s 353 L73lbap 2002 LEGISLATIVE BUDGET ANALYSIS SPECIAL SESSION AUGUST 2002 FOR THE FISCAL 2003 BUDGET Projected Deficit Legislative Budget Options Executive Budget Proposal A Report Prepared for the th 57 Legislature By the Legislative Fiscal Division oTATT documents collectic July 23, 2002 ^ D 1 7 2002 MONTANA STATE L.8RARY •-ri515 E 6th AVE. a.ENA., M.O-NTANA 59620 www .leg.state.mt.us/fiscal/ NASTATELIBRARY ,y?i!l!TA 3 0864 0014 7551 9 MONTANA LEGISLATIVE BRANCH Legislative Fiscal Division Room 110Capitol Building* P.O. Box 201711 * Helena, MT 59620-1711 * (406)444-2986 * FAX (406)444-3036 LegislativeFiscalAnalyst CLAYTONSCHENtK July 23, 2002 Members of the 57th Legislature: In accordance with 5-12-302, MCA, I submit for your consideration the Legislative Fiscal Division budget analysis for the August 2002 special session. It is our goal that this analysis provide the fiscal information necessary to assist committees and legislators in efforts to resolve the current budget deficit. This report is designed to be a working document for appropriations and taxation committees, and all legislators. The report includes: o An overview of the current budget shortfall, including the executive projected general fund deficit, the legislative staff projections, and reasons for the deficit o Legislative options for dealing with the budget shortfall, including a summary of how other states have dealt with recent budget deficits o The executive budget proposal and an analysis of the components of the proposal o The 2005 biennium budget outlook A separate report contains the revised revenue estimates of the executive and LFD, the underlying economic assumptions, and an explanation of the differences between the executive and legislative estimates. It is intended as a working document for the taxation committees in developing the revenue estimating resolution. Your staff of the Legislative Fiscal Division look forward to being of service to the legislature during this special session. We are here to assist legislators in obtaining the best possible fiscal information for making the difficult decisions that lie ahead. Please feel free to call on us to assist in your deliberations. Respectfully submitted, Clavtonpchenck Legislative Fiscal Analyst Digitized by the Internet Archive in 2010 with funding from Montana State Library http://www.archive.org/details/legislativebud2002mont 1 Table of Contents Table ofContents i Purpose ofReport 1 Budget Shortfall 3 Background 3 General Fund Deficit 3 Reasons for Declining General Fund Balances 8 Legislative Options- Alternatives to Executive Plan 11 Introduction 1 Program Eliminations/Modifications 1 1 Suspension ofCost ofLiving'Inflation Increases 13 Spending Deferrals 14 Funding Shifts 15 Program Improvements.Efficiencies/Economy 17 Tax Expenditures 18 Increase Fees 19 Broadening Tax Bases Raising Tax Rates 20 Temporary Revenue Enhancements 21 Deferring Tax IncentivesReductions 22 Fund Balance Transfers 22 Improved Tax Compliance/Collections 23 Asset Sales 24 Other Issues 25 Actions Taken By Other States 29 Introduction 29 Information Sources 29 Measures Usedby Other States 30 Executive Proposed Budget Plan 33 Overview 33 Summary Evaluation ofReduction Plan 33 Governor's Proposed Adjustments 35 2005 Biennium General Fund Outlook 99 Deteriorating Tax Base 99 Structural Imbalance 99 Impact ofCurrent Reduction - One-Time vs. Ongoing 100 Expenditures 100 Potential Legislative Response in 2003 Session 100 Appendix A A-103 Appendix B B-105 Appendix C C-105 Appendix D D-107 Appendix E E-115 Legislative Fiscal Division Executive Spending Reduction Proposal i Overview Legislative Fiscal Division ii Executive Spending Reduction Proposal Overview Purpose of Report The 57th Legislature has been called into special session to bring the general fund budget into balance as a result of a projected deficit for the 2003 biennium. The purpose of this report is to provide the Legislature: • an independent analysis and summary ofthe existing budget deficit • legislative options for resolving the deficit • a summary and analysis ofthe executive proposed budget plan • a broadbrush overview ofthe fiscal outlook for the 2005 biennium A separate report provides a summary of the general fund revenue estimates as projected by the executive and by your LFD staff. As noted throughout this report, there are a number ofdynamic economic conditions that may change the final outcome of revenue and budget projections for the 2003 biennium. Of primary concern is the uncertainty of income tax collections, which have shown a significant downward trend. Further, the actual fiscal 2002 year-end numbers will be available within a few days after this report is published and before the start ofthe special session. This report will be updated as needed should revenue projections or proposed spending reductions change significantly prior to the Special Session. Legislative Fiscal Division 1 Legislative Budget Analysis Legislative Options- Alternatives to Executive Plan Special Session - August 2002 Legislative Fiscal Division 2 Legislative Budget Analysis Legislative Options- Alternatives to Executive Plan Special Session - August 2002 BUDGET SHORTFALL Background For nearly a decade, states have enjoyed a strong state budget picture. Especially in recent years, states underestimated the strength of general fund revenue flows from a robust economy and a strong stock market. States were caught off guard when the national economy went into a recession in early 2002, further aggravated by the unpredictable events ofSeptember 1 1 and a receding stock market. States with sales taxes and large manufacturing/corporate sectors felt the impact first, while states like Montana, with a high dependence on income taxes, didn't feel the full impact until calendar 2002. This mild recession on a national basis has hit states much harder than the more severe recession ofthe early 1990s, largely due to the increased share of state revenues from capital gains during an unprecedented period of stock market growth. While states anticipated a drop-off in capital gains revenues, the impact was far more severe than anticipated. Montana's state budget decline has been below the national average, yet there has been a dramatic decline in revenues that didn't become fully apparent until the cycle of income tax revenue collections reached its peak in mid-2002. In November 2001 and in a series of reports since then, this office reported to the Legislature that Montana was experiencing a sharp decline in general fund revenues. On April 18 the Governor's Office formally announced concerns about a budget deficit, and initiated proceedings to implement spending reductions in accordance with 17-7-140, MCA. On June 22, the Governor directed spending reductions of $23.7 million and at the same time called for a special session ofthe legislature to deal with a budget deficit that had deteriorated further than the Governor felt could be dealt with under the limited authority of 17-7-140 (the Governor's Special Session call is in Appendix A). The following discussion provides current projections ofthe general fund deficit, the differences between 2001 session projections, legislative staff projections, and executive projections, and reasons for the revenue shortfall. The revised revenue projections from the Office of Budget and Program Planning and the LFD are explained in more detail in the LFD Revenue Estimates report (separate document), along with an explanation ofdifferences. General Fund Deficit The 57th Legislature adjourned the 2001 session with a 2003 biennium budget that provided for a projected general fund reserve of $54 million. For the first several months following the 2001 session, state general fund revenues came in even stronger than projected in the revenue estimate resolution for fiscal 2001, and then held steady in early fiscal 2002. In November 2001, the Legislative Fiscal Division reported a significant downturn in general fund revenues and a concern that if the trend continued, the projected ending fund balance would be significantly less than anticipated. The trend continued to worsen, and in early April the LFD reported that a preliminary estimate of the biennium ending general fund balance was $28 million. This placed the projected balance near the statutory trigger point for implementing spending reductions. In late May, this office and the Office of Budget and Program Planning estimated a negative general fund balance for the 2003 biennium, and the executive began the process of identifying spending reductions. Individual and corporation income tax collections were the primary reason for the need to implement spending reductions. These two sources are now projected to be $151.1 million below HJR 2 revenue estimations. Legislative Fiscal Division 3 Legislative Budget Analysis Legislative Options - Alternatives to Executive Plan Special Session - August 2002 Legislative Projection, 2001 Session As shown in Figure 1 (column 1), the 57th Legislature projected a general fund ending fund balance of $53.8 million on June 30, 2003, which is a reserve of 2.3 percent of general fund appropriations for the biennium. Those projections included an average growth in general fund revenue. Which assumes a less robust growth pattern than immediate past biennia, but still a consistent growth. Stronger than anticipated revenues at the end of fiscal 2001 signaled an even brighter picture, with an increased fund balance of $62.2 million, leaving a projected balance on June 30, 2003 of $116.5 million. However, column 2 of Figure 1 shows the revised LFD projections, reflecting a number ofpredominantly negative impacts on the general fund balance that have sharply reduced the projected fiscal 2003 ending balance. The projected ending fund balance has declined by $1 12 million prior to budget reductions, leaving a deficit of $58.3 million. The Governor directed spending reductions of$23 million along with voluntary reductions of $0.7 million, leaving a projected deficit of $34.6 million prior to any legislative action, using LFD projections. Figu