Ohio Budget Expert, Richard Sheridan: “Ohio’s Budget Problems Are A Long Way From Being Solved And One-Time Fixes Have Dried Up”

Richard Sheridan, Ohio budget expert, former head of the state’s legislative budget office and a consultant for the Center for Community Solutions in Cleveland, entitles his September article in State Budgeting Matters,  “Rebalancing the State’s Budget: Misconceptions, Puzzlements, and Risks.”   The article shows that, because of the deepening recession, the governor and state assembly face many challenges in producing and maintaining a balanced budget.

Sheridan prefaces his article with a quote from the State Auditor, Mary Taylor: “Gov. Strickland’s plan is not making real progress toward putting Ohio’s fiscal house in order and unfortunately, by continuing to delay structural reform to the state budget, we have lost valuable time which would have been better spent on advancing serious budget balancing solutions.”

Sheridan says, “What economists see on the horizon is a worsening of the current undeclared recession and, with it, even further contractions of state taxes.

I’ve not yet read Sheridan’s August article, “Options to Stave Deepening State Budget Hole.”  I will make make a post on that article soon.  Governor Stickland, along with the State Assembly, is facing some tough decisions.  It seems to me that the information in these two article should be at the center of the discussion and debate in our current State Assembly political campaigns.  The PDF of “Options to Stave Deepening State Budget Hole” can be downloaded here.

And here is another report all State Assembly candidates should read and respond to, written by Jon Hoceck in April of this year, “A Step Toward Fiscal Balance: Options for Ohio’s Income Tax:  An Issue Brief from
Policy Matters Ohio”

The PDF of “Rebalancing the State’s Budget” can be downloaded here.  What follows are (with emphasis added) excerpts from the article:

  • It appears that for FY 2008, despite earlier testimony from OBM, agency budgets were not actually cut during FY 2008. With respect to FY 2009, agencies were given target amounts to reduce their budgets and have until the end of September to negotiate the specific line items to be cut.  An early list of cuts totaled $158,497,032, but OBM also announced that the “solution” to the latest iteration of the FY 2009 budget problem would require $198 million in cuts.
  • On the last day in FY 2008, instead of paying $434 million due for FY 2008 Medicaid bills, OBM paid those bills out of this year’s (FY 2009) appropriations.  Without additional appropriations authority in that amount for FY 2009, that means the state will not be able to pay that amount of FY 2009 Medicaid spending obligations before the end of the biennium. …  The state can be expected to be$434 million—at least—in the red when it begins the next biennium as a result of this action.
  • One-time Solutions. It appears that the state managed to end FY 2008 in the black, without the need to cut state budgets and, apparently, also without having to “raid” any of the rotaries.  The ability to do so was undoubtedly aided by transferring $434 million in Medicaid spending into FY 2009, which fails to solve the problem and simply pushes it into a new fiscal year.  Still, for FY 2009, as was the case in the proposed budget solution for FY 2008, the bulk of the plan consists of using non-recurring, one-time revenues to shore up spending.  The effect of this is to make it more difficult to provide continuation spending in the next biennium, where revenues will decline because of scheduled tax relief reductions regardless of what happens to the economy.
  • Selective Cutting. Reports that the FY 2009 budget cuts are 4.75 percent “across-the-board,” could not be further from the truth.  Some agencies are completely exempted from the cuts.  Some line items are exempted from the cuts.  As a result, health and human services agencies will disproportionately feel the brunt of the announced $158.5 million in cuts (the final figures, when made public, especially if they total the announced $198 million, will be different) accounting for two-thirds of the cuts.
  • Some Risks. The decision to shore up the current state budget by raiding other state funds and transferring their balances to the GRF, permits state agencies to continue spending at levels that will be sustainable in the next biennium, only if economic conditions improve significantly.  Based on what is happening to financial markets, the likelihood that employment will spike, wages rise, and consumer spending and buy ng expand significantly in the next two years is a dream not shared by any notable economist.  What economists see on the horizon is a worsening of the current undeclared recession and, with it, even further contractions of state taxes. The decision to address the state’s current budget problem with only modest cuts in authorized appropriation levels, has the effect of postponing the difficult choice of significant budget cuts, increases in tax rates, or expansions of tax bases into next February when the FY 2010-2011 state budget will be presented to the legislature for action.
  • One such problem is with the new Keno gambling game. The state is counting on receiving $73 million in profits from the game.  So far the proceeds have been such that the state will be lucky to receive half that amount before the fiscal year ends.
  • Another problem involves the Commercial Activity Tax. The Franklin County Court of Appeals ruled that by including the gross income from the sales of food in the base of the new tax the tax violates the Ohio Constitution.  Should this ruling be upheld by the state Supreme Court, the state tax department estimates it could cost the state an estimated $188 million in lost revenue when the tax is fully phased- in.3  Although the proceeds of the tax now go to local governments, the state is obliged to make up these proceeds using GRF funds.
  • With unemployment rising, the potential for increased Medicaid enrollments also increases.  Even without worsening economic conditions, there are large numbers of persons now eligible for Medicaid whose enrollment could push spending higher than currently estimated.
  • And, recently, OBM examined adult corrections population data suggesting the expectation of significant growth with today’s prison population of 49,691 growing to about 70,058 in the next 10 years, unless something is done.  Such growth would require new prison construction and, in 2007, it cost the state $24,517 per year, per offender.  These costs are increasing each year, especially as the prison population ages and require more expensive health care.  According to the OBM analysis, between 2002 and 2007, GRF medical expenditures per inmate increased by 53.4 percent, to $3,653. Cutting positions in 2008, will “inhibit the ability of the system to absorb additional projected population increases,” according to OBM.4   Unless substantial policy changes are made in the near future, the costs of adult corrections, where 90 percent is borne by the state GRF, are destined to escalate, adding to future budget problems.
  • In a checks-and-balances form of democracy, the legislative branch performs the important role of overseeing the executive branch to insure public accountability.  This is especially important when it comes to state finances, and financial oversight requires continuous monitoring by expert staff.  As competent as the fiscal staff of the LSC rotaries,  (Legislative Service Commission) may be, they must also be responsible for advising legislative leadership when they observe problems, or have questions about fiscal actions taken by the administration so that they can exercise their oversight function and hold the administration accountable for its actions. The old LBO (Legislative Budget Office)    performed this function; the converted LBO does not.
  • With respect to press reporting on the state’s fiscal crisis, every report that I have read has been a regurgitation of the press releases and comments issued by the administration.  As noted at the beginning of this article, the September revenue revision was widely reported by the press as representing “$540 million in budget cuts.”  Even the administration’s statements show that is clearly not the case with cuts being proposed at $198 million. There is no evidence that reporters desire, or even perhaps have the capability, of doing the kind of fiscal analysis needed to question some of the decisions made concerning the state’s fiscal problems or provide the kind of reporting that would “safeguard the public interest.”
  • So, when it comes to scrutinizing the state’s financial problems, and insuring that the state’s resources are being soundly managed, the legislature and the public clearly need an organization like the LBO once was.  In its absence there needs to be more transparency in fiscal actions taken to balance the budget, especially when those actions deviate from announced plans, and greater clarity, and accuracy, in the administration’s reporting on the state of Ohio’s budget.
  • The only way that the legislature, ultimately responsible for adopting the state’s budget and setting appropriations levels, not to mention authorizing appropriate actions to keep the budget in balance, has been able to provide necessary oversight over the executive branch, is through its partisan fiscal staff.  As competent as that staff is, it consists only of one staff analyst serving the House majority, and another serving the Senate majority.  Not only is what that staff is able to do limited by size, it is limited because whatever it does, can be viewed as partisan and become the subject of partisan bickering.
  • So far, the state has acted promptly to address the problem of reduced revenues, including the most recent actions taken just weeks before the November elections.  Many observers were certain that such action would be postponed until after the elections, especially since there appears to be a possibility that political control of the House of Representatives could change.  Acting promptly means that there will be more time to implement proposed responses to the lowered revenue estimates, and, it also means that agencies facing cuts will be able to spread them over more months.  A 4.75 percent cut for FY 2009 implemented on October 1, translates to a 6.71 percent cut, whereas the same cut implemented  on December 1, would effectively be a 9.5 percent cut.
  • In reality, most proposed agency cuts are lower than 4.75 percent because of the effect of exemptions of specific line items. By choosing to avoid making severe budget cuts, and to protect decisions affecting higher education such as the expansion of scholarship programs and freezing tuitions, by shoring up sagging revenues with non-recurring non-tax revenues, Ohio joins the ranks of many other states in similar straits.  Most, though not all, have also avoided the dreaded “tax increase” option.  It is obviously politically difficult to raise taxes during bad economic times and equally difficult to admit that the state cannot afford to pay for new and expanded spending considered fiscally viable just 14 months ago.
  • But Ohio, along with other states in similar circumstances, will soon have to recognize that the budget problems are a long way from being solved, and the one-time fixes have pretty much dried up. That leaves the state in the position of having to draw down the Rainy Day Fund (already effectively reduced from $1 billion to $750 million because of actions taken in the recently enacted Job Bill and the proposed use of $63 million for Medicaid)  if things get worse this biennium, and seriously consider the spending cut and/or taxincrease options to balance the next biennial budget.
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