On table: Spending cuts, tapping reserves, stopping or delaying payments

At least some state lawmakers suspected the midyear budget that Gov. Brian Kemp signed into law this week was a work of fiction the day they approved it.

T hat was March 1 2, t he same day the General Assembly decided to temporarily pull the plug on the 2020 session because of the coronavirus. Lawmakers had added $100 million to fight the pandemic, money that Kemp gave them from the state’s rainy day reserves.

How the state funds the rest of the $27.5 billion budget — which runs through June 30 — is an open question that state leaders know a business-crippling coronavirus pandemic will make extremely difficult to answer. The budget they just passed could be in ruins in a month or so as tax revenue dries up, and state leaders will have to look for answers, quickly.

Because so much of the budget has been spent since the state is nearing the end of its fiscal year, the choices will be few: On the table could be new spending cuts, siphoning the state’s reserves, or stopping or delaying payments.

“I have a hard time seeing how there is a happy ending for this fiscal year,” said Rep. Scott Holcomb, D-Atlanta, a member of the House Appropriations Committee.

House Speaker David Ralston, R-Blue Ridge, said, “You’re going to see some very, very serious discussions about taking a do-over on the budget.”

Kemp’s budget staff has been constantly running financial scenarios, a series of what-ifs that almost certainly include the state taking in less revenue than it needs to provide the services it budgeted. Even more could be at stake.

“There is just so much that is unknown,” said Kelly Farr, the governor’s budget director.

Through the state’s budget, taxpayers help educate 2 million children, provide health care to more than 2 million Georgians, build roads and bridges, manage parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state issues driver’s licenses and helps pay for nursing home care for the elderly.

The state is a major provider of basic medical coverage, mental health and drug treatment, and it helps fund public health programs that are fighting the pandemic.

Besides providing a huge range of services, the state budget also funds the salaries of more than 200,000 Georgians, from teachers and university staffers to prison guards, food safety inspectors, park rangers and criminal investigators.

The budget is a statement of the state’s priorities — for instance, in issuing his edict to cut spending last August, Kemp exempted k-12 schools, most college programs, the public health care program Medicaid, and the agency that builds and maintains roads and bridges. Those areas make up more than 75% of state spending.

But while legislators spent months hearing about what Kemp’s proposed cuts to crime lab testing or mental health programs or county health departments would mean, they didn’t know a potentially much worse fiscal crisis was around the corner.

“This is something none of us saw coming,” House Appropriations Chairman Terry England, R-Auburn, told colleagues last week.

Despite an economy that was viewed as strong before the coronavirus outbreak, Kemp built the fiscal 2020 and 2021 budgets with projections of fairly slow revenue growth, much lower than in most nonrecession years in Georgia. With the stock market tanking, unemployment likely to at least temporarily soar, the federal government delaying the date to file income taxes until next fiscal year, and Georgians staying home as requested, even those conservative estimates may be fanciful.

“Right now, those assumptions are tenuous,” Rep. Andrew Welch, R-McDonough, a member of the House Appropriations Committee, said last week.

Lawmakers can come back in a special session later this year if necessary to make cuts to the budget for fiscal 2021, which begins July 1. They may not have the same amount of time to deal with what will occur in the next few months, in what’s left of fiscal 2020.

In a conference call President Donald Trump held Thursday with governors, Kemp made his case for federal help.

“Unlike the recession, when things went down slowly, when states had time to prepare at the end of the year, we’re all facing drastic revenue drops,” Kemp said.

“The idea of a block grant to the states to help fill revenue shortfalls would be something I’d like for you to consider.”

Trump responded, “We’ll consider everything you said.”

Big, maybe bad, months ahead

Josh Goodman, an expert on state fiscal policy with the Pew Charitable Trusts, said states across the country are facing the same dilemma.

“The primary sources of state government revenue are the sales tax and personal income tax,” Goodman said. “If consumers spend less, sales tax revenue will go down. If workers work fewer hours, the personal income tax (collections) will go down.”

With the inevitable economic slowdown because of the coronavirus, he said, “there is a concern for this fiscal year and the first part of the next fiscal year.”

Unlike the federal government, the state of Georgia can’t run a deficit. The governor, the General Assembly and state agencies can’t spend more than the state takes in. When the fiscal year ends in three months, the books have to balance.

The state of Georgia takes in about 23% of its revenue — about $5.2 billion last year — from April to June.

Even if the country gets coronavirus under control by the end of next month, the expected decline in state collections — mostly from income and sales taxes — could hammer state finances.

With only a few months left in the fiscal year, the state could suddenly face a deficit of $1 billion or more, with little time to figure out how to deal with it.

Georgia faced a crisis in 2008 when the impact of the Great Recession started collapsing revenue collections. Then-Gov. Sonny Perdue acted quickly to cut state spending and suspend pay raises that lawmakers had approved a few months earlier.

Over the following few years the state’s budget was propped up with billions of dollars in extra federal money from a stimulus package meant to keep state services across the nation afloat. Even with that stimulus money, state and school employees lost their jobs, and workers and teachers faced days off without pay. School years were shortened, and services were cut back.

But Perdue made his first move in August, a month into a new fiscal year. He had time to hold back agency funding for the year to cut spending. Kemp and lawmakers don’t have that luxury. Most of the school year is over; most of the money has been spent or allocated. The need for public health care programs will only grow during the pandemic as people lose jobs. The state won’t be able to pull the state patrol off the streets, or likely furlough teachers and prison guards, to cut costs.

“What we are seeing is a massive constriction of the economy,” Holcomb said. “Once cash flow dries up, the impact to the economy is not positive.

“I continue to scratch my head as to why we accepted the revenue estimate and didn’t make adjustment when we knew there would be an economic impact.”

Solutions if tax collections plummet

The General Assembly will have to come back — at some point — before the end of June to approve a budget for the upcoming fiscal year, and it may have to help fix this year’s budget as well.

There are some tools at the governor’s disposal. The federal government could give aid to states the way it did during the Great Recession. The question is whether it could get to Georgia quick enough to help in fiscal 2020.

Kemp has about $2.6 billion to $2.7 billion left in the state’s rainy day fund to use to plug holes. The state all but emptied the fund during the Great Recession. It was replenished to a record amount during Gov. Nathan Deal’s eight-year reign. At $2.7 billion, the fund has enough money to run the state, without any outside revenue, for a little more than a month.

Goodman called the building up of reserves a success story, with many states socking money away since the Great Recession.

“Reserves are really how states deal with a negative surprise,” he said. “A lot of states will be looking to those reserves if they have problems in the next few months.”

Last year, the Kemp administration also showed it could get creative with state finances. Tax collections most months were slow — in part, experts say, because the General Assembly decided to cut the top income tax rate in 2018.

Kemp’s budget staff was concerned the fiscal 2019 budget wouldn’t balance. So they decided to tell state agencies and school districts they could skip the June payment they’d normally make to fund the State Health Benefit Plan, which provides health coverage to 650,000 teachers, state employees and retirees.

The fund had built up hefty reserves, and withholding the payment for a month saved the state and school districts more than $200 million.

Farr said it’s too early to know what federal aid — such as the proposal to give Americans checks to ease the financial impact — will have on state finances, if any. Or how the state would be affected by a move to let Americans pay their income taxes later.

He was around in state government when the Great Recession hit, but in some ways, he said, the two aren’t comparable.

“There were signs it (the recession) was coming,” Farr said. “This just came up out of the blue.”