January 23, 2004

Bredesen is NOT Cutting Spending

On Wednesday I posted a report indicating Tennessee's budget surplus was approaching half a billion dollars, far larger than the $82 million surplus the state announced a few days earlier.

I have now received clarification of the numbers.

The first number you need to know is $8,708,700,000. That is the amount of money the state expected to receive in state tax revenue for the current fiscal year - and how much state tax money was budgeted to be spent.

But now state tax revenue for the current fiscal year (FY 2003-04) is forecast to be between $114-$177.5 million more than that stimates. That includes the $82 million reported surplus that has already accumulated in the first five months of tax collections for the fiscal year. As I warned you back on Jan. 17, the administration is already making plans to spend that money rather than save it in a rainy day "reserve fund."

For the next fiscal year, FY 2004-05, state tax revenue forecast to be somewhere between $317-$386.6 million larger than tax revenue this year.

So, for this fiscal year the surplus is expected to be between $114 and $177.5 million.

And next fiscal year, revenue is forecast to grow by as little as $317 million or as much as $386.6 million. Add this year's surplus numbers and next year's range of forecasted revenue growth and you get this: In fiscal year 2004-5, Tennessee will have at least $431.7 million more to spend than this year, and as much as $564.1 million - 5 percent to 6.5 percent more money than is being spent this year.

That's the data as presented to legislators by the state comptroller on Tuesday. Here's why you need to know: When the legislature starts debating the budget in earnest, you should be wary for big-spending legislators who will try to confuse the issue and make the revenue growth appear smaller than it really is.

And the State Funding Board is helping them do it.

In the Dec. 11, 2003 memo from the State Funding Board to the governor and the legislative leadership, the Funding Board made its offical "consensus" revenue estimate for FY 2004-05

The memo, signed by Comptroller of the Treasury John Morgan, Secretary of State Riley Darnell, State Treasurer Dale Sims, and Finance & Administration Commissioner David Goetz, is the official statement of estimated revenue on which budget decisions are made. It is based on testimony from a handful of university economists from across the state - including University of Tennessee economist Dr. Bill Fox, Middle Tennessee State University economist Dr. Albert dePrince, and University of Memphis economists Dr. John Gnushcke and Dr. Richard Evans, along with Jim White of the General Assembly's Fiscal Review Committee and Reid Linn of the Tennessee Department of Revenue.

You can read all of their reports here.

The Funding Board's consensus estimate: Revenue will grow by 3.6 percent to 4.35 percent in fiscal year 2004-05.

But I'm telling you the state will have from 5 percent to 6 percent more tax revenue to spend next year.

Now, why do they say 3.6 percent to 4.35 percent and I'm telling you the state will have 5 percent to 6.5 percent more money to spend next year? Because the State Funding Board muddled the truth. They are comparing next year's estimated revenue to this year's revenue, but failing to mention that this year's revenue is coming in as much as $177 million more than estimated and budgeted - and their estimated revenue growth for next year is ontop of that higher baseline.

The fact is, if the Funding Board's revenue estimates are right, Tennessee state government will have from 5 percent to 6.5 percent more money to spend next year than was needed to balance this year's budget.

Yet legislators, using the Funding Board's growth rate estimates, likely will talks as if they have only somewhere around $315 to $380 million more in revenue to spend next year - and hope you forget that those numbers are on top of the $114 million to $177.5 million in growth in revenue this year. The truth is, the state will have enough revenue to increase state spending next year by $431 million to as much as $564.1 million - 5 percent to 6.5 percent - over the estimated $8.7 billion in revenue in this year's state budget.

Revenue in FY 2004-05 is forecast to be 5 to 6.5 percent higher than the amount of revenue needed to balance this year's budget.

Even 5 percent growth in state spending is likely enough to compensate for inflation and population growth. Spending growth of 6.5 percent would clearly be more than necessary to offset inflation and population growth.

Bredesen recently asked his department heads to prepare to "cut" their budgets by 5 percent, according to various media reports. Only problem is: spending is not going down 5 percent - it is going up 5 percent. Every dime of revenue that comes in next fiscal year will be spent - including the 5 to 6.5 percent more revenue they'll collect next year than they do this year.

Bredesen isn't cutting spending.

Let me repeat that.

Bredesen is NOT cutting spending.

He's spending every dime of revenue growth, even surplus revenue - even revenue not needed to keep the budget apace with inflation and population growth.

That's fiscally stupid. In small scale, it's what Gov. Gray Davis did in California, spending every boom-time dollar of extra revenue and setting the state up for a fiscal nightmare when the economy slowed. Now, at the beginning of the next economic boom, is when Tennessee ought to be saving extra revenue for a rainy day.

In the short term, revenue surpluses should be required by law to be held in reserve for a rainy day. In the long term, once the rainy day fund is sufficiently filled, surpluses should be returned to taxpayers via economy-stimulating tax rate reductions or direct rebates.

And that is why Tennessee taxpayers need the protections of a Taxpayers Bill of Rights like the one proposed by state Sen. Jim Bryson.

Editor's note: This post was originally published Thursday, but the figure I used for the estimated revenue for this year's budget was incorrect. Later, I received more accurate information, which changed some of the percentage calculations, and have re-updated the post with the correct numbers and re-dated the post for Friday morning.