Downturn reaches state economy

Missouri legislators and state officials wondered aloud this year whether the national economic downturn would hinder the state’s ability to fund schools, health care and other necessities.

In May, the general unease gave way to open worries.
The Missouri Office of Administration announced that state general revenues—the main source of support for schools, universities and much of health care—had fallen sharply after they had grown a remarkable 5 percent during the fiscal year’s first nine months.

The Office of Administration reported:

• General revenue overall had been able to post only a 2.2 percent overall gain so far for the fiscal year, although the state budget had been based on projections of 3 percent growth. Appropriations officials were studying daily updates of the slumping figures as they arrived from the Missouri Department of Revenue.
• The Missouri Budget Project, a nonprofit private group, noted that general revenues fell almost 10 percent in the month. Tom Kruckemeyer, the group’s chief economist and the state economist during the last recession, said it was “among the greatest one-month declines ever seen.”
• Individual income tax receipts fell more than 8 percent in April, the prime month for such tax collections, after they had been responsible for much of state government’s growth this year.
• Corporate income taxes fell about 11 percent compared to April 2007 and below the year-to-date totals posted last year.
• Although sales taxes rose steadily in April, they continued to lag behind the previous year overall as consumers were forced to divert much of their discretionary income into skyrocketing food and fuel costs that, many times, are not subject to full sales tax.

Kruckemeyer

The statistics for April, however, contain an enormous footnote that says simply: “rain.”

As much as state officials tried, they had difficulty commenting on the remarkable budget numbers for April. The Internal Revenue Service—and then the Department of Revenue—allowed residents of 35 counties, including St. Louis County and Greene County, which includes Springfield, an extension to file their 2007 returns by May 19, because of widespread flooding.

 

Robb

Rep. Ed Robb of Columbia, vice-chair of the House Budget Committee and one-time contractor on revenue collections for the House, noted that those areas contained about 35 percent of the businesses and residents of the state. “And the likelihood is that the people who filed on time are those who will get a refund, and the people who have yet to file have a liability” to the state, Robb said.
He is hoping that May figures will show an influx of tax revenues from those late filers.
Robb has been working with the revenue department to get figures on who had filed, categorized by county and zip code, to get a better handle on the likely impact of late returns on state collections.
“I tend to think that we will come in close to the budget figures” projecting 3.1 percent growth in state general revenue by the time the fiscal year ends in June, Robb said.
Robb, however, noted two areas of state government that face substantial troubles if revenues do not bounce back: higher education and state government workers, both of which bore the brunt of the actions former Gov. Bob Holden had to take in 2002 to avoid an avalanche of red ink.
Both are critically important to the Columbia economy.
The last recession found the state repeatedly cutting back on its investment in the University of Missouri and other colleges, and Missouri just now is reaching its original appropriation levels for higher education approved in 2001. Those cutbacks had forced the schools to hike tuition substantially for students—a more politically viable stance than raising state taxes.
Students and their families now have a protection against large university increases because the unceasing wave of large tuition hikes also had political ramifications. The General Assembly last year responded by largely prohibiting schools from raising tuition by more than the consumer price index if, like MU, they have above-average rates. If they exceed that level, the schools risk a penalty of 5 percent of their total state support.
Handcuffed by the law, however, the universities have nowhere else to turn if the state support is inadequate to support programs and keep faculty. For institutions like MU, which gets more than 80 percent of its revenue from non-state sources, it’s a case of the state tail wagging Columbia’s dog.
State workers, whose salaries form a large portion of the local economy because Jefferson City is so near, were never well paid, but fell to the bottom of the 50 states and still rank in the bottom five despite raises in recent years.
The years ahead hold little promise that state services can recover, even if a new recession does not occur.
Gov. Matt Blunt’s budget for 2009 had little credibility when the General Assembly received it because he proposed spending $450 million in the state’s reserve—or almost all of it—for new or expanded services, money largely accumulated during two years of economic surge and cutbacks in medical services for low-income Missourians.
The legislature’s $22.4 billion budget passed this month also dipped into the reserves but cut $150 million in general revenue from Blunt’s spending plans. The most prominent casualties included his Insure Missouri program for low-income workers’ health care, although that largely relied on federal spending at the start. Legislators, however, were concerned about the potential growth that could strain the wallets of the state, private workers and their employers.
Also shed from the budget was more than $13 million for the university’s “Preparing to Care” initiative that was designed to increase enrollments and ease the growing shortage of health-care workers.
As Robb noted, those cuts do not reflect any general legislative unease with tax and spending plans. “Everyone seems to have their own favorite $5 million tax credit” that, when totaled, would cut tax revenues substantially, Robb said.
Tax credits are, after all, simply state spending through cuts in the rates that apply to others.
The legislature just passed and sent to Blunt a $240 million tax credit for Bombardier, a Canadian aircraft manufacturer, if it locates a plant and 2,000 jobs near Kansas City. The Senate scaled back the proposal from $880 million that originally passed the House and theoretically provided for the state to recoup its investment when planes are sold.
The House in late April voted to eliminate the entire corporate income tax by 2013 and expand individual deductions—plus suspend the state gas tax during the summer—at a cost of hundreds of millions of dollars in three years, but the measure is unlikely to pass.
The gas tax vote was particularly untimely because the Missouri Department of Transportation faces near-bankruptcy by 2010 and would need to almost end new construction because it will exhaust bonds floated after a constitutional amendment passed in 2004 and the federal government will sharply reduce payments to the states.

Before he decided not to run for another term as governor this year, Blunt personally killed a proposed August 2008 vote on a new highway funding plan when he told organizers that he would campaign against it. Now Robb and others expect the legislature next year to tackle a new financial plan, although these efforts typically are struggles because the tax hikes are so noticeable.
While the state gas tax must be spent on highway programs, the Missouri Budget Project just released a report that flatly predicted the state would face a shortfall of $555 million to $866 million in general revenue to support services.
Among the critical changes:

• This year, the state’s general services will lose all access to the sales tax collected on cars, which totals $185 million a year, that is diverted to the Department of Transportation.
• Tax cuts passed last year will deprive general revenue of at least $168 million a year by 2010. The total does not include the $20 million annually lost if the state exempts military pensions from the state income tax as Blunt has proposed and the legislature seems likely to do.
• Missouri will lose at least $100 million a year because its income taxes are tied to federal statutes and Congress recently enacted an anti-recession “financial stimulus” bill that allows more rapid deductions of business expenses.
• Just inflation means Missouri must find $155 million extra a year to maintain current programs.
• The new school funding formula, adopted in 2005, will require Missouri to fund $126 million extra a year to the 500-plus school districts.

“As Missouri is required to operate within a balanced budget, a shortfall of this magnitude implies that substantial budget cuts to health care, education and many other vital services are almost certain to occur,” Kruckemeyer and agency director Amy Blouin said in late February