June revenue forecast demystified

There has been much confusion following the most recent economic and revenue forecast last week. At question is how our reserves shrank from over $730 million to just over $160 million. The remainder of this post will unpack that quandary, but the bottom line is that our economy is still weathering the impacts of the recession and as a result state revenues are still suffering. Had the legislature acted to raise revenue, we could have left a larger cushion in our reserves to guard against the negative economic impacts.

At issue is the amount of reserves, also referred to as the “ending fund balance,” policymakers built into the state budget that was signed by the Governor earlier this month.  At that time, the Legislature projected total reserves of about $738 million at the end of the coming biennium. Since then, our state economist has projected that the slowing economic recovery will diminish the total amount of tax resources the state is projected to have available over the next two years, lowering projected reserves.

The bulk of the decline can be explained by three factors (see table below):

1. Fewer resources at the beginning of the biennium: The beginning fund balance (the amount of revenue left over from the current biennium) was expected to be positive $111 million when the budget was enacted. However, anticipated revenues for the 2009-11 biennium were less positive than previously anticipated, eliminating any reserves that would have been available at the start of the coming biennium. As a result, the beginning fund balance is now projected to be negative $84 million. (This is included as part of the 2009-11 economic changes in the table below).
2. Slowing economic recovery in 2011-13: The worsening economy is projected to lower available tax resources by $223 million in the coming 2011-13 biennium.
3. The tax amnesty program: The Legislature implemented a tax amnesty program in 2011 which incentivized businesses to pay back taxes by waiving penalties and interest. This had a positive impact on the 2009-11 budget, but results in a loss of $164 million for the 2011-13 biennium due to forgone interest and penalties the state would have collected. Policymakers did not account for these foregone penalty- and interest-related revenues when the budget was enacted.
   

These changes account for over $570 million less in revenues for the 2011-13 budget, bringing the ending fund balance down from $738 million to $163 million.

Click on chart to enlarge

The continued drop in revenue due to economic changes further illustrates the need for policymakers to take a new approach to the budget, one that includes immediate revenue enhancements and an honest conversation about long-term reforms to our inadequate revenue structure.