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Last week, this column discussed the October revenues for the state which were holding even with last month’s revenues. However, in the current economic storm, it is difficult to see how this can continue. Around the Capitol, budget staff are discussing cuts of over $2 billion from the FY09 budget, a reduction of over 10 percent from the original budget that the General Assembly passed.
Also, previously, state economists had been optimistic about the FY10 budget. Most now think we are in for a multi-year downturn.
Economic indicators — still heading downward
This past Wednesday, the Census Bureau and the Commerce Department jointly reported that building permits and housing starts reached record lows in October. Housing starts nationally have reached their lowest level since 1959, when the federal government started tracking the statistic.
In September, building permits in Georgia were down 51 percent from last year. In Savannah, they were down 44 percent. Both decreases are higher than the national percentage.
Manufacturing and shipping
One of the most quoted barometers of manufacturing activity, the Purchasing Managers Index (PMI), reports that more than 60 percent of those polled believe new orders and other activities were trending downward.
Georgia’s ports have seen previous double-digit growth in container traffic and shipping shrink to -7.4 percent in October and now stands at a total 1.1 percent increase for the year, October was down 6.2 percent. Container traffic was down 7.4 percent in October.
The Georgia Department of Labor reported that there were 72,627 new unemployment claims filed in October. This is up 28 percent from the 56,652 that were filed in September, and up 75 percent (31, 121 claims) from the 41,506 that were filed in October of the previous year. The unemployment rate in Georgia hit 7 percent in October, which is the highest rate since 1992. Georgia’s unemployment rate was 4.5 percent at this time last year. Not surprisingly, unemployment claims are considered to be a significant predictor of the income tax revenues that the state can expect to receive.
Initial predictions about Georgia’s revenue shortfall were based on a forecast of a shallow and short slowdown. Based on these predictions, budget writers anticipated a $1.6 billion shortfall in ’09 and a slight upturn in FY10. The initial proposals to balance the budget included drawing on over $500 million in one-time surpluses or reserves, such as using $225 million from the State Health Benefit Plan surpluses, and a 2 percent cut to education, a 5 percent cut to Medicaid and a 6 percent cut across the board to all other agencies. The governor also deferred all non-teacher state employee pay raises.
Now budget writers are challenged to potentially find another $400 million or more in FY09 and to find the same amount in FY10 without the assistance of the one-time surpluses used to cover the shortfall in FY09.
Basic budget math
In order to understand how budget reductions will affect different policy areas in FY09 and FY10, it is first important to understand how the state spends its money.
The original FY09 budget was $21.12 billion; however, once you take out restricted fund sources such as motor fuel, lottery and tobacco, the budget was $19.1 billion.
• K-12 education is by far the state’s largest area of expenditure. Georgia spends about 45 percent of its budget, or $8.5 billion, on education.
• Health care is the next largest area of expenditure at just under 12 percent of the state budget. Georgia spends $2.3 billion on health care.
Of the remaining $8.3 billion, around $2.3 billion goes to Regents, $1.2 billion covers the Department of Corrections, $1 billion is for debt service which cannot be cut, and $1.6 billion goes to the Department of Human Resources, which covers programs such as mental health, foster care and public health. The Department of Transportation also has around an $850 million budget, but most of this is composed of motor fuel funds so it does not compete with the rest of the budget.
Given these numbers, consider the math. Every one percent cut to education formulas raises around $76 million (because local contributions to the quality basic education formula need to be considered). A 1 percent cut to the non-Medicaid, non-Education $8.3 billion really can only raise $73 million, once debt service is exempted. Currently, all agencies except Education and Medicaid are already taking a 6 percent across the board cut. To raise an additional $400 million would require an additional 5.5 percent cut across these agencies. If budget writers were to try to raise this amount by cutting education formulas, this would require a 7.3 percent cut instead of the proposed 2 percent cut.
State still has reserves
Although some balancing can be done across these agencies, there are no easy solutions remaining at this point. One piece of good news is that the state is likely to go into the budget year with a $1.1 billion in reserve and this may be used to cushion some of the initial blow of the recession.