Friday, November 02, 2018
NOTES FROM THE SENATE, NOVEMBER 2, 2018
NOTES FROM THE SENATE, NOVEMBER 2, 2018
BALANCING THE BUDGET - THE KEY IS IN THE REVENUE
The state constitution charges the General Assembly to set appropriations to operate state government. While the ultimate allocations are widely argued, not much time is spent discussing the revenue estimate that dictates the amount of funding available. While most states work under balanced budget requirements, the ways vary that states arrive at their revenue estimates are varied.
Revenue forecasting, more simply, is an estimation of the taxes or other revenues that the government anticipates receiving during the fiscal year. Forecasting is closely related but not the same thing as setting the revenue estimate. Georgia State University's Center for State and Local Finance released a report in August of this year that looks at revenue forecasting practices in southern states, and where much of the background for this column is derived. https://cslf.gsu.edu/download/revenue-forecasting-practices-in-the-southern-states/?wpdmdl=6495064&refresh=5bd75d37ecd6f1540840759
Forecasting processes fall into three main types: executive, separate and consensus. As you may expect, executive forecasts are made by the governor, separate are made by the governor and legislature independently, and consensus is made by a group that includes both and sometimes additional external or nonpolitical members.
Among southern states, Georgia is one of five states with an executive forecast. Ten southern states participate in consensus forecasting of various types, widely regarded as a best practice. Alabama is a standalone in the south as the only separate forecasting state. While states approach this important task differently, there is no category that is recognized as the most correct. While consensus may be pointed to as a best practice due to the multiple stakeholders that participate, accuracy varies.
EXECUTIVE FORECASTING - SOME THOUGHTS
While each type of forecasting has benefits and detractions, the executive revenue forecast served us well during the recession where Georgia's "CEO-style" government allowed the governor to make quick decisions to keep the state moving forward. Under O.C.G.A. 45-12-74 the Governor produces a budget report, and under 1979 Op. Att'y Gen No. 79-18, the Governor possesses the initial responsibility and authority to establish the estimate of treasury receipts in the next year. That estimate will be used for the purpose of providing appropriations for that fiscal year. Subsequently, the Governor also may amend the revenue estimate, as has occurred in recent years, by transmitting any such amendment to the General Assembly. That is what he will be doing in the special session.
The opposing view of executive forecasting is the unilateral power to make crucial determinations on revenue available for the budget; which may not reflect a context that could be provided through consensus forecast. Another point favoring a consensus forecast stems from its ability to reduce errors from political bias and increase stakeholder buy-in.
A governor with an expensive agenda could overstate the estimate to create a budget that could fund more of that agenda. The inherent danger is from an economic slowdown resulting in a mid- year reduction in revenues which could trap the state.
LOOKING FORWARD - MULTIYEAR FORECASTING
One of the criticisms in appropriations is often the seemingly short-sighted ability of the appropriations act to plan for out-years. Another best practice in revenue forecasting is multiyear forecasting, which displays revenues and expenditures for multiple years and demonstrates potential structural issues in the budget. In Georgia, the Governor's Budget Report does include a five-year forecast of state expenditures and a long term outlook with the most likely revenue estimate. This type of forward looking analysis ensures that the state is taking into account a larger context of fiscal structure in any given session year.
STRESS TESTED FORECASTS
Another area of revenue forecasting to consider stress testing forecasts. After the Great Recession, the ability to gauge how likely the state and certain parts of the budget may be under duress could be of use. Considering multiple scenarios for likely revenues levels establish a minimum baseline of state expenditures and give context to any actions the state might take to handle resulting risk. In the south, three states publicly produce forecasts under multiple scenarios - Kentucky, Tennessee and Virginia.
GEORGIA - EXECUTIVE FORECASTING WITH INPUT
While Georgia continues to have an executive forecast, the Governor appoints both a State Economist, currently is Dr. Kenneth Heaghney, as well as a Council of Economic Advisors that are appointed by the Governor. They typically meet annually in December to discuss the economy and potential impact on state revenues. Under Governor Deal, membership of the Council includes some of the state's most noted economists and professors, from academia and private sector. There is nothing in code mandating even the current process of drawing upon the knowledge of economists in the state.