s good to always be prepared.”
He said he wants Tennesseans not to be blindsided by the additional pain likely to emanate from Nashville soon.
“I would much rather folks be prepared for the financial conversation you and I are having than be surprised by it in three weeks.”