Economists predict modest growth in state revenues

Local News

December 21, 2011

By Ronnie Ellis CNHI News Service The Richmond Register Wed Dec 21, 2011, 09:28 PM EST

FRANKFORT — The only thing they’re certain about is the uncertainty of projections of future economic activity. Nonetheless, a group of independent economists who project state revenues for the legislature Wednesday predicted a modest growth in what Kentucky will take in over the next two and a half years.

The Consensus Forecasting Group is projecting about $136 million more in state revenues than called for by the currently enacted budget which ends June 30, 2012. That’s a 2.8 percent increase in revenue but about $1.2 million less than the CFG predicted in October. But the projections for the next two years are up slightly.

CFG Chairman Dr. Lawrence Lynch, Economics Professor at Transylvania University, characterized the forecast as one of “modest growth.”

The economists predicted revenues for Fiscal Year 2013 of $9.2 billion, a growth of 2.4 percent, and about $48 million more than forecast in October. For Fiscal Year 2014 they projected just more than $9.5 billion or a growth of 3 percent, $103 million better than their October forecast. Those projections will be the ones used by Gov. Steve Beshear and the General Assembly to write Kentucky’s next two-year budget. The group’s estimates in recent years have been consistently accurate.

Dr. Frank O’Connor, Economics Professor at Eastern Kentucky University, said during Wednesday’s discussion that while there remains uncertainty over policy decisions which could be made by European governments and the United States Congress which could affect the economic outlook, the CFG would “be back here to deal with those.”

Those uncertainties are how the European Zone countries will deal with debt crises in some of its countries and whether Congress will extend a payroll tax cut for individuals and unemployment insurance benefits for a year. Both are deadlocked in Congress at the moment. But Lynch said the domestic issues of the payroll tax and unemployment insurance would have only a small impact on Kentucky’s revenue projections.

“There’s enormous uncertainty about the international situation and about our own policy,” Lynch said after the meeting. “But it was pointed out that even if they don’t extend the payroll tax relief and the unemployment insurance it wouldn’t totally produce the pessimistic forecast. It would just hurt a little bit more.”

O’Connor said he thinks “the down side risk is less than people think.” But, as he pointed out during the group’s deliberations, if he’s wrong and government policy decisions adversely affect the economy, the CFG will be called back to revise its projections anyway.

Or as Dr. Virginia Wilson of the University of Kentucky put it: “We’re certain about the uncertainty.”

That’s reflected as well in what the state budget director told a meeting of the House membership Tuesday: the state budget still has long-term problems as lawmakers have relied in recent budgets on federal stimulus money which is no longer available and one-time fixes, creating a structural imbalance. She told the lawmakers the upcoming budget will be difficult.

That reflects earlier statements by Senate Appropriations and Revenue Committee Chairman Sen. Bob Leeper, I-Paducah, and his House counterpart, Rick Rand, D-Bedford. Leeper has projected at least a $330 million hole in the next budget which lawmakers will have to overcome.

Since Beshear first took office in December 2007, the state has cut its budget nine times with some state agencies taking cumulative cuts of 21 percent or so over that time. Lawmakers are also obligated to increase payments to the state employee pension funds, pay for a re-designed accountability testing system for public schools and face delayed requests for operating expenses and capital projects from universities and other agencies.

At the end of Wednesday’s meeting, Lynch said he will retire from the CFG at the end of the fiscal year. Lynch said he’s advised the legislature on revenues since Fiscal Year 1974 and it is time for him to step down.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com.

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