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Monday, August 08, 2016

NOTES FROM THE SENATE, AUGUST 8, 2016

WHY THE REVENUE ESTIMATE IS IMPORTANT

You may have seen articles about budget instructions being issued by Gov. Deal and his call for a flat budget for the coming FY 2018 Fiscal Year. This column last week explored budget instructions and how they varied from good years of growth to recession years.

The revenue estimate that the Governor is tasked by the Constitution to prepare is the underlying number that decides how much state dollars will be appropriated and likely spent. The revenue estimate dictates whether the state will spend or save or reserve expected tax collections and fees... somewhat just like what families go through. That decision can get a state in trouble if it over estimates the flow of tax revenue into the state's coffers and for some reason the state does not grow as planned. Traditionally, Georgia's Governors have made very conservative General Budget estimates and used the Amended Budget for anything of importance that comes up during the year. A conservative revenue estimate insures the Revenue Shortfall Reserve (RSR) will continue to grow if the economy performs as expected.


HOW THE REVENUE ESTIMATE IS DERIVED

During the budget process, the revenue estimate sets the course of the Appropriations bill, and ultimately is what Appropriations writers balance to. The Appropriations bill is the General Assembly's only constitutionally required legislation, articulated in the Constitution of Georgia of 1983, Art. III, Section IX, Par II (b), "the General Assembly shall annually appropriate those state and federal funds necessary to operate all various departments and agencies." The revenue estimate is a key component of appropriations, setting the ceiling on spending, and providing for the operations and capital outlay of state agencies and entities.

The revenue estimate is a specific figure. Under Const. of GA. of 1983, Art. III, Section IX, Par. II (a), it is the exclusive function of the executive branch to prepare a budget report, including a revenue estimate. The General Assembly takes legislative action through a legislative document, the Appropriations Act, to fix agency funding. Also articulated in statute under the Office of the Governor, Office of Planning and Budget, in O.C.G.A. 45-12-75, the budget report contains summary statements of the financial condition of the state. Additionally, it must include "statements of income and receipts for each of the two fiscal years last concluded, and the estimated income and receipts of the current financial year and the next financial year..." In O.C.G.A. 45-12-76, the General Assembly must adopt a balanced budget, and "shall not appropriate funds for any given fiscal year which, in aggregate, exceed a sum equal to the amount of unappropriated surplus expected to have accrued in the state treasury at the beginning of the fiscal year, together with an amount not greater than the total treasury receipts of existing revenue sources anticipated to be collected in the fiscal year, less refunds, as estimated in the budget report and amendments thereto." This balanced budget requirement ensures fiscal discipline.

RECEIVING ECONOMIC OUTLOOK INPUT

Before the Governor releases the budget report, he receives input and analysis from economists. Working with the Office of Planning and Budget, the state retains a State Fiscal Economist to assist in formulating the estimate and providing the forecast for the state's budget. The current state economist is a distinguished Research Professor of Economics at Georgia State University.

Additionally, the Governor also convenes a Council of Economic Advisors, generally in December, to provide additional viewpoints and discuss the state's economic outlook. The Council is comprised of noted economists and professors from public and private walks of life.

ESTIMATES CAN BE ADJUSTED DURING THE YEAR

In the best of circumstances the analysis is accurate, and growth meets projections. But the revenue estimate, once fixed, isn't necessarily set in stone if conditions change, as was the situation during the recession.

In the recession, reports of economic instability and a steep decline in revenue receipts forced a dramatic drop and re-writing of the revenue estimate during the fiscal year, and also transfers from the Revenue Shortfall Reserve (RSR). The RSR, the vehicle through which the state "saves" for a rainy day, was as high as $1.7 billion prerecession before mid-year adjustments, but was nearly depleted following adjustments from the RSR and unanticipated draws as revenues declined.

Georgia's leadership has, over the years, done a good job of managing state resources in recessionary times when revenues fell, mostly by reducing spending. The real test comes when times appear to be better and every agency, every advocate, and most legislators, have a plan for spending new revenue or for cutting taxes or returning excess revenues to taxpayers.

Continuing to build the RSR and holding down spending is the way Georgia has succeeded where other states have failed. Making appropriate payments to retirement funds and investing in critical needs will keep the budget from ballooning in prosperous times and help the state survive a slow economy.

None of us, especially economists, saw the great recession coming until it was upon us. To me, this upcoming year looks a lot like the prerecession year from the past.

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