How Kasich team closed $7.7 billion budget deficit

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Governor John Kasich

By Marc Kovac

news@vindy.com

COLUMBUS

When Gov. John Kasich unveiled his $55.5 billion biennial budget earlier this month, he confirmed what Republicans had been warning about for the past two years.

The $8 billion shortfall was real, the result of too much reliance on federal stimulus and other one-time money and a refusal, he said, of past administrations to face the financial problems.

But Kasich’s two-year spending plan has prompted more questions than answers. How much of the hole was filled by cuts? How much through policy changes? And why is spending projected to increase in the next biennium in light of such a shortfall?

Kasich and administration officials have had a difficult time pinpointing details.

“There’s no place that you could look at these numbers and say, ‘OK, I see this budget. Shouldn’t I be able to subtract something from something else and get $8 billion?’” said Tim Keen, Kasich’s budget director. “And the answer is no.”

The results have left some lawmakers scratching their heads and others, including Kasich’s Democratic opponents, questioning whether an $8 billion budget shortfall ever existed.

Since the budget was released two weeks ago, Keen has been asked repeatedly for a better account. He compiled a more detailed explanation last week.

“This is not a normal budget,” he said. “... This is unlike any budget I’ve ever been involved in because of the fiscal challenges the state faced. This is so much larger than any [gap] I had ever seen, and the challenges were so much greater.”

The Hole

The last two-year budget, approved by a Republican-controlled Senate and Democrat-controlled House and signed by former Gov. Ted Strickland, included nearly $8.7 billion in one-time monies — funds that would not be replenished in the next biennium. That’s opposed to sales or income taxes, which the state receives in steady streams year after year.

The one-time total included federal stimulus dollars and other funds that Strickland and Democrats readily sought to deal with what they frequently called unprecedented economic issues, the likes of which had not been experienced since the Great Depression.

But Republicans, including then-Auditor and now-Lt. Gov. Mary Taylor, equally as frequently pointed out the problem of paying for ongoing state expenses using funds that would not be available in the future.

That was the backdrop awaiting Keen and other members of the Kasich administration when they took office, facing a deadline in two months for submitting their spending plan to lawmakers.

The basic task wasn’t too different from any other budget cycle, though the size of the shortfall in this instance was larger than recent administrations have had to tackle.

“There is a gap, there is an imbalance that you have to wrestle with,” Keen said. “When you budget, you essentially work to close this imbalance. And I will tell you that I’m not really familiar with a budget where there isn’t some element of an imbalance when you start.”

The Framework

Keen and Kasich’s Office of Budget and Management first worked to create a framework for understanding the budget issues.

That analysis projected spending for the next two years out of the general revenue fund, the largest part of the state budget, where most tax dollars go and where most spending occurs.

Keen said the administration projected flat spending across most programs, except Medicaid (medical and other services for the needy and the largest component of the general revenue fund) and a couple of other areas.

The results — a combined $61.5 billion in spending over the biennium —painted a picture of what spending would be if state law and policies remained as-is.

The administration also projected how much revenue it expected to receive over the next two fiscal years. Those results equaled about $53.8 billion in fiscal 2012 and 2013.

The difference, about $7.7 billion, was the budget shortfall Republicans had been warning about the past two years.

“The difference in those two represents the structural imbalance, or the gap that we had to close,” Keen said. “... This is where we started.”

Between then and the unveiling of the budget, Keen and other administration officials worked to create a balanced spending plan (as required by the state constitution) while preserving income tax cuts, avoiding tax increases and preserving funding for services to needy Ohioans.

Another goal was developing a biennial budget that would not create the type of gap or structural imbalance in the future that was faced this year.

“We [made] hundreds and hundreds and hundreds of decisions along the way to close this down and to get the executive budget that we introduced at these spending levels with revenues that would support that,” Keen said, adding later, “It’s not just a balanced budget. ... This is a structurally balanced budget. ... Ongoing revenues and ongoing expenditures are matched.”

The Fix

In the end, Keen said the administration used a mix of policy changes and reforms, spending cuts and updated revenue projections to close the $7.7 billion budget hole.

Redirecting state tax revenues from local governments, schools and libraries made up the biggest percentage of the fix, accounting for about $2.2 billion over the biennium.

Those funds, in recent years, were earmarked for local governments to make up for changes made as part of a major tax reform package enacted about six years ago and electric deregulation about a decade ago.

The state funding was supposed to be phased out over time; Kasich has proposed quickening the pace of the phase out.

“The law was crafted to give these local subdivisions time to make adjustments in their budgets to reflect the future revenue conditions that they would face,” Keen said. “As human nature would dictate, they just hoped that it would never go away.”

The cuts to local government funding likely will be the biggest sticking point moving into budget deliberations in the Ohio House and Senate, as those groups fight to preserve as much state support as they can.

Agency spending cuts and related changes accounted for about $1.8 billion over the biennium, while Medicaid reform made up about $1.3 billion.

There’s also about $1.5 billion in other funding to help balance the budget, including one-time monies used mostly in the first year of the biennium. The latter includes about $50 million from the sale of five state prisons, about $258 million from the transfer of the state’s liquor operations to the new JobsOhio economic development nonprofit and $440 million in debt restructuring.

The final piece of the budget fix is close to $800 million in new revenue projected to be collected during the next two fiscal years.

The resulting executive budget proposal outlines spending of about $26.9 billion in fiscal 2012 and $28.6 billion in 2013, increases of 1.1 percent and 6.4 percent, respectively when compared to year-earlier spending.

That increase has prompted questions about why, in the face of a multibillion-dollar budget hole, the state wants to spend more in the next biennium.

Keen said new general revenue spending includes different items than current spending — spending that was moved outside of the general revenue fund by the last administration has been rolled back into the GRF, for example — making it problematic to compare dollar totals from one year to the next.