Kentucky’s big-government crowd marched out their familiar parade of horribles this week, painting a picture of out-of-work teachers, devastated communities and an economic depression unless Congress rides to the rescue with another trillion-dollar stimulus to prop up state budgets.
If their predictions ever came to pass, it would be a bleak picture indeed. But it’s not as if we haven’t seen this movie before.
While the revenue shortfall caused by this policy-initiated shutdown of the state’s economy is real, its immediate budgetary implications aren’t unprecedented but are absolutely manageable.
To understand what’s going on here, we need to dig deeper than the headlines. The Lexington Herald-Leader reported, “state agencies (are) preparing for 12.5% cuts as the shutdown costs hundreds of millions.” What isn’t explained is the Office of the State Budget Director directed agencies to “submit a plan to refrain from spending one-percent of their fiscal year 2019-2020 General Fund appropriations.” (Emphasis added)
What’s going on here?
The revenue shortfall is projected to be between $318 and $495 million. With only six weeks remaining in the current budget (Kentucky budgets on a July 1 to June 30 fiscal year), the spending reduction must be captured in a compressed time frame. Therefore, a 1% reduction in overall spending is presented as a 12.5% cut due to the limited remaining days in the budget year.
Reasonable people understand reducing state government spending by a penny of every dollar appropriated isn’t going to bring on Economic Armageddon.
There are three other reasons to reject the sky-will-fall scenario painted by Kentucky’s Left:
- General Fund reductions are never applied across the board: Governors have complete discretion to “hold harmless” any agency from a budget reduction.
In 2017, every state agency was directed to submit a plan to reduce spending in order to address a $152 million shortfall and close the books with a balanced budget. When the final budget reduction order was issued, however, several critical services were spared any budget reduction.
Not one dollar was cut from the SEEK formula that funds K-12 education. The State Police, Community Based Services that protects vulnerable children, Commonwealth and County Attorneys, Public Defenders and both state retirement systems were all protected from any General Fund reduction.
The Beshear administration also is certain to use its authority to protect priority services as has been done countless times in the past.
Despite what the Left wants people to believe, educators and uniformed first responders won’t be joining the unemployment lines because of the forthcoming budget-reduction order, unless Gov. Beshear wants them to.
- Restricted Funds to the rescue: Restricted funds are agency funds collected from fees, dedicated surtaxes and other miscellaneous collections taxpayers pay, often without much idea of what they’re paying for, or why. More often than not, these fees support smaller initiatives or administrative overhead, not essential services.
In 2014, Kentucky faced a $90.8 million shortfall to close the fiscal year. More than half of the solution that year – $49.9 million – was achieved through restricted fund transfers. The 2017 budget was balanced by transferring $77 million in agency funds.
It’s hard to know exactly what balances have accumulated in the various accounts scattered throughout state government and, therefore, to predict what amount will be used to close the current gap. It’s a certainty they will be part of the solution.
- The Rainy Day Fund is in decent shape: The Budget Reserve Trust Fund (“Rainy Day Fund”) isn’t nearly large enough, considering more fiscally responsible states like Indiana have reserves six times larger than Kentucky’s savings account.
That being said, the General Assembly deposited over $300 million in the Budget Reserve Trust Fund. While it would be irresponsible to use all of it, there’s a decent amount tucked away, making the job of balancing this year’s budget easier.
Budget reductions make for big headlines and opportunities for left-of-center groups to pursue their long-held policy goal of more government spending. The truth is the budget reduction required to close this year’s books won’t be that much different than what’s been done in the past.
This is a management challenge, not an unmanageable crisis.