State Releases More Pessimistic Revenue Forecast

The official body that approves state revenue estimates released a preliminary forecast today that projects nearly $500 million less in General Fund revenue for the upcoming two-year budget than the draft forecast back in August. Troubling questions about the economic outlook are resulting in less optimistic estimates.

The new estimate suggests growth in the General Fund of only 1.8 percent in 2013 and 2.4 percent in 2014. That translates to revenue growth of $164 million in 2013 and $224 million in 2014.1

In addition to possibly weak revenues, costs will come due in the 2013-2014 budget that were passed forward to balance current and previous budgets. For example:

  • The state is delaying payment of the last payroll of 2012 until the start of 2013, meaning a $72 million hole in the 2013 budget
  • Kentucky restructured debt in the 2011-2012 budget that will mean $23 million more in interest payments in 2013 and $26 million more in 2014.2
  • Kentucky must come up with new monies each year to continue paying back the growing debt in the pension system in part because past legislatures chose not to make the required contributions.

Also, continued high unemployment and poverty levels will mean ongoing elevated demand for a variety of public services, including Medicaid.

In better news, the state is still projecting that revenues will exceed the official forecast for fiscal year 2012. The new projected revenue surplus is $138 million, although that is less than the $192 million projected in August.

A final, official estimate that the state will use for the new two-year budget is due in January.

  1. Consensus Forecasting Group, materials from the October 14, 2011 meeting.
  2. See Kristi Culpepper, “Kentucky’s Bonded Indebtedness,” Memorandum to the Interim Joint Committee on Appropriations and Revenue, September 22, 2011.

State Has Cut Education Funding Substantially from Pre-Recession Levels

iStock_000000520125XSmall-225x149The recession and weak recovery of the last few years have meant less revenue for the state budget, and the legislature has responded with cuts to many services. The state has not spared education in those cuts. Federal emergency education aid has helped blunt the impact, but the end of that federal support in a still-weak economy presents a real challenge to Kentucky’s education system.

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State Has Cut Education Funding Substantially from Pre-Recession Levels

The recession and weak recovery of the last few years have meant less revenue for the state budget, and the legislature has responded with cuts to many services. The state has not spared education in those cuts. Federal emergency education aid has helped blunt the impact, but the end of that federal support in a still-weak economy presents a real challenge to Kentucky’s education system.

In constant, per student dollars, state funding for the primary and secondary education system is nine percent lower in 2011 than it was in 2008. State funding for higher education is 20 percent lower (see Figure 1). Stagnant or declining funding levels as well as rising enrollment in postsecondary education (in part due to the weak economy) have contributed to this decline.1

Figure 1

State Per-Student Spending (Inflation-Adjusted)2

  2008 2011 2012 % Change, 2008-2011 % Change, 2008-2012
Primary/Secondary Education 6,083 5,557 5,649 -9% -7%
Higher Education 6,813 5,468 5,225 -20% -23%

Sources: Author’s calculation using data from Office of the State Budget Director, Kentucky Department of Education, Kentucky Council on Postsecondary Education

The impact of these cuts would have been even greater if the federal government had not provided emergency education aid as part of recovery-related legislation over the last few years. Those dollars are not reflected in Figure 1. Kentucky received $1.2 billion for the primary and secondary system and $137 million for higher education (see Figure 2).3 In the two-year budget for 2011-2012, the state was able to make up for less federal primary/secondary aid available in 2012 by allocating more state dollars to that year’s budget.  However, the federal aid comes to an end this year, and additional support is being held up by debates about the deficit.

Figure 2

federal aid-700x263

Source: Author’s calculation using data from the Office of the State Budget Director

That presents Kentucky with a challenge as lawmakers begin meeting in January to craft a new budget for the next two years. Primary/secondary and higher education make up over half of the state’s General Fund. Spending levels for many state services, including Medicaid, are expected to remain elevated because high unemployment means greater eligibility and need. And the economic and revenue outlook are very uncertain.

Lower education spending takes dollars out of local economies, harms our prospects for long-term growth and prosperity, and impacts Kentuckians’ quality of life. It also particularly harms the poorest students. Most state primary/secondary education funding goes to the Support Educational Excellence in Kentucky (SEEK) formula, which helps equalize funding between schools by providing greater financial assistance to poorer school districts. Cuts to state funding for higher education lead to tuition increases and to restricted access to financial aid.

Given economic conditions, Kentucky needs the federal government to provide additional short-term education funding as part of a plan to create jobs. And state lawmakers should be having a conversation about new revenues through needed reforms of the state tax system as part of the new budget.

  1. Enrollment in the primary/secondary system is up one percent over that time period while enrollment in higher education is up nine percent. See endnote 2 for sources of spending, enrollment and inflation.
  2. Calculation uses actual 2008 General Fund expenditures and enacted 2011 and 2012 General Fund expenditures for the Department of Education (which includes the Support Educational Excellence in Kentucky (SEEK) funding formula for school districts; learning and results services provided to districts; and other state education functions) and the Postsecondary Education budget (which includes funding for postsecondary institutions, the Council on Postsecondary Education, and the Kentucky Higher Education Assistance Authority). For K-12 education, per student spending is calculated using enrollment data as reported in the Superintendent’s Annual Attendance Report Enrollment Report. K-12 enrollment numbers are not yet available for fiscal year 2012, so number of students is estimated using same percent growth in enrollment between fiscal years 2011 and 2012 as occurred between 2010 and 2011. The U. S. Department of Education’s National Center for Education Statistics’ official enrollment projections through 2019 for Kentucky (completed in January 2010) estimated 0.4 percent growth between 2010 and 2011 and 0.3 percent growth between 2011 and 2012, which are approximately in line with the projections used here. Higher education per student spending is calculated using Fall head count enrollment data as reported by the Council on Postsecondary Education, including the official estimate for fiscal year 2012. Per student expenditures are adjusted to July 2011 dollars using the Consumer Price Index.

    Budget of the Commonwealth as amended by House Bill 1 of the 2011 Extraordinary Session of the Kentucky General Assembly, http://www.lrc.ky.gov/Statrev/ACTS2011SS/0001.pdf.

    Kentucky Department of Education, Superintendent’s Annual Attendance Report Enrollment Report, http://www.education.ky.gov/KDE/Administrative+Resources/Finance+and+Funding/School+Finance/Attendance+Data.

    Kentucky Council on Postsecondary Education, Total Headcount Enrollment by Level, http://cpe.ky.gov/NR/rdonlyres/2F32BE86-B24E-4927-838D-955C8F57DD8D/0/10yearenrollment2009_20100129.pdf.

    Kentucky Council on Postsecondary Education, Estimated Fall 2011 Postsecondary Enrollment, http://cpe.ky.gov/NR/rdonlyres/A3020D28-A9FF-4D76-95FD-C65E01BDFA99/0/EstimatedFall2011PostsecondaryEnrollment.pdf.

    U. S. Department of Education, National Center for Education Statistics, “Actual and projected numbers for enrollment in grades PK-12 in public elementary and secondary schools, by region and state, Fall 2011 through Fall 2019,” http://nces.ed.gov/programs/projections/projections2019/tables/table_06.asp.

  3. Sources are the American Recovery and Reinvestment Act (ARRA), the State Fiscal Stabilization Fund (SFSF) and the Education Jobs Fund. Sources for ARRA and SFSF are the revised state budget for FY 2010 and the enacted budget for FY 2011 and 2012. Source for Education Jobs Fund is the Kentucky Department of Education: http://www.education.ky.gov/KDE/Administrative+Resources/Finance+and+Funding/Budgets/.