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Getting the State's Head Out of the Sand

by Joe Sullivan

The state's budgetary bind keeps getting tighter, and only an ostrich can pretend the need for fiscal reform is going to go away.

As has been the case so often in the past, court intervention is impending that will force the state to spend more than the Legislature has been prepared to fund. A federal court order, now under appeal, would require the state to spend an additional $70 million annually to improve conditions at the Arlington Developmental Center for the mentally retarded in Shelby County. A hearing is scheduled for Oct. 6 on a suit that would require teacher pay equalization throughout the state—a suit that State Treasurer Steve Adams predicts will result in $100 million to $200 million a year in added cost.

At the same time, the federal Health Care Finance Administration has moved to disallow federal matching under Tenn Care of the proceeds of the state's nursing home bed tax. Much of the proceeds of this tax are remitted to nursing home patients via what are known as "granny grants." HCFA contends that federal matching of these proceeds is a sham. Their disallowance would add another $70 million to the state's Tenn Care costs, Adams estimates.

It remains to be seen whether a $213 million increase (to $1.6 billion) in state funding for Tenn Care in the current fiscal year will be sufficient to attract enough managed care organizations and health care providers to cover Tenn Care's 1.3 million enrollees. Assuming the state succeeds in its desperate attempt to keep Tenn Care from collapsing, another double-digit increase in funding will likely be required for the next fiscal year, due in large part to escalating drug costs. That's a minimum of $160 million that has to come from somewhere. And not much of it can be expected to come from curbing Tenn Care enrollment abuses even if the state can get out from under a court restraining order that presently precludes dropping anyone from the rolls.

Meanwhile, university faculty members and other state employees remain woefully underpaid. The $10,000 average salary gap compared to other public universities is the single biggest deterrent to making UT more competitive, and an exodus of the best and the brightest continues in other branches of state government as well as on its campuses. "We can't attract or retain systems analysts, accountants and engineers, " says Adams. Yet these are the very categories of professionals most needed if state government is to satisfy the demands of its critics for improved efficiency. A 3-1/2 percent pay raise for the current fiscal year certainly beat the zero raises in the preceding year but didn't begin to close the gap. Yet just replicating the 3-1/2 percent in the fiscal year ahead would cost $120 million. At least another $80 million is needed as a stepping stone toward the $440 million increase (over five years) in higher education funding for which a commission made up primarily of business and political leaders (not academicians) has identified a pressing need.

Adding up all of these additional costs in prospect produces a total need for new revenue of $600 million to $700 million. And just where is this money supposed to come from? Certainly not from the same sort of fudge factors to which the Legislature resorted to balance the current year's budget.

After all attempts at raising any revenue through added taxes fizzled, it will be recalled, the legislators fabricated the extra money by raising the state's revenue growth assumption to 5.5 percent from the maximum of 4.75 percent recommended by the State Funding Board. Now that all the returns are in for the fiscal year ended June 30 this piece of legislative legerdemain looks all the more preposterous.

In hard fact, revenue growth for that fiscal year came in at 3.94 percent, leaving a $34 million shortfall below the base on which the budget for the current fiscal year was jerrybuilt. That shortfall, in turn, bumped up the revenue growth needed to balance it to 6 percent. This at the very time when retail sales are showing signs of softening—a softening that is especially pernicious in Tennessee, where dependence on sales tax revenues is the highest in the nation.

It will take a 10 percent increase in revenues to cover a projected $700 million in additional outlays. Surely, not even political charlatans are quacky enough to portend this need can be met without an overhaul of the state's antiquated tax structure. True, the state is holding more than $200 million in tobacco lawsuit settlement money in escrow that could be used to cover a significant portion of the shortfall. But however spineless they have been in failing to face up to the need for tax reform, legislators have at least shown enough backbone not to commit this problematic source of funds to cover recurring expenses. Rather, given the precarious shape of the tobacco industry, the prevalent intent has been to place all claims settlement money received in a trust fund from which only the income could be spent.

The ostriches, of course, will insist that projections of another year of budget shortfalls represent just another round of wolf-crying on the part of tax reformers who crave deficits big enough to justify a state income tax. But the ostriches will soon have to pull their heads out of the sand for long enough to explain how the state can otherwise balance its budget without: a) violating court orders; b) letting Tenn Care go down the tubes; and/or c) perpetrating further erosion of higher education in the state as exemplified by the mass exodus of 165 faculty members from UT medical school in Memphis over the past three years.

September 7, 2000 * Vol. 10, No. 36
© 2000 Metro Pulse