Missouri faces likely budget challenges
When a drug store customer selects a promotional package offering a free toothbrush with a new tube of toothpaste or two extra razors in a bag of shavers, there's a good chance the sale display was assembled in a sheltered workshop.
Located throughout the state, the 87 workshops employ around 5,600 people with a developmental or other disability that makes them unable to work in competitive employment.
Workshop budgets rely on payments from client industries, local property tax funds and annual appropriations of state general revenue.
The last time the state boosted funding for the program was 2016, when lawmakers approved an $800,000 bump to $26 million. Funds are distributed monthly to workshops based on the hours employees spend working and training.
"As a general rule, some of our more rural shops, that have less industry in their immediate vicinity, are much more reliant on state funding," said Kit Brewer, executive director of Project CU in St. Louis and legislative chair of the Missouri Association of Sheltered Workshop Managers. "It is crucial to all of us, but it is more so to those shops."
When the COVID-19 recession hit, state revenues plummeted. As the shortfall grew in magnitude, Gov. Mike Parson cut $430 million from the $10.2 billion fiscal year 2020 general fund budget.
The cuts targeted both large and small spending items, ranging from $75,000 for epilepsy education to $139.2 million from the $3.2 billion in general revenue set aside for K-12 education.
The sheltered workshops lost $2 million – their entire June payment.
"It was quite a harsh realization that the money was being withheld in a month where the funding was already expended," Brewer said.
The workshops took another $2 million hit in July when Parson cut $438.5 million from the current fiscal year.
"The cut is really putting pressure on us on a long-term basis," said Rob Libera, executive director of Lafayette Industries in St. Louis County and president of the association. "It really forced us to be very careful about how we proceed. It has impinged the ability to get additional business, it has stopped hiring from waiting lists and we look at things more on a month-to-month basis."
The workshops did get a $4 million allocation from CARES Act money delivered to the state, but it is limited to needs directly related to their COVID-19 response, such as protective gear and cleaning supplies. There's money available for business-interruption grants, but many workshops make protective gear such as N95 masks, Libera noted.
"As far as our general business expenses, we do need those funds released and certainly we have needs for our budgets in future fiscal years," Brewer said.
Parson has already released $38.5 million of the general revenue withheld from this year's spending. But whether he can restore any more funding will depend on Missouri's continued economic recovery, federal action on stimulus proposals – and the course of the coronavirus itself.
While budget experts inside and outside government are optimistic about the future, with some even predicting revenue will be high enough to trigger another round of tax cuts next year, it will continue to be the most unpredictable state budget in memory.
"It is prudent to be conservative in our spending, with additional expenses such as Medicaid expansion, outstanding litigation at the state level and large legal settlements," House Budget Committee Chairman Cody Smith, R-Carthage, said. "We have got a lot of challenges inside the budget."
State of the ledger: Receipts
Decision-making begins with an estimate late in the year of how revenues will add up 18 months later. Never exact, the estimate nevertheless guides spending. The governor has the power, with legislative oversight, to regulate expenditures.
The two biggest sources of general revenue – personal income tax and the sales tax – arrive in the treasury in a steady monthly flow from payroll withholding and retailer payments. Sales taxes surge in November and December from holiday shopping, and the spring brings a rush of dollars from tax returns due in April.
COVID-19 blew up the books on fiscal 2020, which ended on June 30, and the derangement is continuing in the current year. The governor and legislature elected in two weeks must resolve many questions to write a budget for fiscal 2022.
"I am still really concerned there is so much uncertainty," said state Sen. Lauren Arthur, D-Kansas City, a member of the Senate Appropriations Committee. "I am not especially optimistic that we will receive additional stimulus money from the federal government. Missouri entered the recession from a weak position, and while we have experienced economic growth, we lagged behind the other states and the national picture."
Discussions on whether legislators and the administration can agree on a revenue estimate begin Nov. 20, said Senate Appropriations Committee Chairman Dan Hegeman, R-Cosby.
"Sales taxes remain more robust than many of us thought they would be," he said. "It will be interesting, if we can arrive at a consensus revenue estimate this year."
The make-or-break month will be tax filing time, Hegeman said.
"The real telling thing will be April when income taxes come in — or income taxes don't come in," he said.
The revenue swings are partially due to the economic situation created by COVID-19 and partially due to a decision about timing of tax payments in response to the pandemic.
This spring, unemployment soared and income tax returns were put off to July 15. General revenue collections fell off a cliff. The fiscal year ended $888 million below the January 2019 estimate in Parson's budget. A starting balance of more than $400 million and $342 million in extra federal support for the Medicaid program helped cushion the landing.
This year's income tax collections have swung just as sharply positive, thanks to the delayed returns. Through last Friday, the state collected $3.38 billion in general revenue, $741.1 million more than the same period a year ago. That fast start, combined with the return of tax filing to April next year, has Jim Moody, a lobbyist who served as budget director for former Gov. John Ashcroft, thinking the fiscal year could see the highest collections ever.
"To get to break even, where you had zero growth, you have to be losing $80 million a month for nine months," Moody said. "I don't see that happening. The greater likelihood, with two final payment dates in the fiscal year, is that it will trigger the third tax cut on June 30, 2021."
The third tax cut Moody referenced would be the third step in a 2014 tax cut. The top income tax rate is decreased 0.1 percent after each fiscal year when revenues exceed the highest of the three previous years' tax collections by $150 million or more.
That trigger amount is $9.72 billion. That is $25 million more than this year's budget after Parson's current withholdings and about $500 million less than lawmakers appropriated for fiscal 2020.
If he was advising Parson, Moody said, he would not recommend any additional releases at this time.
"He's being cautious," Moody said. "If you have a pretty decent second quarter, I would say he looks at the withholdings again."
Reaching that revenue amount, or even substantially more than that amount, would seem likely in a normal year. A blend of nine months revenue for the past two fiscal years added to actual receipts through Sept. 30 would put collections at $10 billion.
But a comparison of April to mid-October revenues shows the underlying weakness in collections, said Brian Colby of the liberal think tank Missouri Budget Project. Net general revenue for that period is down 4.6 percent compared to the previous year and income taxes are down even more, by 6.6 percent.
Sales tax collections, however, are almost unchanged. The period covers the time when Missourians were spending federal tax stimulus payments and unemployed workers were receiving first $600, then $300, in supplemental unemployment payments.
Those payments, along with funds directed to businesses, protected Missourians from the worst economic impacts. While payrolls fell $12.5 billion in the second quarter of the year, net personal income increased by $21.5 billion, economist Ken Kliesen, a research officer with the Federal Reserve Bank of St. Louis, said in response to emailed questions.
The lost wages were replaced by $7.7 billion in state unemployment payments and $26.5 billion in federal payments, he said.
"That surge we saw has now stopped unless we get another stimulus package," Colby said. "It is hard to say but it is likely that if we don't get some form of aid from the federal government, that our fourth quarter and first quarter of 2021 will be pretty weak. I don't think we are out of the woods yet."
State of the ledger: Spending
While the general revenue fund isn't even 30 percent of all state appropriations, it is the fund that gets the most focus. Lawmakers have little discretion over the use of earmarked money. Fuel taxes and other money directed to the state road fund, for example, can be spent even without an appropriation bill from the General Assembly.
And even within the general fund, the vast majority of money is already spoken for with mandatory spending. The Missouri Constitution directs at least 25 percent to public schools, and Medicaid is a shared state-federal program where state participation requires money to be spent in whatever amounts needed to provide the covered population's health care.
Add in core, or recurring, funding for higher education, state prisons, mental health hospitals, payroll and pension funds, and what remains is the money a governor or lawmakers can use to fund special projects or increase programs like scholarships or sheltered workshops.
Demands on the general fund also rise and fall based on the availability of money that can be spent like general revenue, or when federal changes increase or decrease state costs for Medicaid.
For example, revenue from lottery sales and casino gambling are dedicated to education and sprinkled throughout the budget. The more Missourians bet on those games, the lighter the demand on general revenue. When receipts fall, as happened when casinos closed for two months, general revenue must fill the gap.
During the deep recession following the 2008 financial crisis, President Barack Obama and the Democratic-controlled Congress authorized enormous federal transfers to states for general budget support. The CARES Act passed in March also sent billions in aid to states but limited its use to unexpected expenses caused by the pandemic, such as health care, protective gear or employee overtime.
Negotiations over a new federal stimulus package have run hot and cold in Washington, and many Republican leaders have resisted supporting state budgets.
Smith said federal action – or inaction – will have a big impact on the next budget.
"The wild card is any action that Congress may take, either to provide more flexibility with CARES Act money or to do another CARES Act round of funding, whatever that looks like, that does offset the ability to provide general revenue," he said.
The state is holding about $800 million in unspent CARES Act funds, Smith noted.
"Suffice to say those hundreds of millions, if we are able to hold onto some of that to stabilize our budget for the next year or two, would ease this process," Smith said.
One federal change that reduced demands on general revenue was an emergency increase in Uncle Sam's share of Medicaid. Instead of the standard payment covering 65 percent of Missouri's cost, the COVID-19 emergency increased it to 71.2 percent.
It was worth $342 million in fiscal 2020 and has been extended, as part of the federal emergency, through at least March 31. It will mean the state must provide about $535 million less for Medicaid through that date.
Another Medicaid change, based on Missourians' personal income, is also likely in the coming fiscal year. Federal Funds Information for States, a Washington-based organization, is predicting that the state's share of Medicaid will fall by 1.4 percent in the coming year. That small change alone will be worth about $150 million in general revenue funds.
The changes in federal support for Medicaid will make budgeting easier, Smith said.
"It is certainly going to be helpful and we certainly are going to, in my mind, need every penny to fill the holes that are left in our general revenue budget for the next year or two," he said.
Moody said he is telling clients to assume the emergency Medicaid match will continue until at least June 30. The larger federal share for Medicaid in the coming year is because growth in Missouri personal income did not match the national rate.
"That's a good news/bad news story," Moody said. "You get more federal money, but it is because of a poor kind of leading indicator."
The new fiscal year will also begin the expanded Medicaid program mandated by a voter-approved referendum. Some studies claim the expansion pays for itself through savings in other areas, while Republicans have maintained that the extra state share will have to come from general revenue.
"That is one of my worries," Hegeman said, "and one of the things I am watching."
The Senate is likely to be divided on whether to even appropriate money for expansion, he said.
"I think it will be some fairly lively discussions," he said.
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