DOCUMENT RESUMEED 438 127RC 022 255AUTHORSchirmer Peter Childress M - PDF document

DOCUMENT RESUMEED 438 127RC 022 255AUTHORSchirmer, Peter; Childress, Michael T.; Nett, Charles C.TITLE$5.8 Billion and Change: An Exploration of Long-TermBudgetary Trends.PUB DATE1996-12-00NOTE9p.; In: Exploring the Frontier of the Future: How KentuckyWill Live, Learn and Work; see RC 022 247.PUB TYPEReportsEvaluative (142)EDRS PRICEMF01/PC01 Plus Postage.DESCRIPTORS*Educational Finance; *Educational Planning; ElementarySecondary Education; Futures (Of Society); *GovernmentSchool Relationship; Higher Education; *Long Range Planning;*Public Policy; State Government; *Statewide Planning;Strategic Planning; Trend AnalysisIDENTIFIERS*KentuckyABSTRACTOver the past 20 years, the share of Kentucky's general funddollars spent on police and corrections, and health and human services, hasincreased. Meanwhile, the share spent on elementary and secondary educationhas not changed, while higher education funding has fallen. Compared tosimilar states, Kentucky spends less money per student at all levels of theeducation system, especially in higher education. Among 15 Southern states,Kentucky had the largest decrease in education funding per college studentover the last 10 years. The Kentucky Long-Term Policy Research Centerprojected revenues and expenditures through fiscal year 2004 and found thatthese trends are expected to continue over the next decade. Overall,Kentucky's revenues will not grow fast enough to maintain the current levelof services, if current trends continue. Also, Kentucky's rainy day fund isnot well protected. Kentucky should take stronger measures to ensure that thebudget reserve fund is adequately funded and protected, continue to searchfor new ways to cut costs and improve efficiency, ensure that the taxstructure provides adequate revenues for state programs, and diligentlysearch for opportunities to improve its investment in the future througheducation. (Contains two figures depicting projected spending versus revenuesfrom 1994 through 2004, and baseline expenditure projections in six areas.)(TD)Reproductions supplied by EDRS are the best that can be madefrom the original document. $5.8Billion andChange: AnExplorationofLong-TermBudgetaryTrendsBy Peter Schirmer,Michael T. Childressand Charles C. NettKentucky Long-TermPolicy Research CenterU.S. DEPARTMENTOF EDUCATIONOffice of EducationalResearch and

ImprovementEDUCATIONALRESOURCESINFORMATIONCENTER (ERIC)is document hasbeen reproduced asreceived from the personor organizationoriginating it.Minor changes havebeen made toimprove reproductionquality.Points of view oropinions stated inthisdocument do notnecessarily representofficial OERI positionor policy.2PERMISSION TO REPRODUCE ANDDISSEMINATE THIS MATERIAL HASBEEN GRANTED BYMichal SmithMelloTO THE EDUCATIONAL RESOURCESINFORMATION CENTER (ERIC)1BEST COPYAVAILABLE $5.8 Billion and Change: An Explorationof Long-Term Budgetary TrendsOver the past 20 years, the share of general fund dollars spent on police and corrections, and healthand human services, has increased. Meanwhile, the share spent on higher education has fallen. Thesetrends are expected to continue over the next decade. Overall, revenues will not grow fast enough tomaintain the current level of services, if current trends continue. Also, the rainy day fund is not wellprotected. Kentucky should strengthen funding and spending guidelines for the rainy day fund, improve itsinvestment in education, keep the spirit of reform alive, and change the state tax structure.By Peter Schirmer, Michael T. Childress and Charles C. NettKentucky Long-Term Policy Research CenterGovernments at all levels are feeling squeezed between limited resources andseeminglylimitless pressures to increase spending, but it was not always this way. Just 30 years ago,when the U.S. economy was robust and expanding, the national debt was much smaller,there were more workers per Social Security recipient, and programs such as Medicare andMedicaid were in their infancy, economists worried about a drag on the economy resulting frompublic revenues growing faster than public expenditures.' In the 1960s, governments had"structural surpluses." Today, governments have "structural deficits."A structural deficit is not a single-year shortfall, which might occur as the result of anunforeseen natural disaster, a new mandate from the federal government, or a sluggish economy.Rather, a structural deficit is a long-term crisis; it occurs when revenues are projected toconsistently grow more slowly than expenditures over several years. Because many states cannotactually run a deficit, certain expenditures may be neglected, sometimes for years, in order tobalance the books.Does Kentucky have a struc

tural deficit? Will the current revenue structure (consistingofvarious taxes, fees, investments, and governmental transfers) be able to support the currentlevelof services in coming years, or will spending cutbacks be necessary in order tomaintain abalanced budget? This report suggests that Kentucky does, in fact, have a structural deficit.Our claim is based on projected revenues and expenditures through fiscal year (FY)2004.The revenue projection simply assumes that, without any major changes to the tax structure,general fund revenues will grow at the same rate as personal incomea rather generousassumption given recent growth rates and tax cuts. But this report focuses on expendituresandthe possible impact that a variety of trends may have on state spending during the next decade.Of course, no one knows for sure how fast technology will improve or whether the poverty ratewill increase or decrease. We cannot be certain that managed care will yield the expectedsavingsfor Kentucky's Medicaid system or that the prison population will continue to grow asrapidly asit has in the past. But we can make reasonable assumptions about how these things mightchange, and how they might affect expenditures.On the other hand, we assume the quality of state services will not change. In otherwords, thestate will not add new restrictions on Medicaid coverage, it will not increase ordecrease policeprotection, it will continue to give its children as good an education as they receive today, etc.Weare essentially asking, "With the changes taking placein society, the economy and the populace,I Giertz, J. F., McGuire, T., & Nowlan, J. (1995).The Illinois structural deficit dilemma: the growing gap between stateexpenditures and revenue realities.Champaign-Urbana, IL: University of Illinois, Institute of Government and Public Affairs. 256Exploring the Frontier of the Futurehow much money will Kentucky needto spend 10 years from now in orderto give its citizens thesame quality of services they receive today?" Theanswer is, "More money than we'll have."Future Revenues and ExpendituresWe project expenditures togrow approximately 6 percent a year through FY2004,comparedto 5.3 percent annual growth forrevenues. The difference may not seem like much, butat thisrate, expenditures would grow 79percent between FY1994 and FY2004, whilerevenue

s wouldonly grow 67 percent. Even starting witha surplus in FY1994, we project that expenditureswillexceed revenues by more than 4percent in FY2004. This deficit will exist onlyin theory becausein practice spending will have to be lessthan revenue.Overall, general fund spending is growingfaster than general fundrevenue, but not allexpenditures are increasing at thesame pace. If we divide state spending intofunctionalcategoriesprimary and secondary education,higher education, police and corrections,healthand human services, highways and allotherwe find that Kentucky's investmentin education isgrowing slower than spendingon prisons and health care:In our projections, health andhuman services spending experiencesthe sharpestincrease. We project this function'sshare of general fundrevenues to rise from 18.3percent in FY1994 to more than 25percent in FY2004.Police and corrections spending risesfrom 5.3 percent of general fundrevenues tomore than 6.5 percent.Primary and secondary educationspending as a percentage of generalfund revenuesis essentially unchanged.Higher education's share of general fundrevenues falls from 14.5 percent in FY1994to less than 13 percent in FY2004.Highway spending is financed by thetransportation fund, not the general fund,and sois not included in the forecast. Buttransportation fund revenue is nearlystagnant andreal spending is less than itwas 20 years ago.All other spending slips from 12.6to 12.1 percent of general fundrevenues.80%FIGURE 27.1A Structural Deficit: SpendingOutgrows Revenues60%2� 40%E(3 20%0%0-- General Fund SpendingIIGeneral Fund Revenues1994199619982000200220044 Figure 27.2:Baseline Expenditure Projection, byFunction50%as40%3c0a)CC30%LLro20%10%6w ocyoa.-10%In 19941999 D 2004Police &CorrectionsHealth &HumanServicesHigherEducationPrim. & Sec.EducationOtherSurplus/DSource: Kentucky Long-Term Policy Research CenterPolice &CorrectionsHealth &Human ServicesHigherPrim. & Sec.OtherSurplus orEducationEducationDeficit19945.3%18.3%14.5%46.5%12.6%2.7%19996.1%21.7%13.8%46.1%12.7%-0.4%20046.6%25.6%12.9%47.4%12.1%-4.6%56 258Exploring the Frontier of the FutureOf course, a healthy populace and a safe societyare essentials of a high standard of living.Yet we contend that the best (not to say the only) way to cultivatea high standard of living forfuture generations is by increas

ing Kentuckians' knowledge, abilities and talentstheparamountgoal of the education system.Our baseline projection of general fund spending for different functions ofgovernment isillustrated on the preceding page. Note the general fund "deficit" of 4.6percent in FY2004. Weare not actually forecasting that Kentucky will have a deficit because it is prohibited by law.Rather, this shows that spending is growing at an unsustainablerate, given the current taxstructure and our assumptions about a variety of factors.Alternative ScenariosWe have already noted that the revenue and expenditure projectionsassume that the tax andspending structures will not change in the coming years. But what ifwe were to make a change?What if, for example, Kentucky decides that its spending for education istoo low compared toother states and should be increased? Or what if the federalgovernment changes its Medicaidfunding policy? Our budget model allows us to change a variety of factors whichcan createalternative budget scenarios. In this chapter, we explore four alternativesto our baseline forecast:An expanded commitment to higher educationAn expanded commitment to primary and secondary educationA change in federal Medicaid spendingA recessionThe budget projections based on these alternative scenarios do not pinpoint theexact amounts bywhich expenditures or revenues will change. Rather, they illustrate the magnitudeof the impactthese events might have on the budget.The "expanded commitment to higher education" scenario includesa gradual increase in bothspending per student and college enrollments to meet the regionalaverages by FY2004. Ouranalysis suggests that spending for higher education wouldgrow nearly 90 percent betweenFY1994 and FY2004, compared to a 50 percent increase in the baselineprojection. The totaladditional cost of the expanded commitment to higher education could bemore than $1 billionover 10 years. If spending for other functions is unchanged from the baseline levels, highereducation spending could exceed 16 percent of general fundrevenues, and total spending for allcategories would then exceed revenues by more than 8 percent.In the "expanded commitment to primary and secondary education"scenario, we look at thecost of raising state and local expenditures per pupil to match the regional median.Evenassuming local go

vernments bear their share of the increase,we project a huge additional cost$1.8 billion cumulativeand a deficit ofmore than 9 percent of general fund revenues inFY2004. In this scenario, spending for primary and secondary educationis projected to grow 87percent between FY1994 and FY2004, compared to a baseline increase of 70percent.One of the most contentious items of the federal budget debates of1995 was Medicaid.Congress considered a variety of proposals to reduce federal spendingover several years. One billwould have given Kentucky about $13.3 billion for Medicaid between FY1996and FY2002. TheUrban Institute in Washington projected that this plan wouldhave cut Kentucky's federalMedicaid revenues by about $4.3 billion between FY1996 and FY2002;Kentucky's Cabinet forHealth Services projected a reduction totaling about $3.4 billion. Ourestimate is that the statewould lose roughly $700 million by FY2002 and $2 billion by FY2004.The Urban Institute andthe Cabinet for Health Services project gloomier scenarios thanwe do (because of differentassumptions about baseline spending), but even usingour estimates, the state could have ageneral fund deficit of nearly 14 percent by FY2004, and health andhuman services spending7 $5.8 Billion and Change259could amount to more than one-third of all general fund revenue, if we are to maintain thequality of services in the Medicaid program.We look at a recession scenario to demonstrate the importance of the rainy day fund. Thisfund supports state spending in lean years when slow economic growth leads to slow revenuegrowth. While our analysis projects expenditure growth to increase slightlyduring a recession(we chose 2002 as the year for the recession), it also projects revenuegrowth to slow to onlyabout 1 percent, compared to 5 percent growth in the baselineforecast. Instead of a baselinedeficit of 3 percent in FY2002, the slow revenue growth could create adeficit of more than 5percent.RecommendationsMany trends are largely outside the province ofpolicymaking, particularly at the state level. IfKentucky is to maintainlet alone improvethequality of services it currently provides, it mustbe proactive in managing the trends affectingspending. The state must develop and adoptstrategiesforstrengtheningitsfinancialoutlookinyearstocome. We offerfourrecommendations:Take stronger m

easures to ensure that the budget reservefund is adequately fundedand adequately protected.Keep alive the spirit of the Governor's Commission onQuality and Efficiency bysearching for new ways to cut costs and improveefficiency.Be diligent in finding opportunities to improve ourinvestment in the future througheducation.Ensure that our tax structure provides adequate revenuesfor state programs.Strengthen the Budget Reserve Fund. The currentprovisions for funding Kentucky's budgetreserve fund are rather weak;the reserves cannot exceed 5 percent of actualgeneral fundreceipts, and any deposits made to the fund outof excess revenues are made after the stateimplements its surplus expenditure plan, if it sochooses. Protection of the reserve fund is evenweakerreserve funds may be appropriated at any timeby the General Assembly. It's like savingmoney by putting it into yourwallet instead of the bank. In the absence of asound budget reservefund, the budget effects of a recession could bebrutal.Keep Reform Alive.In its 1994 report, the Governor'sCommission on Quality andEfficiency examined past budgets and noted thatKentucky has suffered budget shortfalls in 9 ofthe last 12 budget cycles and 4 of the last 7 years.In our report, we predict that budget shortfallswill continue to be a way of life, funds will notbe available to make an expanded commitment toeducation, and a recession or a change in federalMedicaid policy would require severe spendingcuts. Whether the Commissionstudies the past or we gaze into the future, theconclusion is thesame: in the words of JimGray, chairman of the Commission, "We mustchange the way wemanage our government."Improve and Invest in Education. Perhaps nowhereis innovation and increased efficiencymore urgent than in education.Compared to similar states, Kentucky spendsless money perstudent at all levels of the education system. Andwhile we are closing the spending gap at theprimary and secondary level, the gap in highereducation spending is widening. The SouthernRegional Education Board reports that among15 Southern states, Kentucky had the largestdecrease in education funding per college student overthe last 10 years. We estimate thatKentucky would have to spend an additional $1 billion overthe next decade just to match medianspending on higher education by our benchmark states. 260Explo

ring the Frontier of the FutureWhile it is beyond the scope of this reportto examine possible education reforms in muchdetail, we will note that various experts have criticized thehigher education system in Kentuckyfor duplication of services, "turf fights," and lackof coordination, all of which decreaseefficiency. To increase efficiency, businesses and otherprivate associations might share in thecosts and planning of higher education. And clearly,any substantial commitment of new stateresources to higher education must be accompanied by closer collaborationamong institutionsand the different agencies responsible for post-secondaryeducation.Change the State Tax Structure. As with educationreform, we will not offer many specificrecommendations on tax policy. Others have done that forus. In a study by University ofKentucky professor William Hoyt, the extensive anddetailed work of the Kentucky Commissionon Tax Policy, and the analysis of others who have lookedat this issue, we have numerousrecommendations for changes in the state tax system.' (We shouldnote that the Commission onTax Policy had no authority to enactany of the changes it recommended.) In the absence of taxreform, it seems clear that revenues will not keeppace with expenditures, and state services asthey now exist will be compromised. It is highly unlikelythat Kentucky will be able to expand itscommitment to education (or, for that matter, otherkinds of workforce training, economicdevelopment or environmental protection) if expendituresand revenues continue along theircurrent paths.92 See Hoyt's chapter in this volume,and Kentucky Commission on Tax Policy. (1995). Finalreport. Frankfort, KY: Author. 03/09/199909:58Lt$,..Department of EducationOffice of Educational Pesaaith and Improvement (OER1)-National Library or Education (NLE)Educational Resources Information Center (ERIC)REPRODUCTION RELEASE(Specific Document)I. DOCUMENT IDENTIFICATION:Title:I-7-4lat.LIZExploring the Frontier o the Ftiture: flow Kentucky will Live, Learn andWorkCorporate Source:Publication Date:II. REPRODUCTION RELEASE:;.In order to disseminate as widely as pOssible.iiirielaind eignif,:aant matariPit of interest to the educational community, documents announced in themonthly abstract journal of the ERIC system, ;?es,orapeS in Zducation (RE), are ;;soapy made available to us

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