The Upcoming (FY2012-2013) State Budget

With a requirement to pass a budget that is “balanced”, tricks can be employed to artificially inflate the revenue generated by some proposals, or to understate the costs of others. Examples to watch for include:

  • Imaginary cost savings. Take legislation to combine state agencies. Republicans claim this would eliminate 10,000 state employees and save $1 billion per year. However, anyone who has looked at this proposal has said it would take years for the agency operations to be fully merged and any savings to be realized. There will likely be up-front costs to combine agencies like the merging of computer systems and processes. Any significant savings attributed to the FY 2012-2013 biennium are unrealistic, but that may not stop legislators from counting them when trying to close the gap.
  • Unrealistic cost projections. For instance, the number of Ohioans enrolled in Medicaid can be estimated too low, artificially reducing the projected cost of the proposal over the biennium
  • Deficit spending. The State budget must be balanced when it is passed, but by State Law, also cannot be allowed to drift out of balance during the biennium. What this means is that if revenue is coming in lower than expected, or costs are higher than expected, the state cannot spend more than it takes in month after month. Typically, a provision is included in the budget language allowing a certain amount of leeway (typically 5%) for a given month. If this language is modified to allow the budget to be out of balance by 10 or 15%, it is another way for state leaders to give the illusion of passing a balanced budget, while setting them up to spend money that will not materialize.
  • Deferred payments. The state can push off certain expenses at the very end of a biennium to bring its budget into balance. Examples of payments that can be deferred to create a cushion in the biennium include Local Government Fund distributions to counties and municipalities, and payments to K-12 and higher education institutions.

Other tactics that can be used to close a budget gap include:

  • Fee increases. While some anti-tax groups to whom the Governor has pledged allegiance equate fee increases with taxes, most watchers expect that a variety of state-levied fees will go up to help cover the shortfall, while still allowing a claim not to have raised taxes.
  • Debt restructuring. Employed in the 2010-2011 budget, the state can renegotiate the terms on outstanding debt just like a homeowner can refinance a mortgage. There is the potential to save up to $500 million in the FY12-13 biennium through debt restructuring, however Lieutenant Governor Mary Taylor, and Budget Director Tim Keen went on the record in 2009 as opposed to this approach. It will be interesting to see if they change their tune now that they are responsible for passing a balanced budget.
  • Privatization of state functions or assets. One option is to sell a revenue stream, such as the sale of lottery tickets or turnpike tolls, for a large up-front sum. These proposals cost taxpayers much more in the long run, but provide a one-time source of funds for balancing the budget. Other options include outsourcing state services, such as the operation of prisons to private, nonunion operators who are willing to operate more cheaply than the state.
  • Broadening the Tax Base.

Finally, the are ways the budget gap can actually be exacerbated that must be watched.

  • Possible Tax cuts. One trick that is common is to cut taxes, but to estimate no net revenue losses by promsing an increase in business activity, and thus other tax revenue, as a result of the cut. Republicans have laid out an ambitious agenda that includes elimination of the estate tax, and the introduction of new tax credits for businesses and recent college graduates. These proposals will only add to the deficit, and require further offsetting cuts in services
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