Good times, lean budget

State finances should ring alarms

The debacle of the “party of fiscal responsibility” voting in Congress on health care before getting a cost estimate will likely be next week’s topic. For now, suffice it to say that “We have to pass the bill so that you can find out what is in it” has turned into “We have to pass the bill. We don’t care what’s in it.”

This week’s topic hits much closer to home. In recent years, the state cut back on tax rates. It spent reserves. All the while, the state’s economy grew. Tax revenue growth was tempered, though, as more and more sales took place on the Internet. Sales taxes due are not reliably collected there. That would require a degree of tax-paying volunteerism most consumers lack.

After only two years of such tax relief — intended and unintended — the state had to cut its general revenue budget by $70 million with two months to go in the fiscal year. The just-passed budget for the next fiscal year got some trimming, too. This happened while Arkansas unemployment is at record lows.

One year ago this month, I wrote the following two paragraphs:

“I’m a fiscal conservative, but by a definition that’s obsolete. When I was young, a fiscal conservative was someone who shunned risk. He didn’t buy anything he wasn’t sure he could pay for. He left an ample cushion in his budget for unforeseen events. He didn’t talk about how there’s plenty of savings to be made in budgets. He found them. He didn’t just talk about going through budgets line by line. He did that.

“And when a lot of money was needed, the need was undeniable and his carefully hoarded savings weren’t enough, he cursed through his gritted teeth and passed the smallest possible tax needed to raise the money. Old-fashioned talk like that gets you branded a liberal now. You’re not a conservative now unless you live dangerously.”

Here we are. The state enjoys full employment. Things do not get any better than this economically. Yet the state is making the biggest “adjustment” in its spending since the depths of the Great Recession seven years ago.

It is hard to picture this as an accident. There is already talk of doing something about the Internet drain on sales taxes, and eliminating some exemptions to that same tax. Those efforts get a boost from the fact the state’s spending already leaves no margin.

I hope this tightness is intended. If not, it does not reflect well on state government’s stewardship of the public purse.

Gov. Asa Hutchinson says we can get to the end of the fiscal year without any cuts in state services. After all, it is a $70 million shortfall in a $5.33 billion budget. He is right, but we have found the edge. The state reached this edge while the economy is doing very well.

The economy needs to keep humming along for the state’s ends to continue to meet. No one, under any circumstances, should rely on things to keep humming right along. This is especially true when an independent study finds you are bumping along among the five states least able to absorb a financial shock because your reserves are so low. This is a factor already affecting the state’s bond rating. That rating is not great anyway because of bigger factors, such as low average state income.

A partial curative to address this lack of reserves passed on Wednesday. It shows how far down in the well the state’s bucket has to go to still get water.

The Legislature tapped, or rather arranged to tap, the state’s tobacco settlement trust fund. This is supposed to be a “break glass only if a recession hits” solution. The Legislature can now raid that fund with a two-thirds vote.

The least-disputed fact in state finance is that ever-rising Medicaid expense eats the state budget’s lunch and is getting worse. The settlement money from health-related tobacco claims was supposed to be earmarked for health. As such, it was a hedge against rising health costs; not enough of one, but something.

Going to the tobacco account would be a whole lot like a family going to its health savings account because it overspent its checking account and does not have any savings.

Now the settlement fund can be tapped for anything. The way things are going, it will be.