Budget Proposals Portray a Tale of Two Biennia

Pat Osborne, HFO & Associates

April 5, 2002

Each of the four budget proposals outlined to date rely on using roughly $800 million in one-time tobacco securitization revenue as the major initiative to address a $1.1 billion biennial deficit. Add that to the $450 million in tobacco securitization proceeds, already allocated to the general fund in Act 16, for a total of $1.25 billion in tobacco money being used to cover state spending in this biennium. Regardless of how you feel about spending the entire tobacco endowment fund in this budget cycle, the one-time nature of the revenue should sound a fiscal warning siren for the next biennial budget.

If all of the proposals similarly rely on tobacco money, what are the major differences?  While each plan proposes various ways to cut and spend state revenue to cover the additional $300 million needed to close the current budget deficit, the major differences relate to how state finances are positioned in the next biennium.

In broad terms, just looking at the major pieces -- the Governor presented a balanced budget by using $800 million in tobacco money and reducing shared revenue by $350 million in 2002, $350 million in 2003, and total elimination of $1 billion in aid in 2004.  Under this plan, state spending, for shared revenue, was reduced by $350 in this biennium and by $1.35 billion in the 2003-05 biennium. (The 2003 and 2004 shared revenue payments are made in the next biennium)  The Governor also used $200 million of the tobacco settlement proceeds to pay off state debt and avoid future debt service costs.

The Joint Finance and Assembly budget plans presented a balanced budget by using $800 million in tobacco money, using the $200 million the Governor allocated for debt service,  and coming up with additional cuts in state spending over the Governor's proposal. The JFC/Assembly version proposes a zero cut in shared revenue in 2002, (zero reduction this biennium) with a $250 million reduction in 2003 and a $500 million reduction in 2004. Under these plans, state spending, for shared revenue in the next biennium, would be reduced by $750 million compared to a $1.35 billion reduction proposed by the Governor.

The Senate presented a balanced budget by using $800 million in tobacco money, including the $200 million initially allocated for debt service, and revising the mix of state spending and cuts adopted by the Joint Finance Committee. The Senate version maintains current law with respect to shared revenue funding. Under this plan, state spending, for shared revenue in the next biennium, would not be reduced compared to the $750 million and $1.35 billion reductions contained in earlier proposals.

The four budget plans are now headed to reconciliation in conference committee. The biggest question facing conferees is not so much how they want to deal with this budget deficit -- rather, how do they want to position themselves for the deficit looming in the next biennial budget. Some estimates put the structural deficit, going into the next biennium, as high as $3 billion under the Senate budget plan. That estimate is not official, but it underscores the challenge facing the conferees and the Governor as they head into final negotiations on the budget repair bill.