Governor’s Budget Office Paints Dire Picture for FY 2022-23, Glossing Over Significant Budget Reserve Fund
Appearing before the Legislature’s Appropriations Committee today, the Governor’s budget secretary, Melissa McCaw, sounded some cautionary alarms despite healthy budget reserves.
Office of Policy and Management (OPM) Secretary McCaw said that General Fund deficits are projected to be $3.5 billion in each year of the FY 2022-23 biennium. She emphasized that the revenue picture since March has been fluid because of the pandemic, federal stimulus payments, unemployment assistance and other factors, and that November revenue figures will likely produce a more accurate budget picture.
Potential costs associated with a resurgence of COVID-19 infections, particularly surrounding PPE, testing, reimbursements for nursing homes, and Medicaid caseloads and utilization, continue to be areas of near-term budget concern, McCaw said, although she indicated the state has set aside some federal Coronavirus Relief Funding to deal with such a spike.
“The economic impact of the pandemic is expected to greatly reduce key state revenue streams for several years,” McCaw said in a recent letter to state agencies. “Our tax revenues are projected to decrease by 11.3% from 2019 to 2022 while expenses are projected to grow 7.2% over the same period. We will not be able to support discretionary increases as our revenue base to support current appropriations is likely to be inadequate.”
Against this backdrop, OPM has called upon state agencies to seek savings, cuts, and efficiencies totaling at least 10-percent for the 2022-23 biennium, using FY21 as a baseline.
Data is Skewed Because of Pandemic
Some budget experts would argue that the fiscal picture and budget projections have been skewed by the pandemic and that OPM’s dire predictions may be overstated.
For example, the state ended FY20 (June 30th) with a $625 million surplus, which contributed to a record current Budget Reserve Fund (BRF) balance of $3.075 billion. For the first time ever, the BRF has reached the statutory limit of 15-percent of the total state budget. This is significant because any revenue that accrues above and beyond that threshold will go toward paying down pensions and debt.
In FY 21, however, OPM is projecting a $2.4 billion deficit, based on revenue forecasts from mid-April and mid-July, which are skewed because of the pandemic. OPM has indicated that the fiscal picture is subject to change when the first formal revenue estimates for FY21 become available in the next couple of weeks, and again in November when the next round of consensus revenues are released.
If, in the forthcoming August estimates, the budget deficit exceeds 1-percent of the total FY21 budget, the Governor is required to submit a deficit mitigation plan on October 1 for the Legislature’s consideration.
On the capital side of the ledger, McCaw indicated that the state is on course to exhaust the Special Transportation Fund balance by the end of FY2021, putting a number of capital investments at risk absent intervention and action during the next legislative session. Current projections, exacerbated by the pandemic, show the STF running a $130 million deficit at fiscal year-end.
“Clearly the BRF is adequate to cover any anticipated shortfall at this time (for FY 2021), McCaw said. However, she added, “we must also think about the potential of what FY 2022-23 will look like and continue to monitor revenues until November when the next consensus revenues come out.” Finally, we will be providing regular budget updates as new data becomes available and will also keep you apprised if the Legislature decides on dates for a potential special session