August 30, 2007

Is Bredesen Administration Double-Counting Revenue to Set Higher Spending Baseline?

Goetz: Using Revenues as Baseline OK Even Though Constitution Says Otherwise
NASHVILLE - Tennessee state Finance Commissioner David Goetz claims in a Nashville City Paper article that it doesn't really matter if the state follows the clear language of the state constitution regarding calculating the amount of money the state can increase spending by each year. The paper's story, available here in its e-paper edition, looks at the recent opinion from Tennessee Attorney General Robert E. Cooper Jr. that the constitution clearly requires the state to base its annual spending-growth limit on the baseline of the previous year's budgetary appropriations.

State Treasurer Dale Sims admitted recently that the Bredesen administration has been using state tax revenues as the baseline, a move that just this year allowed the administration to claim it is only breaking the spending cap by $53 million, although using the proper calculation shows it is actually breaking the spending cap by $723 million.

From the City Paper story.

The constitutional spending limit, called the Copeland Cap, says that state spending cannot exceed the growth of the economy - measured by personal income growth - within a fiscal year. If it does, the Legislature has to cast a majority vote to break the cap. It did so this year when the state busted the cap by just more than $50 million.

Now the pertinent question relating to the opinion is: how should the state be calculating how much its spending could grow by - through revenues or appropriations? Some state budget hawks have asserted that the state has repeatedly violated how the Copeland Cap on spending is calculated by using revenues. In an opinion released Wednesday, Attorney General Robert E. Cooper Jr. opined that in both the state's constitution and its law, officials should use the percentage increase in "appropriations from state tax revenues," as they both state.

But Goetz said that's what the state has been doing all along. And since the state traditionally spends all of the revenues it takes in, Goetz said revenues and appropriations are essentially one in the same from a budgetary standpoint. "We might say it appropriations one time, we might say revenues, but there's no difference because we are appropriating the same basic dollar amount," Goetz said in an interview. Goetz said appropriations vs. revenues is a "distinction without a difference."

What Goetz appears to be claiming is that because the administration is spending last year's surplus revenue this year, it allows the administration to use a higher number for last year's baseline to calculate the cap. But that's not how the constitution says to do it.

Double Counting?
Consider this hypothetical budget scenario: The state has a $100 million surplus in hypothetical fiscal year 1. Goetz is saying that the state may use that extra $100 million figure to increase the baseline upon which the state may calculate the spending limit for fiscal year 2. But what Goetz thinks you don't know is this: typically, surplus revenue in fiscal year 1 is not spent ("approrpriated") in fiscal year 1, but rather is spent in fiscal year 2.

Adding the $100 million to the baseline creates a fictional number if the money is not actually appropriated for spending in year 1.

And then, because the surplus money is appropriated (spent) in fiscal year 2, it also adds $100 million to the fiscal year 2 baseline upon which fiscal year 3's cap number is calculated. In effect, Goetz may have unintentionally revealed that the Bredesen administration double-counts surplus revenue, allowing it to hide the fact that it is spending hundreds of millions of dollars over the state constitution's spending limit.

Hiding $670 Million
Here's how the math worked in the real world this year:

The total 2006-2007 fiscal year budget (appropriations) was just over $12.4 billion (appropriations from state tax dollars). Specifically, it was $12,410,400,661

If the projected economic growth rate for this year is 1 percent, then spending could be increased by $124.1 million.

The official projected economic growth rate for fiscal year 2007-08 is 5.46 percent, so the state budget for FY 2007-08 can be $677 million larger - for a total of $13,087,400,661 from state tax dollars - without breaching the Copeland Cap. But the budget just passed by the legislature, containing virtually everything requested by Gov. Phil Bredesen, increases spending from state revenues by $1.4 billion.

That puts it $723 million over the cap. According to the Tennessee constitution and the related statutory provisions, the state can't spend that extra $723 million unless the legislature passes a law stating that it is exceeding the Copeland Cap by $723 million in fiscal year 2007-08. The General Assembly did not do that before it adjourned.

The legislature passed legislation in June declaring that it is exceeding the Copeland cap limit in fiscal 2007-08 by $53.7 million. How did they get that much lower number? By applying the Copeland growth percentage for the coming fiscal to the current fiscal year's revenue which, as we all know, is in record surplus. The legislation authorizing the breaking of the Copeland Cap was short by almost $670 million.

David Goetz has a calculator. He knows these numbers. His comments to the City Paper may indicate the Bredesen administration has decided to lie, spin and mislead rather than follow the law.

Previous Stories
TN Attorney General: State Budget Violates Constitution

Bredesen's spokesman on illegal budget: "We feel comfortable with what we've done."