Revenue Adjustment Leaves Kentucky with $156.1M Budget Shortfall

Posted on December 18, 2017

     Reduction plans for state spending should be made public in the next few days. State Budget Director John Chilton told reporters after a meeting Friday morning of the Consensus Forecasting Group that recommendations for cuts would be “coming soon,” likely before the end of the year. The Consensus Forecasting Group is made up of seven economists, most from Kentucky colleges and universities, who predict national and state economic conditions. The projections are used to develop expenditure plans for the state’s General Fund and Road Fund. Friday morning it made its final adjustment this year, leaving the General Fund with a projected $156.1 million shortfall.

     Various representatives with the Office of the State Budget Director presented an update on the national and state economy before the Group set its latest estimates. At its last meeting in October, the Group adopted a pessimistic outlook for the General Fund. However, J. Michael Jones, the deputy executive director for policy and research in the Office of the State Budget Director, told members of the panel at Friday’s meeting that the new pessimistic approach “is very pessimistic.”

     Economists who make up the Consensus Forecasting Group review three approaches to the economy: a pessimistic, an optimistic and what’s called a control scenario. The outlooks are provided by Global Insight, a national firm that specializes in assessing economic stability and risks. Global Insight’s latest pessimistic view predicted a recession in 2019.

     Several members of the Group took exception with that prognosis. Alan Bartley, an economics professor at Transylvania University, questioned making such a definitive statement. “This is the first time I’ve seen where Global Insight has picked a recession date. I’m not a big fan of that,” he stated. Chris Bollinger, an economics professor at the University of Kentucky, agreed a recession is probably on the horizon but cautioned on setting a time frame. “We know there’s one coming eventually, right? I don’t think there’s any economist in the world who would say, ‘That’s it, there’s never going to be another recession.’ I think the question is when and why.”

The panel voted to use the control scenario for the General Fund, which predicted a slightly slowing path from where the state’s economy is currently. The new prognosis adds half a million dollars to the state’s deficit, leaving the $156.1 million hole. Information provided at Friday’s meeting indicated the General Fund is already running $51 million behind after the Group set its last forecast at the October meeting.

     To hit the estimated receipts, the General Fund needs to grow around 3 percent for the last seven months of the fiscal year. While that worried some economists, Greg Harkenrider, the deputy executive director for financial analysis at the Office of the State Budget Director, told them, “I think we’re going to outperform the third quarter from last year.”

     After discussing what Fiscal Years 2019 and 2020 could bring, the Group voted to continue a control scenario for those budgets, allowing 2.7 percent growth for FY 2019 and 2.6 percent growth in FY 2020. Bruce Johnson, a Centre College economics professor, advised the Group those predictions didn’t have to be exact. “The chances of being called back to do revisions is pretty high.” Jones reminded the economists, “The control scenario essentially says we’re going to continue on the path we’re on.”

     Members also agreed to keep the control forecast for the state’s Road Fund, creating a $2.8 million shortfall for it. Gene Zaparanick-Brown, with the Office of the State Budget Director, reported the Fund has seen an increase in the motor fuels tax due to a jump in motor fuel usage, but it was down in four other categories. The control option adopted Friday for the Road Fund for Fiscal Years 2019 and 2020 calls for the motor fuels tax to remain relatively flat, around $760 million.

     Friday morning’s meeting was the last opportunity for the Consensus Forecasting Group to review the state’s receipts before the budget session in January. Governor Bevin ordered a 17.4 percent cut in spending in September for most state agencies. In October, Chilton said he expected the governor to act on further cuts “in the very near future.”