by Joe Sullivan
Given all the recent signs of a resurgent economy, one might suppose that projected state revenue growth would be sufficient to obviate funding cutbacks to the fiscal year ahead. But such is not the case.
Despite a projected increase of $400 million to $500 million in state revenues, Gov. Phil Bredesen is still facing a budgetary shortfall. What are deemed obligatory spending increases totaling upwards of $500 million must be covered in order to balance the budget Bredesen is due to submit Feb. 2. And since he's ruled out any tax increases, the only way to cover them is with discretionary spending cuts.
As a result, Finance Commissioner Dave Goetz is clear that higher education and many state departments will be hit with five percent reductions. These come on the heels of the nine percent cuts to which they were subjected in the current year and raise the question of when, if ever, higher education funding will stop sliding down the slippery slope that will deprive UT Knoxville alone of another $8 million.
In attempting to answer this question, it's instructive to look at the components of the spending surge that's consuming all of the state's revenue growth and then some. Will they continue to do so, or can improvements be expected in the state's fiscal outlook at least in years of robust economic growth? The pieces of this puzzle are as follows:
 TennCare — State outlays for health care coverage of TennCare's 1.3 million enrollees have grown by more than $200 million in each of the past three years to a total of $2.1 billion. Even with new restrictions on eligibility and prescription drugs, a further $225 million increase is projected for the fiscal year ahead.
Curbing this rate of growth has been Bredesen's top priority, and he retained the renowned consulting firm, McKinsey and Company, to recommend a TennCare overhaul. McKinsey's recommendations are expected later this month and will almost certainly include curtailment of benefits and perhaps enrollment. But Goetz cautions that many of the changes will require federal approval that may be difficult to obtain and that their implementation will involve long lead times. Therefore, Bredesen's budget won't assume that significant cost containment can be achieved until subsequent fiscal years. But the governor has staked his reputation and perhaps his reelection in 2006 on constraining TennCare. So as difficult as it will be to do so with health care inflation running at a double-digit rate, there's room for optimism that he will succeed.
Education (K-12) — One area that's been exempt from budget cuts is the formula-based funding of public schools under the state's Basic Education Program. The BEP formula typically generates increases on the order of $50 million due primarily to enrollment growth, and this coming year is no exception.
For the first time in a decade, though, the formula is due to change in a way that will boost outlays further above the current year's $2.6 billion base. The impetus for the change is a Tennessee Supreme Court decision requiring equalization of teacher pay that now varies widely across the state. The salary schedule presently incorporated into the BEP formula averages less than $29,000. That's far below the statewide average of $39,000 which reflects locally-funded supplements that push teacher pay as high as $48,000 in Oak Ridge.
A gubernatorial task force has recommended provision "in the BEP formula for salaries that reflect a real world average salary cost." Incorporation of the statewide average would cost about $300 million; but Bredesen has yet to decide what the average should be, and he's mulling how to phase it in over several years. So all that can be said at this point is that the BEP outlays are going to be increasing by substantially more that $50 million annually for the next several years.
Families First — Tennessee's welfare reform program cut caseloads in half during the boom years prior to the 2001 recession. But over the past two years they have risen dramatically from just over 56,000 to nearly 74,000 presently. As a result, state payments to jobless parents are budgeted to rise by $66 million in the fiscal year ahead. Job growth has been lagging in the economic recovery to date, but continued growth should serve to reduce the welfare caseload and its cost in subsequent years.
Pension Fund — Based on its biennial evaluation of actuarial assumptions, the State Retirement Board has recommended a $70 million increase in pension system funding for each of the next two years.
While five percent budget cuts will be the rule for most other state departments, there are some further exceptions. The Department of Mental Health and Mental Retardation is expected to get a $30 million increase for mental retardation services. The Department of Correction is in line for a $20 million increase. And health insurance costs for state employees, including teachers, are expected to go up by $25 million or more.
Beyond that, it would be almost unprecedented for state employees to go without a pay raise in an election year. Their most recent, three percent increase was voted on by the state Legislature in 2002. Another one this year would cost on the order of $125 million, with coverage including public school and university employees.
Especially if the growth in TennCare costs can be reined in, the budgetary prospects looking beyond the year ahead would appear brighter than at any other time this decade. These prospects assume of course, that revenue growth rates continue to meet or exceed the 3.6 percent to 4.25 percent range forecast by the state Funding Board in December for the fiscal year ahead. In making that forecast, the board stressed that, "The consensus is that the economy is experiencing a small, non-robust, jobless recovery and that a recovery without job growth cannot be strong." So implicitly, at least, the job creation that typically accompanies the later stages of a recovery could spur more rapid revenue growth.
It doesn't necessarily follow that higher education, which has borne the brunt of the cutbacks, would be among the first to benefit. There are many other claimants for funding restoration. Road builders will be out to recapture the $68 million in highway funds that Bredesen has diverted from the Tennessee Department of Transportation. The same goes for local governments which have sustained a $36 million cut in state-shared revenues. And the list goes on.
Given Bredesen's 2002 campaign commitment to manage the state's way out of its fiscal bind without new taxes, the governor is to be commended for his efforts to date and for potential improvements in the budget outlook. At the same time, it's encouraging that Bredesen is reserving judgment on whether the state's regressive tax structure will be sufficient to the needs of the second term he's almost certain to seek in 2006.
January 15, 2003 * Vol. 14, No. 3
© 2004 Metro Pulse
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