Governor Hutchinson’s new budget proposal raises a number of serious concerns about whether it would actually meet our state’s future – or even current – needs. His tight budget request should, at the very least, be a clear sign to him and to the Arkansas Tax Reform and Tax Relief Legislative Taskforce that additional revenue cuts, especially expensive tax cuts targeted to wealthy taxpayers, pose a clear threat to public services and the well-being of working Arkansans.
State legislators have begun looking over Hutchinson’s budget recommendation for Fiscal 2019, the budget year that begins in July. Lawmakers will consider the Governor’s proposal when the General Assembly convenes February 12th, but his outline is just a recommendation. It’s up to the Legislature to decide how to spend state dollars.
How much new money will be available in the coming budget year? Based on the latest forecasts there will be an increase of about $237 million in state general revenue (or revenue that is “net available for distribution”). This reflects an increase of about 4.3 percent, from about $5.45 billion in FY18 to $5.69 in FY19. Of that $237 million, the Governor is proposing to hold back $63.9 million as surplus. In the past, most surplus funds have gone to the General Improvement Fund (GIF), a fund that legislators tapped to pay for special projects back in their districts. Some were worthy, and some were not. Because of perceived and actual corruption in the spending of GIF funds in recent years, that program has been eliminated. The Governor suggests using most of that proposed surplus fund, $47.9 million, in a restricted reserve fund that could be used as a budget cushion if the economy takes a turn for the worse. The remaining $15.9 million in surplus funds would be used as state match to tap federal highway funds. By all accounts, Governor Hutchinson also plans to use the surplus as a foundation for upper-income tax cuts he plans to propose later this year for consideration during the 2019 legislative session.
Designating that surplus fund would leave $172.8 million in new money for state agency budgets in FYI19, an increase of 2.8 percent over the projected budget for FY18. Most of the $172.8 million would go to the Medicaid program ($137.9 million). These new Medicaid funds would be spent as follows: $35.7 million would be used to pay for an increase in the state match that is now required for Arkansas Works (Medicaid expansion); $48.6 million would be used to pay for a higher state match that is now required for the traditional Medicaid program due to an improved economy in Arkansas; and $51.1 million would be used as permanent funding to replace one-time money that had previously been part of the state Medicaid budget.
A couple of points are worth noting about the Medicaid budget. The requested $137.9 million increase in Medicaid funding for FYI19 is $55 million less than was originally anticipated a year ago because of new “efficiencies” in Medicaid, including a Medicaid caseload reduction of 110,000 because of recipients earning higher incomes, dying, moving out of state, etc. However, the FY19 Medicaid budget request does not take into account a soon-to-be-approved federal waiver that could reduce the Arkansas Works caseload by as many as 60,000 adults, due to work requirements and reducing income eligibility for the program. This will reduce the amount of money needed for the state match for Arkansas Works by some amount yet to be determined.
On the flip side, the reduced caseload for Arkansas Works will likely reduce state tax revenues by some amount. That’s because the reduction in federal spending on those leaving Arkansas Works means less economic activity and less tax revenue generated by that activity. In addition, while some of the adults leaving Arkansas Works will enroll in the marketplace and purchase a health plan that requires insurance companies to pay a 3 percent fee/tax, only half of that goes into state coffers. It’s important to note that not all of the adults leaving Arkansas Works will enroll in the insurance marketplace, because it will cost them more personally. That means less tax revenue for the state, as well. It will also mean more uncompensated care costs for hospitals and our state.
This would leave very little new money — just $35 million — to ensure that other state agencies can provide needed services as their own costs rise. Other state agencies that would receive part of the new money under Hutchinson’s plan for FY19 include:
- Higher education – $12 million
- More child welfare caseworkers for the Division of Children and Family Services – $7.3 million
- Reimbursements for county jails – $4 million
- State police vehicles – $3 million
- Department of Corrections- $3.5 million
- Department of Community Corrections – $1.7 million
- Public School Fund – $1.3 million
- Educational Facilities partnership – $3.2 million
The single largest component of the state budget, the Public School Fund, will receive a miniscule increase of $1.3 million in state general revenue. The Hutchinson administration is requesting NO new state general revenue to meet K-12 educational adequacy requirements. They claim that higher-than-anticipated local property tax revenue and collections from a dedicated 7/8-cent sales tax will be able to offset $50 million in state general revenue they otherwise would needed to meet the constitutional requirement to provide an adequate education for all children. One point is worth noting. At a legislative budget hearing the week of January 8, the Administration had not yet finalized its education numbers and had no specific adequacy estimates (or specific numbers on how it would be paid for) to release publicly or share with legislators.
If approved by the Legislature, the Governor’s proposed budget means a number of important state agencies serving vulnerable children and families will receive no new funding for FY19. Those include the following divisions at the Department of Human Services: Youth Services (DYS), Development Disability Services, Behavioral Health, County Operations, and Child Care and Early Childhood Education – as well as other programs outside of DHS, such as Child Support Enforcement and the Department of Health.
The Governor’s proposed budget would provide no new funding for programs critical to the future ability of our children to succeed, such as pre-K (Arkansas Better Chance Program) and community-based programs for juvenile justice. It also means no funding to begin state implementation of the Positive Youth Development Act of 2011 (quality after-school and summer programs) and no funding to implement most of the recommendations of the 2016 report of the legislative taskforce on special education.
It is important to note that while net available state general revenue for FY19 is projected to increase by a modest $173 million, or 2.8 percent, (if the surplus amount is set aside as requested), the growth would have been higher if not for tax cuts enacted during the 2013, 2015, and 2017 legislative sessions. Together, those cuts have taken away about $300 million that otherwise would have been available for the FY19 state budget. In other words, we created this situation in which so many children’s services can’t be funded. We made sure the funding wouldn’t be there as a result of our own policy decisions.
We’ve done enough tax-cutting for wealthy Arkansans. Any additional cuts recommended by the Tax Task Force should be carefully targeted to working taxpayers in the form of a state earned income tax credit (EITC). That would have less impact on the state budget and would be targeted to those most likely to spend their savings in Arkansas, thereby providing a boost to the Arkansas economy.
It is also important to note that we don’t yet know what recently enacted federal tax cuts will mean for state tax collections or the state budget. A number of state tax provisions are tied to federal tax law, so the federal changes could affect state tax policy. However, the one thing we do know is that, it’s very likely those federal tax cuts will lead to budget cuts that, in turn, will impact our state budget and the well-being of our children. According to the Joint Committee on Taxation, the new federal tax cuts will increase the federal deficit by $1.5 trillion over 10 years. Tax cuts, combined with a resolution that passed the House and Senate last year calling for $5.8 trillion in budget cuts over 10 years, make it very likely there will be huge cuts in federal funding for programs administered by states, including programs that help vulnerable populations meet basic needs. Many states, including Arkansas, will face very tough choices about how, if at all, they will attempt to compensate to make up for the impact of these federal funding reductions.