Budget officials caution against relying on Rainy Day Fund

By Andrea Lannom

The Register-Herald.com

BECKLEY, W.Va. — State budget officials cautioned legislators not to rely on one-time money to resolve the budget deficit, saying doing so could put the state in the same situation years down the road.

Mike McKown, director of the state Budget Office, and Mark Muchow, deputy secretary, presented Gov. Jim Justice’s budget proposal, along with revenue numbers, Thursday in House and Senate Finance meetings.

Justice presented his Save Our State (SOS) budget in Wednesday’s State of the State address.

For this fiscal year, McKown explained to the House Finance Committee that Justice’s budget proposes going to the Rainy Day Fund to resolve the $123 million hole. However, he said this would not be done for the next year.

“This is the last time he proposes to use the Rainy Day,” McKown said. “(Fiscal year 2018) uses very little one-time money to pay for ongoing things.”

To take care of the approximately $500 million deficit the following year, which amounts to about 11 percent of the budget, Justice has proposed measures including $26.6 million in cuts and $450.15 million in taxes.

“We haven’t closed that gap,” McKown said. “To keep things at its current level — keeping PEIA at its current level, salaries on pace with inflation, the Medicaid program, and keeping all retirement programs fully funded with annual required contributions — there is a gap, which means the revenues are less than the expenditures by $497 million.”

“We can go ahead and cut or can raise revenue as the governor proposed last night or we can do a combination of both, or we can use the Rainy Day Fund for maybe one more year, which would be a very bad idea. … There are only a few things we can do, raise revenues, or do a mix of the two to keep ongoing revenues with ongoing expenditures,” McKown said.

McKown said lawmakers should not depend on the Rainy Day Fund forever.

“It’s getting harder and harder every year,” McKown said. “The reason being is we keep using one-time money to fix it. We have to fix it. Otherwise, we will be right back in the same place, having these same problems.”

McKown said today, there is $682 million in the Rainy Day Fund, representing 15.95 percent of the general revenue.

“We have the fourth-best funded (Rainy Day Fund) in the country,” McKown said. “We need to have a strong Rainy Day Fund because of the volatile severance tax collections.”

McKown said the state’s credit rating has three strengths. He noted the state was downgraded a notch from AAA, which he said is as high as a small state like West Virginia could be.

“We have conservative budgeting, a healthy Rainy Day Fund and payments on our retirement systems,” McKown said. “We do not have a lot of strengths here, and take one of those away, and we’re dinged more on bond ratings. They won’t tell you that, but they will send you a letter saying, ‘We just did it.’”

McKown said revenues are staying flat and expenditures are continuing to increase.

Muchow discussed revenue in the afternoon meeting. He said a good part of the current gap has been closed by former Gov. Earl Ray Tomblin’s midyear across-the-board budget cuts.

Legislators asked why officials did not do across-the-board cuts like Tomblin did.

“Everyone feels that it just makes agencies — no agency can function properly when you continue to do that,” McKown said. “We’ve picked specific items that we cut 100 percent. These are targeted cuts to eliminate funding from programs.”

Muchow said general revenue declined by 7.5 percent last year, which he said is “one of the worst years ever.”

This year, he said, there is no year-to-date growth in general revenue and broad-based taxes are down. This has been offset by tobacco tax, where revenue has doubled, he said.

“The state is recovering but it’s a slow recovery,” he said. “I compare it to the snail moving across my lawn. It takes him a while. We are moving at a snail’s pace.”

Some of Justice’s tax measures include sales tax increasing from 6 percent to 6.5 percent, raising the DMV sticker fee from $30 to $50, and widening the tax base to account for professional services.

Delegate Cindy Frich, R-Monongalia, asked how many professional services would be included in Justice’s budget. Muchow said there are many different professions represented except in the medical field. Muchow said this includes engineers, accountants, lawyers, surveyors and real estate.

“It’s a whole gamut of professional services with most probably in accounting and legal services,” Muchow said.

Muchow said none of the surrounding states tax professional services like what is being proposed. He mentioned Ohio technically taxes services that would be hit on gross receipts taxes, but said beyond that, people would look to states such as South Dakota, New Mexico, Hawaii, and Washington as other examples.

One legislator asked whether the budget estimates are too high. McKown said the budget is driven by revenue estimates and said expenditures have to meet that bottom line.

“If the legislature thinks the estimates are too high or too low, especially too high, they are certainly able to not appropriate all the revenue estimate. They can submit a budget with a lower estimate.

“This is our best guess. We did these in November and December of what is already 2016 to run a year that doesn’t start until nine months later and doesn’t end for another 12 months after that. It’s difficult for revenue people to get estimates. We’ve never seen a decline in the economy like we have with coal and extraction industries over the last few years since the Great Depression.”

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