Tuesday, January 19, 2016

Governor: Use state budget surplus to patch highway shortfalls

Posted By on Tue, Jan 19, 2016 at 5:36 PM

click to enlarge NO NEW TAXES: But lots of new spending in the governor's new highway plan. - BRIAN CHILSON
  • NO NEW TAXES: But lots of new spending in the governor's new highway plan.

Earlier, Max outlined Gov. Asa Hutchinson's long-awaited plan for highway funding. I was at the press conference, so I'll add a few more details.

The governor said it was especially urgent to find new money for highways because of the passage of a federal transportation bill had made new funds available from Washington, but only if Arkansas kicks in a match. If Arkansas fails to produce $50 million per year, Hutchinson said, the state effectively would be forfeiting an average of $200 million per year in federal money, or $2 billion over the next decade. 

Hutchinson said he's found that money in the state budget without raising taxes, which is something he has refused to do. His plan allocates an additional $46.9 million to highways in FY2017 (the fiscal year that begins this summer), rising to an estimated $81.1 million by FY2021. The cash comes from a combination of general revenue and surplus, as explained below.

This is significant money, but it's only around half the amount the governor's own working group on highway funding recommended in December. They suggested a new $110 million annually for the Arkansas Highway and Transportation Department over the next one to three years, and $140 million per year after that. Hutchinson today acknowledged that his smaller proposal was "just a starting point" in meeting the state's road needs.

Hutchinson explicitly tied his highway plan to the continuation of the Medicaid expansion — you may remember it as the private option — by the state legislature. The plan is "not workable if we don't have access to federal funds that are part of the Medicaid expansion," he said.

Hey, wait a second. Medicaid expansion ... saves Arkansas money? Hasn't Hutchinson been telling the legislature and the public that cuts must be made to traditional (i.e., pre-expansion) Medicaid programs in order to pay for the private option? Medicaid expansion does indeed help the state budget — but as Dave Ramsey wrote earlier this month, that's not the way the governor has been spinning things. (It's also hard not to pose the question yet again, now that he's acknowledged his highway funding plan is contingent upon a fiscal assist from the Medicaid expansion: Does Hutchinson still really want Obamacare to go away?)

Anyhow. The largest chunk of the proposed spending comes from surplus. This year, the governor will allocate $20 million from his "rainy day" discretionary fund and ask the legislature to kick in another $20 million in unobligated surplus funds. (That's about half of both pots of money, said Duncan Baird, the governor's budget chief.) In future years, under the governor's plan, the legislature will allocate 25 percent of surplus dollars in the General Improvement Fund towards highways. That would work out to about $48 million per year, he estimates, based on the average annual surplus over the last ten years.

The GIF comes from surplus, some of which goes to the governor for discretionary spending and some of which is allocated by the legislature toward local projects (some worthy, others less so). Hutchinson said the idea to use a percentage of GIF money for roads came from Rep. Joe Jett (D-Success).

My first thought on hearing the GIF idea was that it's better than sucking up more general revenue. But then, a friend who's more conversant in state budget matters than I am pointed out something crucial: Surplus money is itself dependent on budget forecasts, which are made by the state. If the state's forecasts are highly conservative, that leads to higher surpluses. It also means less money for general revenue. In other words, if budget priorities depend on surplus funds, the line between "surplus" and "general revenue" inevitably blurs. This is one of the dangers of predicating major public spending priorities on "surplus" money. Another is that a surplus is contingent upon economic growth. I asked the governor today what happens if the state doesn't meet that $48 million annual surplus estimate in future years. He said they'd go back to the drawing board and look at other ideas proposed by his working group on highways.

In addition to the surplus, Hutchinson's plan also calls for a significant amount of outright general revenue to be diverted to highways — $16.1 million in FY2018, rising to $33.1 million in FY2021. (About $5 million of this is technically from state Central Services, the fund that pays for legislative staff and other core government functions.) General revenue cuts will have to be made up somehow, but the governor wouldn't give specifics on what would take a hit, saying he'd be negotiating with the legislature over his priorities. He claimed increased efficiency measures would make up much of the difference, but that's meaningless without details.

The governor acknowledged that this would be the "first time in history we've made a contribution to highways from general revenue" in Arkansas. Traditionally, both funding and administration of AHTD is set apart from the rest of state government. If Hutchinson's plan succeeds — and it's hard to imagine it won't, given the compliance of the Republican-controlled legislature during his first year in office — the walls surrounding the Highway Department may come down somewhat.

The governor said he'd told officials at AHTD he wanted to see "greater transparency" and an "increased level of legislative oversight." He's asked the Highway Commission for "internal reforms" to that end, though he didn't give details. Rep. Jett afterwards said he was somewhat disappointed the governor didn't offer more specifics about such transparency, given that he's asking the legislature to divert general revenue to AHTD.

Hutchinson displayed a map that argued two points: First, there's nothing unusual about using general revenue to pay for roads; every neighboring state except Texas already does that, he said, and voters there approved in November an initiative to capture "up to $2.5 billion in general revenue" for roads. Second, Arkansas fuel taxes are already the highest among neighboring states.

I suppose this second point was to preempt any discussion of state government seeking the most obvious solution to a shortfall in road revenue: Raising taxes on those who use the roads, by updating stagnant fuel taxes. As Arkansas Advocates has described so well, it would be easy to modernize the gas tax without hurting lower-income residents. Just institute a state-level earned income tax credit to offset any damage; that is, make the gas tax more progressive. But no one expects Hutchinson to raise taxes, period, and no one (including me) pressed him on the issue. At least he felt the need to make the argument.

click to enlarge annual_percentage.jpg

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