West Virginia budget blues

State Budget Director Mike McKown apologized to lawmakers this week just before his briefing.  It was a sunny, pleasant autumnal day in the Mountain State, but McKown’s news about the state’s financial condition was gloomy.

According to McKown, the proposed state budget for next fiscal year (FY 2015, starting July 1, 2014) has a potential gap of at least $265 million.  That’s a huge number considering the general and lottery revenue portions of the state budget only total $4.5 billion.

By law, the state cannot have a budget deficit, therefore Governor Tomblin and lawmakers have to figure out ways to balance the budget.  Absent a surge in economic growth, which is not on the horizon, state leaders will have to cut spending, raise taxes or use a combination of both.

About 65 percent of state spending is written into state law—public education and Medicaid make up the largest shares—which means only 35 percent of the budget can be targeted.

Tomblin hasn’t said yet what he plans to do, but here are some possibilities.

The Governor has already asked state agencies to submit two budget plans; one holds the line on spending for next fiscal year while the other reduces spending by 7.5 percent.  If the Governor takes the cut, that will save about $80 million.

The long-term budget forecast for 2015, which was included in last year’s FY 2014 budget documents, includes a two percent pay raise for school teachers and public employees.  Eliminating that will save another $50 million.

The remaining $135 million could be made up by sweeping one-time money that is socked away in a variety of government and legislative accounts.  Additionally, Tomblin could dip into the Rainy Day emergency fund, which has $900 million.

Historically, the Governor has refused to open up the Rainy Day fund for fear it would trigger a run on the account by lawmakers anxious to find money for a variety of wants and needs. Additionally, the flush account helps maintain a high credit rating for the state, holding down interest rates on borrowed money.

Tomblin or legislators could also decide to raise taxes to offset the deficit, but that’s politically dangerous territory.  For Tomblin, an increase would be a retreat on his campaign promise of lower taxes.

State House Republicans oppose any tax increases. Some Democrats may be willing to get behind higher taxes—especially if it’s something like a tobacco tax increase—but that could be used against them in the next election.

Meanwhile, the pressure on the budget will grow more intense when the legislative session begins in January.  School teachers and public employees believe they are overdue for a raise and Senate President Jeff Kessler wants to set aside a portion of the growth in tax collections on the natural gas industry to create a fund for economic development or tax breaks in the future.

No wonder McKown gave lawmakers a warning Monday before he made his presentation.  Still, it could have been worse. The Budget Director could have also talked about FY 2016, where the state budget is expected to be at least another $200 million short.

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