July 24, 2013
They may be relatively unknown, and their subject matter may be a little dry, but the eight economists who comprise the Consensus Forecasting Group have a powerful role to play: They determine just how much money state government can expect.
As anyone who has ever put a budget together knows, it can be tough to predict what a year will bring. Their job, however, is even more difficult: They have to look more than 30 months ahead, to cover not just the two-year span for the budget but also the six additional months needed to prepare, pass and implement it.
Fortunately, this group’s crystal ball has proven to be fairly reliable. The fiscal year that ended June 30th, for example, was only about 0.4 percent over what had been projected, the equivalent of 40 cents out of $100.
It’s important to note that the economists’ forecast is mainly focused on state revenues, which go into what is known as the General Fund. Although the state gets more money from the federal government and such restricted sources as college tuition, it is the General Fund that drives the budget.
Over the last decade, our state revenues have seen both highs and lows. They went up nearly 10 percent during each of the 2005 and 2006 fiscal years, but in 2009 and 2010, they posted the first two-year decline in decades.
Earlier this spring, a joint report from the National Governors Association and the National Association of State Budget Officers found that Kentucky and many of her sister states appear to be finally turning the corner financially, although we’re still below 2008 levels when adjusting for inflation.
At the time of the report, 11 states (but not Kentucky) reported that they needed to make additional mid-year cuts, but that was far better than the 39 having to do that during the height of the recession. On the other side, 16 states reported this spring they were actually increasing spending during the fiscal year, though Minnesota and Texas accounted for most of the new money.
More than 40 states, including Kentucky, have bigger budgets this fiscal year than they did last year, but many areas of ours are essentially flat-lined. The General Assembly took this approach because we will have to use the expected growth in revenue to maintain critical state services in the face of inflation and increased need.
It is worth pointing out that our budget is relying less on one-time revenue sources to pay for ongoing expenses, something known as a structural imbalance. During the 2012 fiscal year, it was the foundation for 4.6 percent of the budget, but this fiscal year, that figure is down to 1.6 percent.
When taking a closer look at the state’s revenues, it becomes clear that part of the economy is doing well while other parts are struggling.
As our region unfortunately knows all too well, Kentucky lost 4,100 mining jobs when comparing the first three months of 2013 to the same period a year earlier, which was a sixth of that workforce. Manufacturing, meanwhile, went in the other direction, adding 8,000 jobs.
Businesses that help other businesses – advertisers, CPAs, attorneys – are also on the upswing, but construction has seen relatively little growth in recent years. There is hope that a steep increase in new single-family homes nationwide will help to reverse that trend, though.
The lottery is up – it provided $215 million to the state last fiscal year, with most of that going to help students attend college – and the Road Fund also increased for the fourth straight year.
Although we are just a few weeks into the second half of the two-year budget, work is already underway to be ready for the next cycle. Planning estimates will be compiled through the fall, and the official revenue estimate will be unveiled just before the holidays.
Governor Beshear will then present his administration’s final budget proposal in January, and the General Assembly will vote by mid-April on whatever changes it thinks should be made. Not surprisingly, there will be a lot of competition for every new dollar. Just increasing per-pupil funding in our elementary and secondary schools by one percent, for example, will take $29 million.
The budget is always the most difficult bill the General Assembly considers during even-year legislative sessions, but with the Consensus Forecasting Group helping to light the way, my colleagues and I can at least rest assured that we will know how much we have to work with. No one can foresee the future, of course, but this group, thankfully, comes pretty close.