September 30, 2002
If you’ve read the headlines, you know that Montana’s budget crisis has just gotten worse: we’re now down $300 million instead of the $250 million we thought we were down. What’s happening? Well, there are many reasons for our budget deficit, and we share at least one of them with almost every other state.
To put $300 million into some kind of perspective, it’s 13% of the General Fund budget for the 2003 biennium, the current budget cycle. If you eliminated every state program except for Education, Health, Corrections, and the University System you would save $250 million of General Fund money.
And to put that last paragraph into perspective, let me explain some terms. The Montana Legislature meets only once every two years, and budgets are set for a two year period, or “biennium”. They also budget on a fiscal year, which begins on July 1, rather then a calendar year. Fiscal Year 2004 (FY 2004) begins on July 1, 2003. The “General Fund” is the main spending account for the state. When we talk about a deficit, we’re talking about the General Fund.
So, how did we get here? First, previous legislatures have enacted tax breaks and spending increases that are just now coming in to full force. A cheap legislative trick is to pass a spending or tax cut bill that that particular legislature doesn’t have to budget for. One of the major culprits in Montana was the 50% cut in the business equipment tax in 1997, Senate Bill 200 (SB 200). Ignoring completely the good or bad points of cutting that tax, SB 200 was destined to put future budgets in the red.
Every piece of legislation that raises or spends money has to have a “fiscal note” attached to it to show how much money it will raise or cost in the present budget cycle, and what the long term effects will be. They are prepared by the Governor’s Office of Budget and Program Planning. The fiscal note for SB 200 predicted that it would cost the General Fund $20.6 million in lost revenue for the 2001 biennium, $72.2 million for 2003, $149 million for 2005, and $170 million in 2007.
The 1999 legislature had a field day when it came to tax cuts. Revenues for the 2001 biennium were cut by $223.7 million, which grew to 347.9 million in the 2003 biennium, and increase even more in the 2005 biennium. There were some tax increases to replace the lost revenue, so the net figures aren’t as high: $174.1 for 2001, $277 in 2003. That means that the 2001 legislature had $103 million less to budget with than the 1999 legislature. The 2003 Legislature will have still less.
The 2001 Legislature played the same kind of game. They enacted spending legislation that did’ât fully take effect in their budget period. A pay increase for state employees had a “delayed implementation date” so that it won’t be in full effect until the 2005 budget, when it will cost an additional $36.4 million. The state also assumed costs for District Courts. That, too, doesn’t take full effect until the 2005 biennium when it will cost $39.9 million.
Second, we spend more than we take in. This is what the Legislative Fiscal Analyst’s Office calls a “structural imbalance.” The state takeover of District Court costs is one example; another is the state taking over costs for welfare offices formerly operated by the counties. This combination of somewhat moderate spending increases coupled with serious tax reduction is one of the major causes of our current dilemma.
Third, some costs that were not expected to increase, did, mainly in Public Health and Human Services where higher costs for Medicaid and prescriptions will cost $76.3 million more than budgeted, and in Corrections due to an increase in prisoners: $11.1 million.
Last, income tax revenues are in the tank because of the stock market. Almost all of the decrease in income tax revenues is due to a sharp fall off in capital gains tax receipts.
Those are the main points, and it’s a lot to absorb in one sitting. You might be wondering what’s going on in other states (it’s all bad), and what they’re doing about it. That’s a good question, and that’s my next article.