Former state budget director paints bleak picture of Missouri's finances

Sunday, June 28, 2009 | 12:01 a.m. CDT; updated 10:23 a.m. CST, Tuesday, December 8, 2009

COLUMBIA — "Bleak." That's the forecast for Missouri's financial situation in upcoming years from Jim Moody, former state budget director. 

“Missouri’s problem is that two years from now, when the stimulus money runs out, we’re walking off the cliff,” Moody said.

At the bottom of that cliff lies what Moody estimates to be the state’s nearly $1 billion deficit. The deficit was created by a significant drop in revenue — Moody estimates it at roughly 6.5 percent — during the past fiscal year without significant spending cuts.

The gap between revenue and funding is being filled with American Recovery and Reinvestment Act funds. As part of the act, states are given stabilization funds to help  balance their budgets. 

State Budget Director Linda Luebbering said the Missouri General Assembly appropriated $1.26 billion in stabilization funds to help balance the state’s roughly $23 billion 2010 operating budget.     

“We know we have a long-term budget situation, and the governor is putting together a long-term plan,” Luebbering said.   

Part of that plan includes spending cuts. On Thursday, Gov. Jay Nixon announced over $100 million in line-item cuts to this year's budget and put an additional $325 million on hold. Of the $430 million cut from the budget or frozen, $248 million came from stabilization funds. That money will be available for later use.

Luebbering said the governor wants to spread out the use of stabilization funds to ease the transition between receiving federal assistance and having to balance the budget with no outside help.   

“If he was going to spend all of the stabilization funds this year then, yes, we would have a cliff,” Luebbering said. 

In a presentation to the Missouri School Board Association earlier this month, Moody warned budget makers of the risks of using one-time stimulus funds for ongoing expenses.

Of the stabilization money the legislature appropriated to the budget, Luebbering said roughly $800 million would be used for ongoing projects and programs, while roughly $500 million was appropriated for one-time use.

“They didn’t want states to make major cuts to their core services,” Luebbering said. "That’s why they gave us the money.”

But Moody said that by using stabilization funds to balance the budget, “the date of reckoning is just being pushed out a year or two.” Moody does not believe the state will be able to cut back spending or raise enough revenue to make up the current shortfall. 

The biggest structural reason for the significant revenue loss over the last year, Moody said, is the state’s reliance on personal income tax. About two-thirds of the money in Missouri's general revenue fund derives from personal income tax, which has been drastically reduced due to job loss caused by the economic downturn.   

“There is evidence that income growth in Missouri has been rather anemic compared to the rest of the U.S.,” said Joseph Haslag, director of the Economic Policy Analysis and Research Center and an MU economics professor.   

Haslag echoed Moody’s sentiments, citing the state’s dependence on income tax as one of the reasons for its slow income growth. He said the state cannot continue its current level of spending and expect to balance the budget with stabilization funds.  

Increased spending in fiscal year 2009 was due to a projected revenue growth of 3.5 percent, significantly higher than the nearly 7 percent decrease Moody estimates the state actually experienced.

“If you miss your revenue estimate by 10 percent, that’s a major problem,” Moody said.

As a possible solution to the current budget situation, he proposes that the Legislature reinstate the sales tax on food. Luebbering said she could see why reinstating the tax might be tempting. 

“Right now, the one thing people are buying is food,” she said. 

However, Luebbering said Nixon has no plans to increase taxes to fix the budget problems. Instead, she said, the governor plans to try to create more jobs in Missouri in addition to making spending cuts.

Because of a provision in the Missouri Constitution that requires 25 percent of the general revenue funds to be spent on public schools, Haslag does not anticipate any cuts to be made in that area. 

Although the governor did not veto funding for the Ellis Fischel Cancer Center but instead put it on hold, Haslag said health care will most likely be the flash point for discussions about spending cuts.

Despite the dreary picture Moody paints of the state’s funding outlook over the next few years, he said Missouri is in relatively good shape compared to other states, most notably California and Illinois.

Reuters reported that California’s budget deficit is expected to grow to over $40 billion within the next fiscal year. California Gov. Arnold Schwarzenegger has declared the state to be in a financial crisis, and it is uncertain when it will be able to climb out of its deficit. Unlike Nixon, Schwarzenegger said he would support raising taxes to increase revenue.

Illinois is facing a projected $11.5 billion deficit, and there are plans to slash health care and social services by as much as 50 percent.   

Luebbering said she expects Missouri to be back on track by fiscal year 2011, but Moody and Haslag are skeptical. If Moody’s projections are correct, it will take close to an additional $600 million in spending cuts or revenue growth in the 2010 fiscal year to meet that goal without additional federal assistance.

"Missouri is a generally well-run financial state," Moody said, "but we're in unprecedented times." 

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